Obama's Tax Deal Is Disastrous ... Compared to What?

If you're just joining us for news about Obama's compromise on the Bush tax cuts, here's how to catch up.
-- The plan's outline is here.
-- If you don't know what to think, choose from the buffet of reactions here.
-- Top Democratic mayors support the plan here.
-- House Democrats reject the plan here.
-- The Bush tax cuts, unemployment benefits and payroll tax cuts -- three key elements of the plan -- are explained here, here and here.

The last point I want to make on the Bush tax cut compromise is about perspective. Critics of the plan have said that the plan is bad for the deficit, bad for the economy, and bad for the low-income poor. Are they right? Yes and no. Depends on what you compare it to.

This $800 billion plan is a deficit disaster ... but compared to the Senate Democrats' plan -- permanent extension of the Bush tax cuts for 98 percent of Americans, which would cost about $3 trillion over ten years -- its impact on national debt is fairly ho-hum, especially if it expires into a reformed tax code.

Using $120 billion (or so) to extend tax cuts for the rich is a poor use of finite resources ... but compared to a scenario where there is no deal, and none of the Bush tax cuts are extended, and American families' tax burden rises by thousands of dollars, a $120 billion compromise looks like a cinch when you're talking about keeping a $14 trillion economy afloat.

This compromise is a bad deal for the working poor making under $10,000, who stand to lose $200 if the new payroll tax cut replaces the stimulus tax credit ... but it's a great deal if you compare it to a scenario where the stimulus tax credit dies, as it might have without the president's compromise. What's more, for the majority of workers in the bottom half of earners make much more than $10,000 a year, and a payroll tax cut is more generous to them than the Making Work Pay credit it would replace.

Yes, I'm choosing my own baselines, too, just like the tax deal's critics. I'm not saying the critics have no merit, because this plan will blow up 2011's deficit and let taxes on the rich stay at historically low effective rates while giving less money to the working poor. That's no progressive dream. But then again, this is the 11th hour for the White House and the economy. It shouldn't surprise anyone that promises are turning into compromises.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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