Was GOP's Opposition to Bailout a Clever Ploy? Concessions for House Republicans Could Increase Budget Deficit, Make Plan More Expensive

The decision by the House GOP to reject the bailout plan that Bush, Paulson, and McCain endorsed was truly dramatic. Although many experts viewed the bailout as a necessary tool for stabilizing the economy, many House Republicans opposed it on the grounds that it would reward reckless corporate behavior and because the $700 billion price tag would unduly burden struggling taxpayers. In other words, GOP opposition appealed to fiscal responsibility, corporate ethics, and to populism.

But did this lofty rhetoric conceal a different, less-popular motivation for rejecting the proposed legislation? Perhaps. The Senate is presently working on a compromise bill that offers concessions to the House GOP. But from my review of the negotiations, these concessions would actually make the bailout even more expensive and would augment the federal budget deficit.

The Washington Post, for example, reports that in order to appease House Republicans, Senate negotiators will likely add provisions to the bailout that would increase FDIC caps for one year, revive currently expired corporate tax breaks, and raise the minimum income level that exposes individuals to the alternative minimum income tax. Although the FDIC provision would potentially protect consumers, it also expands governmental liability in the event of bank and credit union failures. Also, the proposed concessions would reduce tax revenue by extending the availability of corporate tax breaks and reducing the number of high-wage earners subject to the alternative minimum income tax.

The proposed revisions do not include any measures that would offset revenue reductions by curbing government spending. Consequently, these concessions would make the proposed legislation more costly to taxpayers and would increase the budget deficit. If the House GOP rejected the initial bailout plan to secure tax cuts for corporations and high-income earners, then they need to come clean with the public.

Let me be clear: I am not opposed to the idea of a bailout, increasing FDIC, or to tax relief -- including corporate tax cuts and a revision of the alternative minimum income tax to reflect the inflationary erosion of real income. I cannot imagine a private sector solution to the financial crisis that would not cause protracted suffering for poor and middle-class Americans. Also, given the impending (or ongoing) recession, reducing taxes is arguably sound policy, and in the past Congress has unjustifiably refused to tie the alternative minimum income tax to inflation. And if you're a supply-sider, tax cuts could ultimately enhance revenue (an idea that many economists strongly contest).

But putting aside the merits of the proposed revisions, the House GOP presented itself as a fiscal watchdog for "the people" and as an opponent to handouts for irresponsible corporations. Now, GOP members apparently want to give these same companies tax breaks, make the bailout even more costly to "the people," and reduce tax revenue without cutting spending. Why didn't they say that in the first place?

Ironically, conservative, or "Blue Dog," House Democrats are threatening to reject the revised bill if it includes tax reductions without any corresponding spending cuts. So the Senate Democrats' efforts to win over House Republicans might ultimately cost them House-Democratic support. The soap opera continues!