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The Democrats’ Tax Cut Dilemma

Saturday afternoon, the Senate failed to achieve cloture on a proposal to extend the Bush-era tax cuts for family incomes below $250,000 but end them for incomes above this threshold.

Perhaps the most likely outcome, according to reporting by The Times and other news organizations, is that the tax cuts — which expire at the end of the year if Congress takes no action — will eventually be extended at least temporarily for everyone, including high-income earners, as the White House seeks to cut its losses.

There’s been quite a bit of debate in the blogosphere about how Democrats have handled the negotiations. Some liberal-leaning writers, in particular, have suggested that Democrats have played a poor game of poker, having folded their hand before they really needed to.

I’m more inclined to agree with my colleague David Leonhardt, however: the Democrats’ position — while perhaps not backing them all the way into a corner — is not very strong.

There are essentially three possible outcomes in the debate: first, that the tax cuts are extended for everyone; second, that they are extended for no one; and third, that they are extended only below some threshold, most likely $250,000 for couples (although alternatives like $500,000 and $1 million have been proposed).

The way in which Republicans would rank these outcomes is clear. Their first preference would be to extend the tax cuts for everyone. But presumably, when push comes to shove, they’d prefer to extend some of the tax cuts — on incomes below $250,000 — instead of ending all of them.

It’s a little bit more difficult to identify the preferences of Democrats, because there are more divisions within the party: between the president and Congress, between moderate Democrats and liberal ones, between Democrats who are electorally vulnerable and those who aren’t. It is safe to say, however, that on balance, the Democrats would prefer to extend the tax cuts only below the $250,000 threshold, and not above it.

This is also the most popular choice among the general public. Four recent polls — from CBS News, Gallup, The Associated Press, and CNN — find an average of 49 percent of Americans preferring this position, versus 33 percent who would rather see all of the tax cuts extended and 14 percent who would like to see all of them expire. (Another 4 percent are undecided.)

So, the theory goes, if Democrats would prefer extending the tax cuts for incomes below $250,000 to letting all of them expire, and so would Republicans — and so, for that matter, would the general public — then what, exactly, is the rub? Not that victories in Congress ever come easily, but shouldn’t this be a fight that the Democrats can win?

The problem with this theory is that it relies, implicitly, on the assumption that the Democrats can take the third option — extending the tax cuts for everyone — off the table. If the Democrats could do this, then they would be in a very strong position. But this is not so easy to do.

We know what the Democrats’ first preference is: extending the tax cuts below $250,000 only. But what is their second preference? If forced to make a choice, would they rather extend the tax cuts for everyone, or for no one?

Republicans, evidently, believe it is the former; this is why they unanimously voted against cloture in the Senate today. By taking the Democrats’ first choice off the table (extending some of the tax cuts), they figure, they can force them to vote for their second choice — extending all of the tax cuts, rather than letting all of them expire.

Suppose, instead, that the Democrats could credibly demonstrate that they’d prefer to let the tax cuts expire for everyone, rather than extending them for everyone. This would make their bargaining position stronger since that is what will happen in the status quo if no action at all is taken.

But Democrats are likely to have trouble convincing the Republicans of this, for at least four reasons.

First, this is not, by and large, the rhetorical sword that the Democrats have been brandishing for the past several years. Instead, they’ve been suggesting that making the tax code more progressive — by raising taxes on the rich, lowering them on the poor, or both — is the priority. President Obama, for instance, repeatedly pledged on the campaign trail in 2008 that taxes would not be raised on incomes below $250,000.

Second, ending all of the tax cuts would have deleterious effects on the economy at a time when it remains fragile. It is unlikely that the Democrats will be able to pass much more in the way of economic stimulus — but a tax increase would have an anti-stimulative effect. While most economists think that letting the tax cuts expire on high incomes would have a relatively small (although nevertheless negative) short-run effect on the recovery, that is not true of letting everyone’s taxes rise. And, as Mr. Leonhardt argues, the Democrats — and in particular, President Obama — would probably receive more blame if the economy remains poor, particularly if it does so after everyone’s taxes rise.

Third, the Democrats would no longer have the support of the public in staking out this position. According to the surveys I cited earlier, only 14 percent of American adults would, as their first preference, like to see all of the tax cuts expire, versus 33 percent who would rather that none of them expire. Unless a disproportionate number of the 49 percent who would prefer to see some of the tax cuts expire would, as their second choice, rather see all of them expire than none of them (and that seems unlikely), the Democrats would have the unpopular position.

Fourth, there is a variety of evidence — such as from the political scientist Larry M. Bartels — that Congressional policy is most responsive to the preferences of the wealthy, and not those of the middle class. Incumbent Democrats — even those who stake out populist positions — often receive many of their campaign contributions from wealthy Americans and from wealthy corporations. Most of them, especially in the Senate, are also quite wealthy themselves. This does not mean that Democrats will never be willing to pass a policy that helps the middle class at the expense of wealthy Americans. But such policies are not likely to win very many tie breakers when the decision is otherwise close.

Certainly, I do not claim to be absolutely certain about what the political impact would be if all of the tax cuts were to expire. But it is far from obvious that it would leave the Democrats in a stronger position vis-à-vis Republicans, and the opposite could well be true. Moreover, from the standpoint of individual policymakers — importantly, including President Obama — this is not entirely a zero-sum game.

One consequence of the tax cuts lapsing for everyone, particularly if it extended the economic slump, is that voters could get very angry at incumbent politicians of all kinds, and would be inclined to vote many of them out of office, regardless of political party. Perhaps, after all the dust settled, Democrats would wind up in a stronger position than Republicans. (Although that seems unlikely; since the Democrats are the party that will have an incumbent president up for re-election — as well as two-thirds of the incumbent Senators — they still have more to lose, on balance, in 2012.) Even if this were true, however, it would not benefit incumbent politicians — and they are the ones who have a vote.

So suppose that Democrats don’t really want to end all of the tax cuts. Could they make a credible bluff to the contrary? The question answers itself. If Democrats aren’t willing to follow through on the bluff, then ultimately, it isn’t much of a bluff. And it will be called by an opponent skilled at the art of legislative poker, as Republicans are.

Still, Democrats may have some leverage. They still control the Senate — and will continue to do so even after the new Congress convenes in January — as well as the White House. A veto threat, in particular, could be a game-changer, since President Obama would be staking a lot of his political capital on the outcome.

What impact would a veto threat have? This seems very difficult to predict. Republicans would have to decide whether they felt the threat was credible. They’d furthermore have to decide whether they believed it to be advantageous to force Mr. Obama to use his veto pen. Congressional Democrats, in effect, would have to answer the same questions. Mr. Obama would have to decide at what point, if any, he would be willing to accede to a compromise.

The negotiations could go on for many months, against the background of an economy that would surely not be pleased by the gamesmanship. There would be significant upside and significant downside for all parties.

Still, however, Democrats would be in something of the same catch-22. Certainly, President Obama could — and surely would — attempt to frame his threat as forcing a choice on tax cuts for the rich. But the Democrats’ leverage, ultimately, stems from their willingness to allow everyone’s taxes to increase, if necessary, since that is what happens if no deal is reached. If President Obama were to begin noting, for instance, that raising everyone’s taxes would have about three times the deficit-reduction power than raising just some of them, this could make his threat more credible. But it would also make his position less popular, since it would change the debate from being one about taxes on the rich to being one about the proper level of taxation over all.

I’m not a political strategist. It does seem clear, however, that in the absence of strong action from the White House, Democrats are very likely to lose this battle — although they may win a few consolation prizes, like forcing the G.O.P. to take a vote on the record against lowering middle-class taxes (as they did today), and perhaps getting a few concessions in both tax policy and other areas.

In the presence of strong action from the White House, both the risks and the rewards are higher. But ultimately it seems to me that, for such a strategy to have a high probability of success, either the White House or the economy would have to be on somewhat surer footing than they are right now.

Nate Silver founded and was the editor in chief of FiveThirtyEight.