Game of Chicken on Bush Tax Cuts Holds Economy Hostage

Party politics is at loggerheads with good economic policy.

By + More

Just hours after the still Nancy Pelosi-run U.S. House of Representatives voted to extend the current tax rates for middle- and lower-income Americans--rather than keeping all the tax rates where they are on everyone as the Republicans want--negotiations to bring up similar measures in the U.S. Senate collapsed.

Senate leaders, according to various published reports, had been working on a plan to offer four different approaches, one that mirrored what the House passed, one that extended the current tax rates for anyone making less than $1 million per year, one that would extend the current tax rates for everyone for five years and one that would make the current tax rates permanent.

What will happen next is anyone’s guess. Harry Reid, the leader of the Senate Democrats, is expected to push for a vote on the House-passed measure as early as today but it is not at all clear there are enough votes in favor of the measure to allow it to come to the floor.

[See our editorial cartoons on the economy.]

Almost everyone agrees that raising taxes in an economy as weak as the U.S. economy is now is foolhardy. And there is plenty of evidence that lower tax rates, up to a point, on the highest incomes provides the biggest bang for the buck as far as stimulating the economy goes. So we’re in a position where party politics and good economic policy are at loggerheads, with the Democrats continuing to adhere to the class warfare argument that the rich are somehow less deserving of lower tax rates than the rest of the country. 

In essence, the U.S. economy is being held hostage to a political game of chicken. The White House is still trying to work out a compromise with congressional leaders to craft a measure acceptable to everyone, which would mean preserving the current structure as it is for some period of time, but the general perception is that it is following rather than leading the discussion. There is still time to work a deal out and pass something that will allow all sides to claim victory. One idea is to link yet another extension of unemployment benefits to a package that extends the current tax rates on everyone for everything, but the economic uncertainty the ticking clock is producing is likely to drive the economy way down as the year comes to an end.

  • See a list of the finance and credit industry's favorite lawmakers.
  • See photos of the Obamas behind the scenes.
  • Check out a roundup of editorial cartoons on the economy.