In Defense Of The Tax Cut Compromise

There’s a lot I’d criticize Obama for: His Bush-like despotic abuse of civil liberties and presidential powers when it comes to US prisoners, for example, is nothing less than loathsome. His ridiculous habit of making concessions to Republicans in return for nothing. His government’s attack on Wikileaks. His refusal to make the filibuster an issue (although here the majority of blame rightly belongs to Harry Reid). His lack of leadership on climate change, the most important issue of this century. (Although here, again, the Senate deserves most of the blame).

So I’m hoping this post won’t lead to accusations that I’m a mindless Obama-worshipers, etc..

But this week’s tax deal isn’t something I’ll hate on Obama for.

Because it’s a good deal.

The GOP got around $95 billion in tax cuts for wealthy Americans and $30 billion in estate tax cuts. Democrats got $120 billion in payroll-tax cuts, $40 billion in refundable tax credits (Earned Income Tax Credit, Child Tax Credit and education tax credits), $56 billion in unemployment insurance, and, depending on how you count it, about $180 billion (two-year cost) or $30 billion (10-year cost) in new tax incentives for businesses to invest.

That’s $125 billion in the tax cuts Republicans wanted, and $246-$396 billion of the tax cuts Democrats wanted. Frankly, that’s about $200-$300 billion dollars better than I expected. (It’s likely that Congress will wind up changing these numbers somewhat before the final bill is signed, but the baseline has been changed in a very positive direction). Overall, imperfect though it is, it’s more stimulus than anyone expected — and stimulus for the economy should be a higher priority than either deficit-cutting, or tax fairness, until unemployment drops to reasonable levels.

I think we might have gotten a better deal if the Democrats in the Senate had been standing firm on taxes over the last month, rather than a whole bunch of them being obviously and publicly weak on blocking the extra tax cuts for the rich. That wasn’t Obama’s fault, but it put him in a bad bargaining position.

And nonetheless, Obama walked away with a much better than expected bargain.

I know that the press thinks otherwise, and Republicans think otherwise. That’s because both the press and the Republicans are fools. They don’t do the math; they just pay attention to who won the news cycle. Well, Republicans won this week’s news cycle. But they lost on the numbers.

Paul Krugman writes:

President Obama did, after all, extract more concessions than most of us expected. [...] All of this is very much second-best policy: consumers would probably spend only part of the payroll tax break, and it’s unclear whether the business break would do much to spur investment given the excess capacity in the economy. Still, it would be a noticeable net positive for the economy next year. [...]

This political reality makes the tax deal a bad bargain for Democrats. Think of it this way: The deal essentially sets up 2011-2012 to be a repeat of 2009-2010. Once again, there would be initial benefits from the stimulus, and decent growth a year before the election. But as the stimulus faded, growth would tend to stall — and this stall would, once again, come in the months leading up to the election, with seriously negative consequences for Mr. Obama and his party.

Krugman’s argument is that even if though the compromise is more than he thought Obama would be able to get, and “would be a noticeable net positive for the economy next year,” it could also lead to electoral trouble in two year’s time.

First of all, that amounts to criticizing Obama for taking a deal that’s good for the country even if it’s not ideal for the Democrats politically. Since when is putting the country’s needs first the wrong thing to do?

Secondly, the politics of this aren’t as clear-cut as Krugman claims (Krugman is an authority on economics, not on politics). The problem in 2010 wasn’t that the “recovery” had stalled; it was that the recovery only existed on paper and in corporate balance sheets, but not in the areas that ordinary Americans care about. The unemployment rate didn’t drop, and in general people don’t have any more money to spend or feel less economically vulnerable.

If we see some real economic improvement — dropping unemployment, more security, more spending money — then the Democrats will be in a stronger position for the 2012 election, even if things level off before November 2012.

And if that doesn’t happen, my bet is that things like the payroll tax cut get extended another year. Extending tax cuts for the majority of working Americans during a time of economic crisis is not the most difficult political lift in the world. But if Republicans want to fight for raising every working American’s taxes with just 10 months to go until the 2012 elections, would that really hurt the Democrats in 2012?

This entry posted in crossposted on TADA, Economics and the like, Elections and politics, In the news. Bookmark the permalink. 

15 Responses to In Defense Of The Tax Cut Compromise

  1. 1
    Jenny says:

    I really don’t think allowing tax cuts for the rich is putting people first, rather it’s more like Reagan: http://amleft.blogspot.com/2010_12_01_archive.html#6564683165265554888

    And have you seen this yet?: http://protestobama.org/

  2. 2
    Robert says:

    Accelerated depreciation has been a conservative, if not bipartisan, idea for many years.

    Also, conservatives who were OK with the idea of a fiscal stimulus at all, would have named payroll tax holidays as one of the best ways to accomplish that. I did, as you may or may not recall. (I looked offhand in my email archive, I think it was around February of 2009 because that’s when we had the discussion of the stimulus.)

    So I’m not sure you can identify the bill’s goodie list with quite this level of dichotomization.

  3. 3
    Robert says:

    Also, you’re a mindless Obama-worshiper.

  4. 4
    Elusis says:

    Robert – what’s accelerated depreciation?

  5. 5
    Robert says:

    “Equipment expensing” in the chart above. Ordinarily capital investments like new computers or factory gear or buildings or what have you depreciate according to a schedule that the IRS puts out. (It used to be computers were on a five year schedule, then they made them two or three because businesses started replacing them more often.)

    The idea of depreciation is that you get a tax writeoff for the value of these capital-intensive items, a fraction of the value each year for X number of years. Equipment expensing (which is really a better name for it than accelerated depreciation, since the latter could just mean compressing the schedule) collapses this process into one year, so you can write the whole thing off right now.

    It basically encourages companies to buy stuff now because they can get the whole writeoff now. Thus stimulating demand and boosting economic activity now, when we need it boosted. It costs us a little tax money now (since you get the whole deduction right away) but not over the long haul (you still write off the same amount either way.)

  6. 6
    L33tminion says:

    That separation of “what we got” and “what they got” is just wrong.

    First, it doesn’t mention that the compromise included removing the “Making Work Pay” tax credit, which will raise taxes on some of the poorest.

    Second, I think that Republican politicians would cave on unemployment insurance. There are currently about four unemployed job seekers for every job opening. There’s broad support for unemployment insurance, and a lot of Republican voters are unemployed, too. Extending unemployment insurance is good, but why do we need to categorize that as “Democrats win” and compromise something away for it.

    Third, the payroll tax cut is a trap. In two years, Republicans will propose extending that and the Democrats will be left fighting for a “tax hike”. And then the axes come out for social security.

    Fourth, the temporary extension of tax-cuts for the rich is also a trap. Democrats who think it will be easier to just let that expire when it’s just the rich are wrong. It will be “socialism” this and “class warfare” that, and then the cuts will be extended for another two years, to be used against the Democrats ad infinitum.

    Fifth, low taxes for the rich act like a negative stimulus. While taxes for the rich are low, it’s cheap to increase CEO compensation relative to pay for those who have less.

    (Tax cuts are generally ineffective as a stimulus. The rich spend it on speculation, not direct investment or goods or services. The poor will spend some, but generally will (correctly) try as much as possible to save any surplus or use it to pay down debt.)

    The alternative is bad, but this deal is so terrible that it’s worse than the alternative. At least some of the Democrats are fighting it. The House caucus is refusing to vote on the Senate bill, and Bernie Sanders is currently 7 hours into his speech in the Senate.

  7. 7
    Robert says:

    There’s a decent explanation of it here:
    http://en.wikipedia.org/wiki/Accelerated_depreciation

    Which I went to read to make sure I hadn’t steered you wrong above, since it’s been a few years since accounting class, and I rarely depreciate anything in my business, which is people-heavy, not equipment-heavy. The one thing the article clarifies that I didn’t cover is that you can’t write off a capital expense the first year you buy it, you HAVE to take the expense over a course of years, which can really discourage capital purchases.

    For example, say my company projects a net profit of a million dollars this year, so we decide to use that money to buy a $1 million Fromulator. Fromulators depreciate on a 3-year schedule. That means that we spend our million dollars on the equipment, but we can only take $333K of it as a business deduction for our taxes. We will owe tax on $666,667 of income, even though we haven’t got any money left. Big problem!

    In practice we wouldn’t do it that way, of course, for the exact reason that it would cause us a big problem, and instead we would defer our Fromulator purchase, or maybe lease an already-existing one (which does nothing for Fromulax, the company that makes them.) Yeah, next year and the year after we get a $333K deduction again, but we might not need the deduction next year and the year after; the cash crunch would come NOW.

    With equipment expensing, we can write off the whole cost the first year. Our net profit is $0, we owe no taxes, Fromulax gets a big order, and everybody wins. It makes our decision to buy the capital equipment right away much more attractive and much simpler in terms of planning.

  8. 8
    Paul Healey says:

    With all due respect, you should listen more closely to Krugman (and you don’t win a Nobel in Economics by being ignorant about politics). The truth is that the Republicans took a BIG step toward permanently crippling our government through a giveaway to the very rich, in exchange for short term concessions that won’t really change the situation for the rest of us. Yes, it’s good in the short term for some of those who need help. In the long term it is a terrible deal for us all. The deal was a big blunder, pure and simple.

  9. 10
    Elusis says:

    Ah, thanks Robert. I’ve done that as a self-employed person.

    In other news, I am listening to hours 7 and now 8 of Bernie Sanders’ fillibuster – the first real one in 18 years – and I am truly, truly impressed with this man. Whether Amp’s analysis here is correct or not (I need to read more), hearing someone actually speak out against the real class warfare, of the very very rich on everyone else, is heartening.

  10. 11
    Bucky says:

    Charles Krauthammer agrees with you, btw.

    If Krauthammer is in agreement, then you seriously need to reconsider your position.

  11. 12
    Robert says:

    Not necessarily. Krauthammer doesn’t agree with Barry on many substantive issues, he just thinks that the Democrats got a better deal than the Republicans.

    Barry and I can agree that the socialists won a particular ideological battle, or that the capitalists did, without agreeing on whether that’s desirable.

  12. 13
    RonF says:

    l33tminion @ 6:

    The rich spend it on speculation, not direct investment or goods or services

    I’ve see this stated on this site before. I’d be interested on what data there is to back it up. I don’t say this to contest the position. Let’s just say that I’m not drinking anyone’s Kool-Aid at this point.

    Because if that’s true I’d honor hearing the argument that the tax cuts for wealthy people should be dependent on structuring them in such a fashion as to maximize their effect on stimulating the economy. Such an amendment could be proposed in the Senate and then accepted by the House in confrerence.

  13. 14
    AlanSmithee says:

    Mmmn… Obama. He’s just so good looking. I don’t know who’s nicer to look at, him or Michelle. What I like to do is cut out pictures of the Obamas and paste them to to the wall above my bed, making a big collage of my two favorite people in the entire world.

  14. 15
    Jake Squid says:

    Mr. Smithee brings up a great point! I, too, think the 2% reduction of the employee contribution to Social Security is a bad idea. Or a good idea. Either it adds to the right wing contention that SS is doomed or it refutes it by implying that SS is good enough shape to not need that 2% right now.