Last Friday Standard and Poor’s downgraded America’s credit rating from AAA to AA+. In the days following both political parties have been quick to blame the other, and the White House has argued that the analysts at S&P are sorely mistaken. Putting blame aside, there is one thing Democrats can do to restore the credit rating fairly quickly if they so desire. Democrats have the ability to make the Bush tax cuts expire for the richest Americans, and if they pledge to do so it would likely reassure the credit ratings agencies.
In downgrading the country the S&P consistently cited the current political environment rather than any particular economic problem. The S&P, and every other credible ratings agency, agrees that the country has enough money to pay back the debt. The problem is one of will, not resources. The S&P specifically cited Republicans who have resisted “any measure that would increase revenues.” In their analysis, the S&P assumed that Congress would not allow the Bush tax cuts to expire at the end of 2012. The report explicitly states that the decreased credit rating was dependent on this assumption. Indeed, if the Bush tax cuts were allowed to expire the country’s yearly budget deficits would be eliminated within 10 years.
The solution would involve convincing the rating agencies that somehow or another revenue will be raised in the future, and the Democrats are capable of accomplishing this task by themselves.
Most tax increases require a majority in the House of Representatives and 60 votes in the Senate to get around a filibuster. However, the Bush tax cuts are set to automatically expire in December of 2012. If Congress does nothing, then the tax cuts will go away and revenue will be raised.
Republicans believe that they can force Democrats to extend the Bush tax cuts by once again using the “hostage-taking” strategy. The Bush tax cuts for the richest Americans, those making over $250,000 each year, are very unpopular. However, the Bush tax cuts for the middle class and poor are very popular. Republicans have refused to decouple these cuts, and have said they will refuse to extend any of the Bush tax cuts unless all of the Bush tax cuts are extended.
In the past Democrats have blinked when faced with this threat. In December 2010 President Obama signed a two year extension of all the Bush tax cuts when Republicans used the hostage-taking approach. Many Republicans have signed an anti-tax pledge, a blood oath of sorts which requires them to oppose any tax hikes in the future. Put simply, the Republicans are winning and the S&P knows it.
But alas, Democrats are not helpless. The Democrats could sign their own pledge which would assure the expiration of the Bush tax cuts for the wealthy. The Democrats have 53 votes in the Senate, and will almost surely maintain a filibuster proof block of 41 votes after 2012. If 41 Senators sign a pledge to increase taxes on the wealthy it would virtually assure that at least some of the Bush tax cuts expire. If President Obama pledges to veto any extension of the Bush tax cuts for the wealthy this would also virtually assure an increase in revenue, since Republicans do not have a two-thirds majority to override his veto.
Some might argue that the Democrats would be blamed for tax increases under such a scenario. However, this is the same kind of defensive thinking which put the Democrats in the current situation. Democrats could argue that they are willing to extend any tax cuts for those making $250,000 or less, and in doing so make it clear that the Republicans are the party bringing about a tax increase through their hostage-taking strategy. Such a strategy would require effective messaging, and President willing to use the bully pulpit, but it could be done. Just like the debt problem, all that is currently missing is the political will.