Four disturbing consequences of Pelosi’s tax retreat

For the past few months, I (and others in favor of allowing the Bush-era tax cuts for the rich to expire) had worried that once we got into the lame duck session, congressional Democrats would let their position slip and start supporting extending tax cuts for couples with income above $250,000 (individuals above $200,000). But I thought at the very least it would happen in the last month or two, when the pressure was really being brought to bear.

Turns out, it happened a lot sooner than that. Yesterday, House Minority Leader Nancy Pelosi (D-Calif.) signaled support for allowing the Bush-era tax cuts under $1 million to expire. Pelosi explained, “It is unacceptable to hold tax cuts for the middle class hostage to extending multi-billion dollar tax breaks for millionaires, Big Oil, special interests, and corporations that ship jobs overseas.”

Yes, I understand that “tax breaks for millionaires” sounds better in a press release than “tax breaks for households with income over $200,000, or $250,000 for couples.” And perhaps she felt forced into this, worrying that she might not be able to hold her caucus at the $250,000 mark, opting instead to retreat to more defensible terrain before the battle royal later this year.

But this shift has a number of very disturbing consequences:

1) Slipping to the right.This will now be the left pole of the debate. The Democratic Party has moved from opposing the Bush-era tax cuts to supporting 80 percent of them, to now supporting nearly 90 percent of them. And yet these concessions have been given for free, without any countervailing progressive demands. This is just more evidence that the tax debate is shifting further to the right. Pelosi may have done this for short-term advantage, but in the long run, these shifts tend to be very difficult to reverse.

(From Flickr Creative Commons by nasa hq photo)

2) More spending cuts. Given that the Bush-era tax cuts cost $2.6 trillion over the last decade and will cost over $4 trillion in the next decade, this concession will put even greater pressure on the budgets of vital safety net and public investment programs.

3) The definition of “middle class” is losing relevance. The previous definition of the middle class as being anyone under the $250,000 threshold was already a severe stretch. After all, you’re talking about people who (1) are making five times that of the typical American household (which makes closer to $50,000 a year in combined income), and (2) whose incomes are higher than 98 percent of American households. To now extend the definition of middle class to people who make 20 times that of the average household and whose income is greater than over 99 percent of households is to define away the entire concept of the middle class.

4) Bigger tax cuts to the highest-income Americans. This shift isn’t just a huge boon to upper-income households making between $250,000 and $1 million in income.  In fact, about half of these additional tax cuts would go toward households with over $1 million in income. This is because the cut-off—be it $250,000 or $1 million—represents the portion of a taxpayer’s income that is subject to the continued tax cut.  So the previous Democratic position—which remains President Obama’s public position—is that if you make over $250,000, you still get to keep your tax cuts for all your income below that threshold and only have to pay higher rates on income above that threshold. Revising the threshold up to $1 million basically means that all income between $250,000 and $1 million also retains its tax cuts, and as it turns out, about half of those tax cuts will go to people with income over $1 million.

As Jared Bernstein said, we’ll let the game theorists argue over whether this helps or hurts the Democrats’ negotiating position. But even if this does give the Democrats the upper hand in negotiations, what then? The whole point is to enact a tax code that can adequately fund the social safety net and public investments that we need to create a stronger economy with equal opportunity for all. Retaining the tax cuts for most people making over $250,000 and reducing the tax increase that people making over a $1 million would be subject to, makes that job significantly more difficult, if not impossible.