Monday, December 6, 2010

The Tax Compromise

Ezra Klein tries to make some lemonade from the lemon:
Rather than paring the tax cuts and the deficit back, [Obama and the Republicans are] 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.
John Sides agrees. To which I say, okay, maybe.  But this is all predicated on the idea that maintaining tax cuts for the wealthy will stimulate the economy, and the evidence suggests that it largely won't.  I don't consider myself much of a deficit hawk, particularly when economic growth is weak, but I'm not a fan of throwing money away, either, especially to people who are doing relatively well.

Meanwhile, what 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.

Furthermore, Obama has apparently negotiated the tax extensions to go for another two years, rather than three.  Ezra sees this as a good thing for Democrats:
The White House believes that an improved economy and a bigger deficit [in 2012] 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.
I have a hard time seeing that.  Obama would seriously sign a tax increase during his reelection campaign? Really? A tax increase that John Boehner's House will pass? Really?

Democrats are certainly getting some decent things out of this compromise, but it's hard not to think that they're getting rolled.

Update: Jonathan Bernstein seems to think that John Sides and I are in an "intra-polisci dispute" over the tax deal.  Mommy and Daddy aren't fighting!  Sides and I obviously agree that the most important factor in the 2012 elections will be the strength of the economy.  But I do think we have a different take on the stimulative power of the tax deal.  I just have a hard time believing that preserving the lower tax rates on income above $250K will provide the crucial extra economic growth that ensures an Obama victory.  But I'm happy to be wrong.

Further update: Bernstein is absolutely correct when he says the following:
Beware of anyone who confidently claims that Barack Obama did a lousy job of bargaining at this point. We don't know what more he could have had. I'm more sympathetic to long-range critiques (such as that the Dems could have passed a tax bill in spring 2009), but once you get to a bargaining session, we're going to need to know a lot more than we have now to know how well anyone played their hand.
When I say that the Democrats got rolled, I mean that on balance, I don't think they got a great deal, but I have no idea whether they could have done a whole lot better.  As Jon says, we really don't have the evidence on that.  Institutions (read: the filibuster) really do matter, and all the presidential charisma and willpower in the world can't really change that.


Unknown said...

would the House have to "pass" anything in two years, or would it expire if the Democrats could hold it together?

Seth Masket said...

In theory, it will just expire if the Dems can hold together, but that same logic is true -- and exploding -- today. I'm not convinced Dems will have a stronger hand in 2012, particularly since their numbers will be fewer and the president will be running for reelection.

Anonymous said...

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.

On the other hand, the GOP has been doing this for the past two years and nobody listens to the (few) Democrats that try and paint this picture - I'd say that they're not going to get any better at it, and this means the Senate might actually get some things done rather than have to go through the fight every couple of months (I know, I'm a hopeless optimist!).

Unknown said...

I think the strength of their hand will depend on the state of the economy. If we can expect 8%-ish unemployment and any sort of increase in GDP which is large enough to make headlines, I think there might be some persuasive rhetorical opportunities about "Republicans trying to guillotine benefits" with their high-wealth tax cuts.

That said, I think this is dumb: it is terribly non-stimulative and wasteful. So much of the deal is going to pay down debts for the wealthy and into low-yield savings accounts it makes me sick, and in two years the rallying cry for the Republican party will be that Democrats blew up the deficit. I want to see more fiscal stimulus, but this way of doing it is just too costly.

Andrew Oh-Willeke said...

Berstein is full of shit if he thinks that Obama couldn't have gotten a better deal.

In the federal government, the burden is always on someone who wants to change the status quo, and this time around, the status quo was a major tax increase that Democrats were far less concerned about than Republicans.

With Democrats controlling the Senate and the Presidency, they have immense power to say "no" and deny Republicans what they want, indeed the only legislation that they care about other than preventing the government from shutting down, but failed to use that leverage.

Seth Masket said...

Andrew, I disagree about the Democrats having immense power to say no. As long as Republicans can defeat a cloture vote in the Senate, they are the ones with the immense negative power. Legislative time is very precious for the Democrats right now, who lose seats in the Senate and control of the House in a few weeks. Inaction is much more dangerous for Dems that it is for Reps right now.

Sure, you could argue that Republicans really wanted something out of this session -- extending taxes for the wealthy. On the other hand, they could also let taxes go up on the Democrats' watch and say, "See what happens when you let them run the place?" said...

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