Two obstacles to such a framework approach immediately come to mind. First, buying a little more time would only push the problems down the road -- until the next deadline approached. Second, even temporary extensions of the tax cuts would require a compromise: Would we extend all of them (presumably, the administration wouldn't want to) or only those for taxpayers with incomes below $250,000 (House Republicans wouldn't like that)?
Lame-Duck Difficulties
Given such difficulties, it might not be possible to reach a framework agreement during the lame duck. Then, all the tax cuts would expire. A dramatic scenario, but this, unfortunately, may be the most likely.
In January 2013, the economy would be hit with a major fiscal contraction, market anxiety would rise, and both sides would blame each other for Washington's dysfunction. But there would be a silver lining: The debate could then move away from the question of which tax cuts to extend.
If we get to this point, the administration could step forward with an entirely different concept for decreasing taxes. It could propose, for example, large increases in the payroll- tax holiday and in the standard income-tax deduction. This would reduce taxes for everyone, but do it in a much more progressive fashion than the Bush tax cuts did. The net result of the new tax cuts and the expiration of the Bush ones would be higher taxes for upper-income people, as the administration desires.
The president could then dare the Republicans to vote against the new universal tax cut. Republicans would have a harder time withholding support for such an across-the-board tax cut in early 2013, once the Bush tax cuts are water under the bridge, than they would have had holding firm on extending all the Bush tax cuts in late 2012.
Resolving the tax issue in that way wouldn't be enough to raise the debt limit and waive the sequestration spending cuts. To accomplish those things, House Republicans will demand some changes to entitlement programs. The question is whether they would push only for the relatively modest reforms discussed last summer (such as using the so-called superlative consumer price index to make cost-of-living adjustments in Social Security) or demand bigger structural changes (such as premium support in Medicare).
It's tempting to feel nostalgic for the days when Congress wasn't so polarized, and the confluence of a substantial tax-cut expiration, a huge spending cut and the debt limit would virtually guarantee a major piece of legislation. Taxmageddon highlights how much more challenging our system has become.
In navigating through the coming storm, we need to avoid undue fiscal contraction (and preferably provide additional support to the economy if the unemployment rate remains elevated) but also recognize that enacting a debt-limit increase will require some long-term deficit reduction -- which would be desirable in any case. The coming debate thus shows, once again, the benefit of a dual strategy in which we continue to provide stimulus to the economy in the short run but enact substantial deficit reduction that takes effect down the road.
(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)