Matthew Yglesias: Harris' most important plan is unknowable

Kamala Harris’ presidential campaign has been dogged by demands for more specific details about what kinds of new policies she would pursue. But the real economic stakes of this election relate to a law passed seven years ago: the Tax Cuts and Jobs Act.

The truth is that Democrats are extremely unlikely to control Congress regardless of what happens in the presidential election, and any bold agenda Harris lays out is almost certain to be a dead letter. The biggest known unknown of the campaign isn’t how Harris plans to change the tax code, but how she will handle negotiations over the law’s expiring tax cuts.

Both candidates have made their positions clear on the law, whose provisions expire at the end of 2025 for individuals and in later years for corporations. Donald Trump says he wants to fully extend TCJA and then add on a huge pile of additional tax cuts. Harris, by contrast, says she would extend TCJA provisions that benefit families earning under $400,000 a year but not those that benefit only the richest households. She also says she wants to raise the corporate income tax from the TCJA level, but not all the way back to the pre-TCJA level.

But what’s actually going to happen? A Trump administration, backed by a Republican Congress, would almost certainly fully extend the TCJA. Trump’s other ideas — exempting tips and overtime from taxation, restoring the full SALT deduction, and ending taxation of Social Security benefits — probably add up to too much of a deficit increase for even a GOP Congress to swallow. But it’s a safe bet that some parts of his plan will become law, depending on how large the Republican majorities are.

With a Harris administration, things are much less clear. Harris will in all likelihood be dealing with a Republican Senate majority. Her first move would be to ask for only a partial extension of the TCJA, and Republicans would say no.

The interesting question is what happens next. The best precedent is the “fiscal cliff” standoff between then-President Barack Obama and congressional Republicans after the 2012 elections. Tax cuts signed by former President George W. Bush were scheduled to expire that winter, and Obama had won re-election based in part on a promise to extend tax cuts for people earning less than $250,000 a year while rescinding them for wealthier households. (1) Republicans resisted, threatening to let all the tax cuts expire and then blame Obama for raising taxes.

The administration, somewhat to the chagrin of progressives, didn’t just take “yes” for an answer — that is, allow taxes to go up, and then bargain down from there (or not). Obama’s concerns about that strategy were in part political and in part substantive: The US economy was then still suffering from very weak demand and high unemployment. Interest rates and inflation were low. He worried that a large tax increase might tip the economy into recession, and the political fallout would hurt Democrats.

So Obama engaged in deep negotiations with congressional Republicans, and eventually a deal — primarily brokered by then-Vice President Joe Biden — emerged which set the cutoff for tax increases at $400,000 for an individual and $450,000 for a married couple. As sweeteners, Republicans also gave Democrats an extension of enhanced unemployment insurance benefits. Progressives hated this deal, and moderate Senate Democrats weren’t wild about it either, but as I learned from my reporting at the time, the White House thought it was the best it could do.

Harris’ decision— and, to an extent, that of Democrats more broadly — will be whether to take a different approach.

The economic outlook is certainly different. The US has full employment, but inflation is still above-target and interest rates are higher than anyone wants them to be. Under the circumstances, while voters of course prefer paying lower taxes to higher taxes, there’s no particular reason to think that a sharp tax increase would be macroeconomically damaging.

Drawing a hard line — saying she is perfectly happy to let the TCJA fully expire if Republicans won’t pass a bill that she’s happy with — would allow Harris to negotiate from a position of strength. Once the provisions expire, she could simply ask why Republicans are holding up the middle-class tax cuts she is asking for. Depending on how Republicans react, federal revenue could end up higher (and the deficit lower) than Harris’ own stated preferences.

Alternatively, she might be able to bring the GOP to heel. But she also might not even try — repeating Obama’s tactic of preemptively conceding that full expiration would be a disaster.

Which approach she takes will set the tone for her presidency. But her campaign isn’t talking about this, nor is it likely to before November — in part because it doesn’t want to be seen as overconfident, and in part because no one wants to concede how unlikely it is that Democrats hold the Senate. No number of interviews or policy rollouts is going to shed any real light on this anyway, since discussing the arcana of legislative strategy isn’t how you win elections.

The upshot is that there certainly will be a high-stakes debate over tax policy in 2025 — and the broad outlines of it are already clear. But there is very little insight into the tactical considerations that will shape the outcome.

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(1) To be clear, because of the way tax brackets work, even high-income households benefited substantially from the middle-class tax cuts that Obama wanted to keep. It’s not so much that he was opposing tax provisions that benefited rich families, he was opposing provisions that only benefitted high-income households.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Yglesias is a columnist for Bloomberg Opinion. A co-founder of and former columnist for Vox, he writes the Slow Boring blog and newsletter. He is author of “One Billion Americans.”