So, was this worth it? I’d still say no, although it’s better than what I expected over the weekend. It still greatly increases the chances of the Bush tax cuts being made permanent especially because the front-loading of the stimulative stuff actually worsens Obama’s 2012 electoral prospects.
Overall, enough sweetener has been added to diminish, but not eliminate, the bitterness of the disappointment.
It is possible that Republicans could have gotten an even better deal next year, since their numbers in Congress will increase in January. But that would have left them having to cut taxes retroactively and left households paying first higher and then lower taxes. Acting now reduces both uncertainty and volatility. Republicans can now spend the next two years advancing spending cuts and long-term tax reform.
The deal has something to annoy everyone -- but also something for everyone. You're a Democrat? The tax cuts for the rich are extended, and the estate tax deal exempts inheritances up to $5 million while cutting the rate heirs pay to 35 percent. But that's why the Republicans like it. You're a Republican? The tax cuts are only extended for two years, and they're paired with 13 months of unemployment insurance, an extension of a variety of tax credits passed in the stimulus, and a new payroll tax cut -- all of them deficit-financed. But that's why the Democrats like it. You're a deficit hawk? The deal adds more than $700 billion to the deficit. And, let's be honest, you got nothing in return.
Subtract the $400 billion cost of the Bush tax cuts. Subtract another $140 billion or so, which is the cost of extending the Alternative Minimum Tax patch (and almost certainly would have happened regardless). You’re then left with more than $300 billion in net stimulus over two years. And while that sum will not be enough to fix the economy all by itself, it is serious money. The original stimulus bill cost about $800 billion, and most of the money will have been spent in the first two years after its passage.
This deal looks an awful lot like a second stimulus.
Don’t let anyone spin you. We’ll see unemployment come down somewhere between 0 and 0.1% from extending the high-end tax cuts. We are being asked to take on a massive deficit with nobody able to really confirm the net effect on employment is indistinguishable from zero. That’s compared to the 0.2% to 0.5% for middle-class tax cuts.
[The tax cut deal] has partially set my mind at ease about the prospects of a GOP strategy of economic sabotage. The tax policy the right wants, though in general bad for the country, is not bad for short-term economic performance. And the concessions they were willing to give Obama in exchange for boosting the incomes of rich people are expansionary in the short-term. So the terrain here exists well within the range of “normal” politics where conservatives want lower taxes on rich people. This is kind of nutty in my view, but it’s a deeply held article of faith on the right and not some ad hoc effort to sink the economy or anything.
Obama’s cave-in on taxes will alienate more than vocal progressives. It could be far more politically damaging than that. This is not simply a matter of provoking the base with yet another compromise. This is a matter of abandoning a position that is widely and strongly held throughout his party. In some cases, Obama has angered progressives by doing exactly what he promised during the campaign, but in this case he would be openly repudiating one of the most prominent positions he took during the campaign.
Extending the tax cuts for the wealthiest Americans may be a bitter pill to swallow for many progressives, but it’s not that high of a price to pay for a serious shot of stimulus. I would actually like to see more stimulus in the form of direct payments to middle and low income Americans, followed by some long-term structural and tax reforms to shore up the long term deficit. But deficits, while important for our future, are a ways down the list during a recession. First comes economic recovery, then comes whatever necessary cuts and tax reforms necessary to get our fiscal ship in order.
[W]hat has Obama gotten out of this deal? Mainly, a 13-month extension of unemployment benefits. I don't know this for sure, but my guess is that the Republicans would have caved on unemployment benefits eventually -- opposing them is politically toxic and, unlike tax cuts, it's not a major priority of theirs. But maybe they'd have just approved another two months, and then dithered some more and approved another two months, etc., providing numerous opportunities for Democrats to portray Republicans as cruel and insensitive to struggling workers. Obama just traded that away for a year.
Ezra Klein argues that this might amount to a win for the White House on mid-term political and even policy grounds because of the stimulative effect of the tax cuts and the UI re-up combined. His argument being that there's enough stimulus contained in the deal to measurably improve the economy by 2012 and thus the president's chances of reelection. Not only that, but create a better political climate to re-litigate the tax question. I think Ezra may be on to something (I'll have to give it some thought). But I find myself in a position somewhat similar to that he acribes to a lot of folks on the Hill: it might be brilliant. But it's getting hard to believe it's not brilliant by accident.
This is clearly a win for the Republicans, who get everything they want for the rich. The tax cuts on incomes over $250,000 a year will last for two years, versus just 13 months for the extension of federal unemployment benefits, and just one year of lower payroll taxes. Meanwhile, all the Congressional opposition to this deal is going to come from Democrats, who are basically being asked to sign off on exactly the same bill that George W Bush would have asked for, with a spoonful of unemployment-benefit sugar to help the medicine go down. A lot of them will be wistfully eyeing David Leonhardt’s list of what could be achieved with the $60 billion going on those tax cuts for the rich, and wondering how a Democratic president could find himself doing this.
As much as I hate to say it, if they can get 13 months of unemployment benefits, I’d take it. I figgered the most they would get would be six months. Thirteen months might save a lot of families. As bad a policy as I think the tax cuts for the rich are, thirteen months of keeping people from the brink of disaster is a mighty good sweetener.
Optimists think there might be an opportunity to hammer out some sort of medium-term package in the coming months: Mr Obama’s state-of-the-union speech, his budget in February, and the imminent need to raise the statutory ceiling on how much debt the Treasury may issue could all provide the setting. There is potential common ground between Republicans and Mr Obama on tax reform, Social Security, and on rules limiting discretionary spending. But administering such bitter medicine usually requires a helping of sugar, and now that both Mr Obama’s and the Republicans’ near-term priorities have been satisfied, most of the sugar is gone.
A debt crisis has never been likely for America, much less imminent. But it looks to me that while the odds remain low, they went up tonight.
I continue to think that it's stupid to extend the tax cuts for two years instead of three, and caving in to Republican demands for an estate tax cut for the absolute wealthiest sliver of the population is grating as hell. On the positive side, the payroll tax holiday (semi-holiday, anyway) is a good idea, the extension of various tax credits is a good idea, and the 13-month extension of unemployment insurance is much better than expected. This isn't anyone's idea of dream legislation, but it could be a lot worse.
[T]he most pernicious piece of this deal is the estate tax cut. It will amount to another $7 billion in tax breaks in 2011 that benefit no one but the ultra-wealthy. Under Obama’s plan, just 0.25 percent of estates in the country would conceivably have to pay the estate tax, but Lincoln and Kyl proposed spending billions to lop another 0.11 percent off of that.
The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics.
Why were Republicans so flexible? They are willing to deal away a lot if they're getting tax cuts for the rich. President Clinton got Republicans to establish a Childrens' Health Insurance Program in 1997 in return for a capital gains tax cut. Now Obama got a fair amount of stimulus in return for upper-bracket tax cuts. Unfortunately, it tends to be terrible policy. But it's the party's core policy goal, and if you help them attain it they can be surprisingly reasonable.
It is a great deal [for the Republicans], because of President Obama's volunteering the 2 percent payroll tax holiday. We and many other conservatives have long argued that this measure would aid job creation more than just about anything the government can do. By abandoning any effort to raise taxes and adopting a favorite conservative tax cut, Obama has admitted that the Republicans were right all along.
After making the budget deficit not just a campaign issue but the campaign issue of 2010, one of the very first legislative things the Republicans in Congress will do after the election is agree to a tax cut and extension of unemployment benefits (and god knows what else) that will...wait for it...increase the deficit. The two-year increase in the deficit because of the deal will be greater than the stimulus bill the GOP railed against during the election.
Yes, permanently extending the tax cuts are a bad idea. But it’s not as if temporarily extending them makes permanent extension less likely. As Paul Krugman wrote today, "if tax-cut blackmail works now, why shouldn’t it work again later?" This was arguably Obama's best and last chance to kill a tax cut that will, over the next decade, starve government of money necessary to run its most important programs.
[T]his can no longer be considered a two-year tax cut. This year, the Democrats gave in to the framing that letting the cuts expire would be a tax increase. President Obama has already nailed himself to the cross of “stop[ping] middle-class taxes from going up.” With that on his resume, how is he going to flip-flop and let those taxes go up in 2012? He won’t win a vote to cut taxes just for the middle class with fewer Democrats in Congress than he has now. So if he wants to preserve the middle-class tax cuts, he’ll have to compromise again.
And Obama will no longer be able to say the tax cuts were a mistake made by President Bush that he was letting expire. Now he owns the mistake.
In the short run, we need more stimulus, and this is likely the best that could be gotten. In the long run, we need a radical transformation of our tax code and benefit side of government or our country will go bankrupt. The next two years won't do it, but the tax code we have just extended is a disaster for anyone who is interested in a balanced budget if it remains for the long term. Hopefully it will be replaced by a far simpler tax code along the lines suggested by the Deficit Commission, and our nation will have an adult conversation about how much spending we want and we will then develop a way to pay for it. It will be up to the President to focus the nation's attention on our long term fiscal situation and the deficit with his budget next year, and his powers of persuasion for the remainder of his time as President.
With progressives, Obama has taken out a large political IOU. The battle over tax rates remains to be fought another day. Best case, it could become moot if a genuine deal could be worked out to phase out tax expenditures (targeted tax breaks such as the mortgage deduction) in favor of lower marginal rates. Medium case, the economy will be strong enough in 2012 for Obama to win the rematch when the tax cuts sunset once again. Worst case, we ride the Bush tax cuts to national bankruptcy.
Personally, I've got my eye on another, shorter-term IOU. I hope fervently -- and will think better of his much-maligned negotiating skills if it proves so -- that he has extracted a commitment to get New Start -- and maybe DADT -- through the lame duck Congress.
The deal reached today is big news, to be sure. It is a win for the President. The elements of the deal are significant, but not nearly as significant as the fact that it was achieved in fairly quick order. What manymyself includedfeared would be a wasted and ugly lame duck session of Congress now has a chance of being fairly productive. There should be time now, before the 111th Congress folds up its tent, to approve critical funding measures, and perhaps even to ratify the New START treaty. It would be nice, as well, if Congress would have the guts to repeal “Don’t ask, don’t tell.” There is time to do all of this, but what is not known is whether or not the tax deal has also produced “fungible goodwill” to help move other things along. It would be nice if it did, but one probably shouldn’t count on it.