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The Journal’s Tax Advice
The <i>Journal</i>’s Tax Advice

The Wall Street Journal editors are unhappy about the present correlation of political forces. Who isn't? They're also, I gather, unhappy about "Beltway sages" who, facing the fact that the Bush tax cuts expire at the end of this year, have suggested Republicans accept a modest increase in tax rates for the wealthy while leading the charge to keep taxes from rising for 98 percent of the American people.

US Capitol Building at night Jan 2006

It would be great if the Journal editors had a better idea of what Republicans could do. They don't. 

This becomes clear about halfway through their editorial. After making a familiar—if mostly sensible—political and economic case against higher tax rates, the Journal editors come to the heart of the matter in these three paragraphs:

“It's certainly true that Republicans can't stop a tax rate increase if Mr. Obama is determined to make it happen. The Bush-era rates automatically go up on January 1, and the House can't extend them alone.

“But Mr. Obama also can't get what he wants without House Republicans. He needs their votes to extend current rates for lower-income taxpayers, as well as to prevent the Alternative Minimum Tax from hitting 27 million more taxpayers. Most of those new AMT taxpayers live in high-tax Democratic states. Meanwhile, the death tax rate reverts to 55% and a $1 million exemption. Senate Democrats running for re-election in 2014 won't want that on their resume.

“For all of his bluster about blaming Republicans, Mr. Obama also knows a budget failure would do enormous harm to his chances of second-term success. It would guarantee at least two more years of trench budget warfare and poison the chances of immigration or other reform. Another recession would be on his watch, not on George W. Bush's.”

Paragraph one is correct: The Bush-era tax rates expire on January 1. It might have been a good idea to make this clear nearer the beginning of the editorial, but it is to the Journal editors credit that they now clearly state the problem.

The second paragraph is the Journal's attempted answer to the problem. But it turns out to be no answer at all.

It's true that "Mr. Obama also can't get what he wants without House Republicans. He needs their votes to extend current rates for lower-income taxpayers, as well as to prevent the Alternative Minimum Tax from hitting 27 million more taxpayers." But think for a minute about the implications of what the Journal seems to be saying. The Journal editors believe that after January 1, when taxes will have gone up for everyone, House Republicans will block Democratic legislation that would cut taxes—that would restore the lower 2012 rates for the vast majority of taxpayers, fix the Alternative Minimum Tax, and for that matter would probably offer a compromise on dividends and the death tax better than what will be the new dividend rate of 39 percent and death tax of 55 percent with a $1 million exemption.

Will Republicans really oppose such legislation? President Obama will be beating the drums for this tax cut. Senate Democrats will pass this tax cut. If Senate Republicans vote against it, it won't be "Senate Democrats running for re-election in 2014" who will have a tax hike on their resumes. It will be Senate Republicans who will have voted against cutting taxes. And if House Republicans block such legislation, it will be they, and they alone, insisting on higher taxes.

Of course they won't. Republicans will fold with lightning speed after we go over the tax cliff on January 1. Which is why the third of the Journal editorial's three key paragraphs is moot. If we go over the cliff, there won't be damage to Obama's chances of second-term success. Quite the contrary. What Republicans will have done is to make Democrats the party of tax cuts and Obama a president fighting for economic growth.

As I say, it won't happen. Most Republicans will go along soon after January 1 with what will now be the Democrats' tax cutting agenda. If the House Republicans now follow the Wall Street Journal editors over the cliff, the only effect, I'm afraid, will be to turn a manageable tactical retreat in December into a panicked strategic rout in January.  

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