The trump card on taxes

By now, the state of play is painfully obvious. When it comes to the debt-reduction talks, Democrats expect a compromise with some tax increases. Republicans have ruled out the very idea of touching tax rates, but may be open to scrapping some tax incentives and deductions.

It seems awfully likely that Democrats will be unhappy, to put it mildly, with the end result, since the “deal” will probably feature massive spending cuts, no changes to tax rates, and paltry revenue from so-called “tax expenditures.”

But there’s one part of this that often gets overlooked: Obama has something of a trump card in his back pocket. Ross Douthat’s item on this late last week sounds right to me.

[If participants in the debt-reduction talks] do work out a deal — and this is the crucial part — it doesn’t have to include nearly as much in the way of revenue increases as a liberal president would normally prefer, because taxes are already scheduled to go up. Republicans are being intransigent on taxes in these negotiations for ideological reasons, but also because they know that if Obama is re-elected (which is more likely than not), they won’t be able to block tax increases: With a non-stroke of the pen, he can just let the Bush tax cuts expire — for the rich, or even for the middle class as well.

This is the trump card that liberals carry into all these negotiations. If we just do nothing on taxes except let the “current law baseline” run its course, their preferred vision wins.

Agreed. The tax deal worked out in December, much to the left’s chagrin, extended all of the Bush-era rates. Obama has said he won’t allow this again — come hell or high water, the president won’t let the wealthy keep the tax breaks they don’t need and the country can’t afford.

This matters a great deal, of course, in the context of the current talks. Dems want more revenue, Republicans won’t even consider tax increases. But the president can generate all kinds of revenue later, and there’s nothing the GOP can do about it.

The White House will probably offer Congress a familiar deal: current rates up to $250,000, Clinton-era top rates for those over $250,000. If Republicans agree, taxes on the wealthy go up and the deficit shrinks. If Republicans refuse, demand Bush-era rates for everyone, and reject a deal that shelters the middle class, taxes go up across the board and the deficit shrinks a lot.

It’s something to keep in mind as the debt talks continue.