The Bush tax cuts will decide the deficit debate

(CHARLES DHARAPAK/ASSOCIATED PRESS) In Wonkbook this morning, I argued that Reid’s deal shows that Republicans have won the debt-ceiling debate: Revenues are now off the table. But that doesn’t mean they’ve won the deficit debate. We won’t know who won that until we know what happens with the Bush tax cuts in 2012.

Imagine Reid’s proposal passes. If Reid runs through $2.7 trillion in spending cuts to get the debt ceiling lifted, and then the Obama administration and the Republicans start looking for another $4 trillion grand bargain that has three times as many spending cuts as tax increases, then this will have been a terrible deal for Democrats. The GOP pocketed all the easy cuts in 2011 without giving anything up in return, which means the next package will have to rely on spending cuts that are much harder for Democrats.

But if the Obama administration decides that the grand bargain is dead, wins the next election and uses the expiration of the Bush tax cuts to raise revenue by a trillion dollars or more, then this deal will have worked out quite nicely for Democrats. It preserved the leverage of the Bush tax cuts, let Democrats write most of the spending cuts and preempted the $4 trillion deal that Obama offered Boehner, which would have done much more damage to Democratic priorities.

The question, in other words, is whether the administration and congressional Democrats want to use the expiration of the Bush tax cuts as leverage in 2012. My reporting over the last few months has convinced me that the White House would vastly prefer a grand bargain in 2011 to a fight over taxes in 2012. In fact, I don’t think they’re particularly interested in a fight over taxes one way or the other. But if they can’t get the grand bargain, maybe they’ll reconsider their stance.

The same analysis holds for Boehner’s plans. If his decision to go with a smaller deal means he gets some spending cuts now followed by more and deeper spending cuts later, he will have walked away with a big win for his side. But if he gets spending cuts now only to be forced into large tax increases later, his coalition will come to wish they had taken the deal the president offered them in 2011.

Remember that if the Democrats and Republicans can’t come to an agreement over the expiration of the Bush tax cuts, taxes rise by almost $4 trillion. In contrast, the deal the president and Boehner were working on would have probably raised taxes by about a trillion dollars once all was said and done.

But either way, the bottom line is the same: We won’t know which side came out ahead in the debt-ceiling deal until we know what happens with the Bush tax cuts. Boehner had the opportunity to take that uncertainty off of the table by striking the $4 trillion deal with the White House, but he refused to do so, and now we’re waiting to see whether his gamble pays off.