Tuesday, August 2, 2011

A question for my readers

To my chagrin, internet access is still limited, meaning that the US government is in the process of enacting an enormous, epochal budget deal and I know next to nothing about it. Argghhh!

So if any of you are able to follow this thing more closely than myself, I've got a question. My understanding is that the cuts mandated by the trigger -- a huge amount of which come out of military spending -- go into effect if $1.5 trillion in other cuts aren't made by a certain date in 2012.

These numbers are calculated with regard to a CBO baseline. But, and again, I could be wrong about this, it seems like the CBO baseline includes the expiration of the Bush tax cuts. In other words, if the Bush tax cuts are extended, the number of cuts that need to be discovered elsewhere in order to avoid the trigger goes up by the cost of the tax cuts themselves. That's a huge sum -- it would easily double (or could even triple!) the number of cuts that need to be found.

So my question is about the incentives this creates. If my understanding is accurate, it seems that anyone who successfully extends the Bush tax cuts now must also be prepared to accept absolutely draconian cuts to government OR the firing of the trigger. Likewise, anyone wants to avoid draconian cuts to government and the firing of the trigger now has an enormous incentive to let the Bush tax cuts expire as scheduled.

So doesn't this basically force the Democrats to let the tax cuts expire? And it surely distorts the incentives for Republicans as well, although I'm less clear how. I have no doubt that many congressional Republicans would prefer to extend the tax cuts and then make up the difference by adding an additional 2.5 trillion in spending cuts to the debt committee plan. But that's simply not politically feasible -- Democrats aren't going to accept 4 trillion in additional cuts with no new revenue, particularly when both the president and the Senate have veto power over any final deal. Besides, it's not like Republicans themselves have shown a lot of stomach for massive Medicare or entitlement cuts. What the next-best option for Republicans? Would they risk a constituent revolt over Medicare cuts in order to stave off a return to Clinton-era tax levels? At what point does simply letting the Bush tax cuts expire simply become the path of least resistance for both parties?

Again, I could be totally misunderstanding all of this. Certainly, the small bits and pieces I've read so far treat the inclusion of the the expiration of the tax cuts in the CBO baseline as a Republican victory. But I'm not seeing it, at all.

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