Gerry Canavan

the smartest kid on earth

Tax Policy Monday

with 27 comments

My first reaction to the Obama tax cut deal (contrary to the general impression on the online left in my Twitter feed) is that Obama has made out with more than half the loaf on this. While I think a return to Clinton-era rates would be a relatively decent outcome on policy grounds—if anti-stimulative at a time when the economy desperately needs stimulus—I just don’t trust either Obama or the Senate Dems to actually hold to that as a fail point. I think they would have caved, which means we’d have inevitably gotten something worse than this after the GOP takeover of the House in January. Here we get a temporary extension for the super-rich income bracket (which is pretty bad) but a resumption of unemployment benefits, a payroll tax cut, and a partial return for the estate tax; that’s not nothing. Tim Fernholz notes the compromise is nicely stimulative. And Ezra Klein calls all this winning by losing, which I think might be pretty accurate:

The deal isn’t done, but right now, Democrats look likely to get a 13-month extension of both unemployment insurance and many of the tax breaks built into the stimulus (Making Work Pay, the bump in the Earned Income Tax Credit and the Child Tax Credit, the business tax breaks and so on). That totals about $180 billion over two years. So if the White House gets the deal that the early reports suggest are close — and that they seem to think they’ll be able to get — this is a two-year stimulus package that approaches $300 billion. [Update: Just to be clear, that’s $300 billion for tax cuts for income over $250,000, and tax extenders. Add in the rest of the tax cuts — which I left out because they’re already at consensus — and it’s closer to $750 billion. So the $300 billion is the marginal cost over the tax cuts for income under $250,000.]

In other words, rather than paring the tax cuts and the deficit back, they’re making both larger. If you’re of the mind that the economy needs all the extra help it can get right now — and you should be — this is a lot more extra help than anyone expected Republicans and Democrats would agree to give it. And from a political perspective, if you believe that what matters for elections is the economy — and you should — then it’s worth it for the White House to lose news cycles in 2010 if it means adding jobs by 2012.

That’s the policy of the deal. The politics are similarly focused on the next election: Democrats are negotiating toward a two-year extension of the tax cuts. They’ve rejected a three-year extension. That means the next fight over the tax cuts will be part of the 2012 election. And the White House believes that an improved economy and a bigger deficit will make it much harder for Republicans to support extending tax cuts for the rich. If they try, that gives Democrats both a populist cudgel and a way to take hold of the deficit issue.

John Sides agrees: “If these tax cuts and the extended unemployment benefits indeed have a stimulative impact on the economy, this deal is by far the best thing for Obama to do for 2012.”

Better still would have been to make this a campaign issue last September, but no one listens to me.

Written by gerrycanavan

December 6, 2010 at 7:36 pm

27 Responses

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  1. i may be missing something, but how is this not another rationalization for losing on virtually every front? the payroll tax cut is a downgrade from obama’s proposed making work pay tax cut – apparently klein wrote his blog before reading this? krugman cites this critical CBO study of the payroll tax cut’s likely stimulus effect in his latest op-ed. if you’re right (and you probably are) that the dems would have caved had this debate been put off until after the lame duck period, isn’t this just a better-timed cave, i.e. making a republican legislative victory work for obama’s re-election chances, or cashing in on the modest uptick in employment from the above half-measures in exchange for deepening the deficit (and making it easier for republicans to argue for cutting social spending)? also ending tax cuts for the rich could have been the “populist cudgel,” but they haven’t picked it up yet and probably won’t then, when they’re numerically weaker.


    December 6, 2010 at 8:21 pm

    • …how is this not another rationalization for losing on virtually every front?

      I don’t think I was very clear about this in the post, but my take on this is that we’d already lost when they decided not to do this in September. My sense is that, if all our options left were losses, this was one of the least-worst losses available — and may actually amount to a slight win insofar as it wrestled some stimulus away from the Republicans (who see a failed economy as their key to 2012).

      We lost in September, is my point.

      If Obama doesn’t fight the issue in 2012, of course, then it’s not winning by lossing at all, but just the usual double loss.


      December 6, 2010 at 8:52 pm

      • which tax cuts were the republicans against?


        December 6, 2010 at 9:35 pm

      • They were against the unemployment extension. I count the estate tax and the payroll tax thing as half-victories.

        I’m not saying it’s great! I’m saying it’s better than what I thought we were going to get.


        December 6, 2010 at 9:39 pm

      • oh, i misinterpreted (or overinterpreted) – the biggest stimuli are the various tax cuts, right? which republicans never opposed? i’m glad about the unemployment insurance, but that’s the kind of charity stuff the democrats always get left with (and the repubs want spending cuts in exchange).


        December 6, 2010 at 9:41 pm

      • My understanding is that the biggest stimuli is the unemployment extension and the payroll tax cut, then the lower-incomes-class tax cut (which the Republicans never “opposed” except in the sense that they refused to allow them to go forward without the high-income tax cuts). Tax cuts for the rich aren’t especially stimulative, though the population at large seems to mistakenly think they are.

        Although it’s the policy I want to see eventually, going back to Clinton-era tax rates across the board in the context of 10% unemployment is probably a mistake — so it’s probably what he had to do, and probably something like the best compromise he could have gotten.


        December 6, 2010 at 9:52 pm

      • well i feel like this is where we usually end up when we argue about things democrats do – i think you should be more miserable precisely because we (or congress, or obama, or all three) lost this issue in september, whereas you seem to think that should make us more forgiving about the various defensive maneuvers being taken now. i guess i just have no hope for the future.


        December 6, 2010 at 10:30 pm

    • i just don’t see how the debate will be on better footing in 2012 than it was in september (or now, though i recognize that they can’t do it now). and while it’s probably too dismissive to call the unemployment benefits “charity,” they’re a relatively inexpensive, common-sense measure held hostage by the repubs to ensure there would be no fight on their primary objective (tax cuts for the rich) and that obama will stomp on any congressional dems (like sanders) who try to take drastic measures like keeping their promises to their constituencies. i have a hard time seeing it as a ‘win’ or more than 1/4 of a loaf, especially since your expectations seem to have been pitched lower than those of a lot of congressional dems. and this klein piece seems more like his typical mode of damage control than an honest assessment.

      obviously no one wants tax hikes for everyone right now, least of all obama’s reelection campaign — that’s how the repubs have been able to keep playing the dems on nearly every issue.


      December 6, 2010 at 10:15 pm

      • The unemployment extension is actually a little worse than I thought; apparently it doesn’t help the 99ers:

        As for the other stuff, it comes down to whether or not they’re willing to go back to Clinton-era rates and hold that line no matter how many tax cut bills the House throws at them. Since they’re *obviously* not — they took this deal, after all — you have to show what else they could have gotten that they didn’t. I feel like that calculation is very speculative, and at least this way has the benefit of throwing some cash into the economy in advance of 2012. I’m pissed at Obama for a lot of things but this still seems more or less as good a deal as they were going to get.


        December 6, 2010 at 10:19 pm

      • I guess at this point we’re left hoping that Congressional Dems can extract something additional out of it, like helping the 99ers at least.


        December 6, 2010 at 10:21 pm

      • they could try to hold the line and then call on the house to submit a middle-class-only tax cut bill. but that’s too risky for obama’s reelection calculation.


        December 6, 2010 at 10:41 pm

      • Right, that was the plan I was pitching to Shankar last night: threaten to veto anything but a middle-class-only tax cut, demand a middle-class-only tax cut in the SOTU, etc, etc. But in that scenario you not only have to trust Obama to potentially hold the veto line, which I don’t; you also have to trust inevitably traitorous Senate Democrats not to pass the tax cut through the Senate. At that point, after all, it would become “bipartisan,” with the cost of a veto that much higher. No president is going to repeatedly veto tax cuts passed by both houses of Congress in the midst of 10% unemployment.


        December 6, 2010 at 10:46 pm

      • “you also have to trust inevitably traitorous Senate Democrats not to pass the tax cut through the Senate.”

        i don’t think that would have been insurmountable if this weren’t so last-minute.

        also obama could have sold the tax cuts a little more dearly instead of forcing us to rely on congress to fight for the table scraps.


        December 6, 2010 at 10:53 pm

      • You’re trusting them not to do it for the entirety of 2011 and 2012. Once it takes over the House the GOP can just pass an identical tax cut bill over and over if it likes.

        But yes, this was a failure of leadership at every level. Our hand was stronger last summer, there was no reason to flinch then.


        December 6, 2010 at 10:59 pm

  2. er, that should mean obama is (or seems to be) giving up on the existing making work pay cut to buy the (apparently less effective) payroll tax cut.


    December 6, 2010 at 8:24 pm

  3. oh, this makes the point more clearly:

    But Congressional Democrats have expressed increasing anger that the payroll tax cut and the jobless aide, which Mr. Obama demanded in exchange for continuing the Bush-era tax rates for the highest-income Americans, were not enough in return for such a big concession.

    The payroll tax cut would put about $120 billion back in the pockets of workers and the unemployment benefits would cost about $60 billion, officials said. Continuing the lowered tax rates for the highest-earners, by contrast, would cost the government $700 billion in lost revenue over the next 10 years, according to budget analysts.

    Some Democrats expressed wariness about the emerging deal. But it was clear that Republicans were happier with the results.


    December 6, 2010 at 8:28 pm

  4. Like we didn’t see this coming? And I am sure that none of us will be surprised when all Bush era tax cuts are extended for years and jobless benefits are not extended. Obama is a fucking Republican and the biggest fucking idiot in the world.

    Name: Mark

    December 6, 2010 at 8:43 pm

  5. Gerry, I agree with you that this was already lost in September. But I also think that this was lost long before that. Obama may be a blue-dog, perhaps this is multi-dimensional chess, perhaps this could be worse. But maybe it’s high time we demand the left take back the narrative from the right. Giving in and saying “It could be worse” seems like the last thing we need to do.


    December 6, 2010 at 9:57 pm

    • thefeistysweetheart, I honestly couldn’t agree with you more. I don’t know if you’ve seen my other posts on the current state of the Obama administration (see here and here and here and here and here for starters) but it’s pretty much what I say all the time. But in this case the Democrats actually DID take the narrative back from the right; they did exactly what we wanted them to. Now step 2 is either cut a deal or call the bluff; I think from a long-term policy perspective that’s really about a wash, but from a 2012-centric political perspective cutting a deal is probably better. So I’m not all that upset about this.

      Maybe I just read too much Steve Benen.


      December 6, 2010 at 10:09 pm

      • the federal worker pay freeze was definitely worse.


        December 6, 2010 at 10:22 pm

      • For reals.


        December 6, 2010 at 10:29 pm

    • Thanks Gerry – I actually read you (and Steve Benen) several times a day, and I almost always agree with you both. And I’m sure you’re taking a strong but realistic perspective. Nonetheless, I’m concerned that we’ve given up so much ground. Following the extreme rhetoric surrounding Wikileaks, the abolishment of the House Climate Change Committee, the attacks on Social Security… I’m deeply concerned about where we’re headed. Perhaps this move is sensible on Obama’s part, but in the larger scheme of things I see everything dragged in a terrible direction. Where can I take a stand? Maybe this isn’t it, but when I’m feeling helpless in this general storm, anywhere feels like the right place.


      December 6, 2010 at 11:18 pm

  6. Krugman takes the other view: Let’s Not Make a Deal. He says the anti-stimulative effects of a tax increase are overstated.


    December 6, 2010 at 10:31 pm

    • i linked to that one above. not to be petty.


      December 6, 2010 at 10:42 pm

      • Oh, that must have been where I got the link from. It was open in my browser and I couldn’t remember where I found it.


        December 6, 2010 at 10:47 pm

  7. […] preempting me in yesterday’s column: Let’s Not Make a Deal. Think about the logic of the situation. […]

  8. […] talking about it. For any possible upside you basically have to stick to the win-by-losing stimulus hypothesis—so don’t read Krugman telling you it won’t […]

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