Can the White House win in 2012 by losing on the Bush tax cuts now?

By Ezra Klein

The compromise the White House is negotiating on the Bush tax cut is looking more and more like the White House's opening gambit in the 2012 campaign.

The White House has stopped negotiating for ideal -- or even acceptable -- tax policy and moved to negotiating stimulus policy. The tax cuts for income over $250,000 will pump about $100 billion into the economy over the next two years. It's not the most stimulative way to spend $100 billion, but it's more stimulative than not spending it, or than raising taxes. And it won't be alone.

The deal isn't done, but right now, Democrats look likely to get a 13-month extension of both unemployment insurance and many of the tax breaks built into the stimulus (Making Work Pay, the bump in the Earned Income Tax Credit and the Child Tax Credit, the business tax breaks and so on). That totals about $180 billion over two years. So if the White House gets the deal that the early reports suggest are close -- and that they seem to think they'll be able to get -- this is a two-year stimulus package that approaches $300 billion. [Update: Just to be clear, that's $300 billion for tax cuts for income over $250,000, and tax extenders. Add in the rest of the tax cuts -- which I left out because they're already at consensus -- and it's closer to $750 billion. So the $300 billion is the marginal cost over the tax cuts for income under $250,000.]

In other words, rather than paring the tax cuts and the deficit back, they're making both larger. If you're of the mind that the economy needs all the extra help it can get right now -- and you should be -- this is a lot more extra help than anyone expected Republicans and Democrats would agree to give it. And from a political perspective, if you believe that what matters for elections is the economy -- and you should -- then it's worth it for the White House to lose news cycles in 2010 if it means adding jobs by 2012.

That's the policy of the deal. The politics are similarly focused on the next election: Democrats are negotiating toward a two-year extension of the tax cuts. They've rejected a three-year extension. That means the next fight over the tax cuts will be part of the 2012 election. And the White House believes that an improved economy and a bigger deficit will make it much harder for Republicans to support extending tax cuts for the rich. If they try, that gives Democrats both a populist cudgel and a way to take hold of the deficit issue.

The White House's problem is that they handled the politics of this argument so poorly in 2010 that their allies on the Hill don't trust them to do better in 2012. One Senate staffer summed up his reaction to the deal in one word: "Nausea." Another said the deal is fine -- but it was getting hard to trust the White House. "Will they actually have that fight in 2012?" He asked. "They dropped the ball this time around."

The irony of the situation is that the White House may strike a better deal because they handled the politics so poorly. If they'd showed more backbone early on and publicly demanded that the Republicans extend a package of tax breaks from the much-hated stimulus bill, it might've made it impossible for Republicans to agree to anything of the kind. As it is, the White House defined an extension of the tax cuts for the rich as a loss for them -- and now they're going to extend those tax cuts, and lose. They were not playing for this outcome.

But though they're coming out on the wrong side of the short-term politics and the wrong side of the tax policy, they may be coming out with a win on stimulus that no one expected, and that may ultimately matter much more for both the economy and Obama's reelection campaign.

Photo credit: By Jewel Samad/AFP/Getty