The Tax Cut Debate: The Latest Train Wreck Waiting To Happen

BY Gwen Ifill  December 2, 2011 at 7:46 AM EDT

As I prepared for a PBS NewsHour discussion about the prospects of extending and expanding the year-old payroll tax holiday, I knew the challenges that lay ahead. And that was before the Senate confirmed my pessimism by rejecting not one, but two, proposals to grant Americans year-end tax relief late Thursday.

This time, I hoped for a little more nuance. After all, both sides say they agree that now is not the time to allow a tax cut to lapse that has saved many families as much as $1,000 this year. Plus, the proposal now on the table would boost those savings to $1,500, while cutting payroll taxes for small businesses as well. What’s not to like at holiday time?

But we’ve been to this rodeo before. To pay for the plan, Democrats demand a formula that will tax those who earn the most. Republicans counter with an approach that slashes government instead.

What ended up unfolding on the NewsHour on Wednesday night served as a reality check and a reminder. It’s no accident that big things are not happening in Washington. It is by design.

But this is one of those cases where the inside-the-Beltway argument might actually have an effect on the money in your pocket.

Both sides appear to agree on this much: allowing the payroll tax cut – originally envisioned as temporary relief – to lapse would feel like a tax hike for Americans who have been able to pocket those savings for the past 12 months.

The White House argues – and Republicans largely do not dispute – that reducing the tax to just over 3 percent would cost about $265 billion a year. And although there are still Republicans and even some Democrats who believe that fiddling with the tax code is not the solution to the nation’s economic problems, leaders of both parties appeared to agree this week that it’s even harder to take away a tax break than to pass one.

So there is the agreement. Now, more consequentially, here is the disagreement.

Both sides are way, way apart on how to pay it.

The Democrats’ solution, promoted in our NewsHour discussion by White House National Economic Council Director Gene Sperling, is to balance the tax cut with a surtax on people who earn $1 million or more. It’s a populist argument that has played a starring role in much of the Obama administration’s economic policy arguments.

“We’re giving tax relief to over 99- percent of small businesses and entrepreneurs next year by cutting the payroll tax cut in half, to have a tax increase that affects only the 300,000 most well-off Americans,” Sperling said. “So this is a very significant tax cut for small business, job creators, entrepreneurs.”

But only minutes before we taped that interview, Senator Minority Leader Mitch McConnell (R-Ky.), who had opened the door to compromise just the day before, proposed his own plan to pay for the tax cut. Instead of taxing the rich, he suggested freezing government hiring and spending and imposing means tests on government benefits. This would include unemployment compensation.

Sperling, who seemed unaware of the McConnell proposal when we spoke, did not reject it out of hand. But by the next day White House spokesman Jay Carney did. He called the approach “unbalanced.”

Sen. John Barrosso, the Wyoming Republican who appeared on the NewsHour right after Sperling, asserted that Americans would not be in this fix were it not for the “Obama economy.”

“We need to keep that money in the hands and pockets of the American people,” he continued. “We will get to that end. And the best way to do it is by cutting spending, not by raising taxes on anyone.”

Those two approaches represent a pretty fundamental divide when it comes to taxes and spending. Whether it was in the collapse of the deficit reduction supercommittee or in the standoff earlier this year that forced the government toward shutdown, the basic disagreement between Democrats and Republicans has never changed.

So unless there is a secret compromise that our elected leaders are hoping to surprise us with under the tree in a few weeks, it’s difficult to see how they will ever agree to agree on the details. Even when they seem to agree on the goal.

The yellow brick road has never seemed more crooked.

Gwen’s Take is cross-posted with the website of Washington Week, which airs Friday night on many PBS stations. Check your local listings.