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Bill Thomas’s Revenge

Democrats now face his magically disappearing tax cuts.

Jul 26, 2010, Vol. 15, No. 42 • By GARY ANDRES
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While everyone’s preference was to make all these tax cuts permanent, Thomas and others were trying to do the best they could under the political constraints. He proposed to use as much money as possible to enact the most simulative yet politically vulnerable tax reductions—accelerating the individual marginal rates and cutting taxes on dividends and capital gains. He felt he could phase out other more politically popular provisions, knowing a future Congress would have a tough time not extending these tax cuts.

After listening to the Thomas scenario, Bush was convinced. “I’m with Bill,” he told the other congressional leaders.

“[Thomas’s] main goal was to protect what many thought was the most needed but vulnerable pieces of the package—the individual marginal rate reductions,” David Hobbs, former assistant to the president for legislative affairs told me. “Protecting the middle class from the AMT, the child credit, and marriage penalty relief had broad bipartisan support,” he notes. “By structuring the bill the way he did, Thomas got the biggest bang for the buck and did the most with what he had to work with.” 

He also created a huge political headache for today’s Democrats, already nervous about November’s elections.

President Obama says he wants to shield families making less than $250,000 from higher rates. Treasury Secretary Timothy Geithner announced the administration wants the capital gains increase to go no higher than 20 percent. 

Yet granting the administration’s wish requires tough decisions by Congress on a broad range of thorny tax policy questions. First, how to pay for these changes? The Congressional Budget Office projects revenue flows into the government based on current laws. And right now, with these tax rates set to rise, so are revenues. Exempting certain groups requires billions in offsets (i.e., higher taxes on someone else) or government debt balloons further. 

Neither option is good. 

“We’re talking about $411 billion just for offsetting for the next two years,” lamented Representative Earl Blumenauer (D-Oregon), a member of the tax-writing House Ways and Means Committee.

And deciding to exempt all but “the rich” (incomes over $250,000 per year) is not as easy as it sounds. Many small business owners file as individuals and will get hit by these higher rates—not a popular political move or sound economic policy with the prospect of a double dip recession.

Bill Thomas is no longer in Congress, but the remnants of his strategic political thinking endure. Leave it to one of the House’s best legislative schemers to create a nasty political problem for the Democrats long after he retired.

Gary Andres is vice chairman of public policy and research at Dutko Worldwide in Washington, D.C., and a regular contributor to The Weekly Standard online.

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