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Get ready for a tax hike

By David Frum, CNN Contributor
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STORY HIGHLIGHTS
  • David Frum says there are falling odds Democrats, GOP can agree on tax cut extension
  • Frum: Democrats may want the issue of opposing cuts for the wealthy rather than a deal
  • Republicans may be emboldened by victories in November, he says
  • If there's no deal, economy and markets could take a big hit, he says
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Editor's note: David Frum writes a weekly column for CNN.com. A special assistant to President George W. Bush in 2001-02, he is the author of six books, including "Comeback: Conservatism That Can Win Again," and is the editor of FrumForum

Washington (CNN) -- The Bush tax cuts are scheduled to lapse in January 2011. Congress is debating some kind of renewal, and most people assume that some kind of renewal will happen. But as the days click away, that assumption looks more and more like wishful thinking.

If the Bush tax cuts do lapse, the top rate of income tax will go from 35 percent to almost 40 percent. The per-child tax credit will drop from $1,000 to $500. The tax rates on capital gains and corporate dividends, now at 15 percent, revert to 20 percent and 40 percent, respectively.

Most elected officials, Republican and Democratic, agree that such a big tax increase would fall like a hammer blow on an economy that is only weakly recovering from the worst recession since World War II. But how to avoid it?

President Obama proposes extending them for everybody earning less than $250,000 a year. Congressional Republicans want them continued for everybody, indefinitely.

Those two positions might not seem so very far apart as to preclude compromise. Former Obama budget director Peter Orszag offered one such compromise in an Op-Ed for the New York Times: Extend the full Bush tax cuts, but for a finite period of time - say two years. Once we're out of recession, we can review any next steps. Seems reasonable, right?

Compromise seems so close to hand, in fact, that just about everybody believes it's going to happen.

Just about everybody may be wrong.

Last weekend, Republican House leader John Boehner offered the anticipated compromise. He told CBS's Bob Schieffer on Face the Nation that he would accept a middle-class-only tax cut if he had no other choice. What happened? Let Bob Schieffer tell it:

"By mid-afternoon [Sept. 12], the White House acknowledged Boehner's change in position, but added in a written press release: 'Time will tell if his actions will be anything but continued support for the failed policies that got us into this mess.'

"Blame it on a long memory, but I can remember when the first move by a president like Lyndon Johnson or maybe a smart aide in the Eisenhower White House would not have been a snarky press release.

"I'm guessing LBJ would have been on the phone to Boehner in five minutes after seeing him on TV, saying something like, 'If you're serious, why don't you come over here quietly and we'll try to work out something good for both of us and the folks out there?'"

Schieffer astutely diagnosed this reality: President Obama's Democrats do not want a tax compromise. They are looking at polls that purport to show the unpopularity of extending tax cuts for those families earning $250,000-plus. Facing a desperate political situation, they have seized this issue as their last hope of rescue.

Here's the Democratic hope: The goal is not to pass a middle-class-only tax cut before January. The goal is to maneuver Republicans into opposing a middle-class-only tax cut before November. Democrats will gain an issue, maybe save some seats in Congress.

It won't work. The public will ignore the maneuverings, the Democrats will still lose big -- and time will have been wasted. The day after the election, we'll be less than two months away from the tax cuts' expiration, but further than ever from a deal.

Post-election, Republicans will have less incentive to deal. If they wait until January, they'll have much more clout, perhaps a majority in one or both houses of Congress. So they'll want to wait.

But when the new Congress reconvenes in January, time will be tight -- and moods will be angry. The new Republican caucus will be bigger, but also more militant, less willing to deal. The compromise John Boehner offered in September has been severely criticized by many Republicans in Congress -- and may not be available in January, even assuming Boehner becomes House speaker.

By then, President Obama will be thinking hard about his own re-election, looking for issues to sharpen the contrast with the GOP -- maybe force them into a confrontation they might lose, as they lost the government shutdown in 1995. Tax cuts for the rich may seem the perfect issue over which to force a confrontation.

Whatever the two parties think, by January we'll be out of time. Taxes will jump, markets will panic, the economy may stumble.

Our minds are wired to discount the probability of very bad events. If something seems too horrible to happen, we assume it won't happen. Mostly that's a reasonable way to think. Why waste time worrying that a giant meteorite may strike the Earth 100 years from now?

But sometimes very bad things do happen. Then -- and only then -- do we see how easy it would have been to prevent them and how difficult it is to repair them. If taxes spike in January, we'll all regret it. The time to act is now. And yet there are no signs of action.

The opinions expressed in this commentary are solely those of David Frum.