Saturday, December 11, 2010

tax cut deal: a compromise (really?)

            In light of President Obama’s latest capitulation to GOP demands, extending Bush’s tax cuts for the rich, I thought it might be interesting to dig through some numbers to put into perspective what doing that means.

            The number that most immediately jumps out is $900 billion: that’s the amount Americans won’t pay in taxes because of the lower rates, and correspondingly, the amount by which the federal budget deficit will grow.  And remember, that’s just in two years.  When the GOP comes back in 2012 and finds something else to hold hostage (it was extending unemployment benefits this time) so it can demand the cuts be made permanent, that $900 billion catapults into the multi-trillion dollar range over the ensuing decade.  Oh, and as a by the by, because the Bush tax cuts were slanted so heavily toward the rich, fully 25% of the $900 billion that won’t be paid in taxes over the next two years, won’t be paid by the top 1% of the population.  If you extend that out to the top 5% of the population, the number tops 40%.

            Did the GOP give up anything in return for receiving its main priority?  Well, yes it did, sort of.  It agreed to extend unemployment benefits through the end of 2011 (notice this is a year less than the tax cuts will remain in place), it agreed to fairly sharply reduced Social Security payroll taxes for the coming year, and it accepted a reinstatement of the estate tax, though at a rate of 25% instead of the 55% it had been.  So why all the crying and complaining from Democrats and Progressives?  Both sides gave a little, both sides got a little.

            Perhaps the reason for the whining lies in the transparent unfairness of the deal and the perception of GOP motives that are hard to describe as anything but callow.  The line in the sand Republicans drew was extending long term unemployment benefits; its justification for drawing the line was that extending benefits would adversely effect the budget deficit.  The hypocrisy here is jaw-dropping.  Unemployment benefits average about $270/week and the GAO estimated that extending them would add, at most, $5-7 billion to the deficit.  And, as has also been pointed out by numerous non-partisan studies, even that number is misleading because essentially every dollar of unemployment is going to be spend on goods and services which in turn will generate tax revenue.

            Republicans who couldn’t stomach mouthing that shibboleth turned instead to the fiction that extending the tax cuts will stimulate the economy.  Here they found a big supporter in Obama, who said the tax relief “will spur our private sector to create millions of new jobs and add momentum that our economy badly needs.”  Say what?  Let’s keep in mind that what happened here wasn’t adding new or deeper tax cuts.  It was keeping in place the tax rates we have all been paying for the past seven or eight years.  So if the level at which we are all being taxed now isn’t doing much to create new jobs or stimulate the economy, how exactly does continuing those rates change that?  I’m reminded of Einstein’s definition of insanity.

            The final Republican fall-back argument I’ve dealt with on this blog before—the notion that raising the tax rate on those making over $250,000 would hurt small business (see "Tax Cut Poppycock).  I found some interesting numbers germaine to this argument.  There are approximately 220,000 “sole proprietorships” in the U.S.  That means  a business entity that is the sole source of income for an individual.  Their average annual income is less than $100,000.  Under the original Democratic plan, their taxes would be unchanged.  Of all the small business operations in the country, only 3% fall into the $250,000 category, and nearly all of them are professional organizations like law firms or medical groups.  So, yes, owners of those businesses would take a higher tax hit, but as I pointed out in my earlier blog, that in itself would have no impact on their ability to expand the business or increase the number of employees.

            Reducing the Social Security payroll tax sounds like a surprising act of compassion on the part of the GOP, but keep in mind that the Social Security payroll taxes employees pay is matched by their employer, so this cut is as much a break for business as for wage-earners.  In fact, proportionally, it’s a much bigger break for business.
           
            More to the point, Social Security is currently solvent, but is projected to remain so only another 25 years or so.  At that point, it will become what Republicans disingenuously say it is now, a contributor to budget deficits.  This one smacks a bit of cutting off one’s nose to spite one’s face.

            The one thing Obama got to his credit was reinstatement of the estate tax.  That will effect only the wealthiest Americans and, even at the 25% rate, will have a positive effect on the deficit.

            Beyond the substantive problems with Obama’s deal is the perception that he once again conceded the field to the Republicans without a fight.  If ever there were a position more blatantly hypocritical than the GOP’s insistence that unemployment benefits couldn’t be extended because the budget couldn’t take it, but an exponentially larger hit to the budget in the form of tax cuts was an ideal to be sought, I can’t imagine what it would be.  It is probably true that there are enough Republicans and DIMO’s (Democrats in name only) in the Senate to have kept extending tax cuts only on the rich from happening, but what so many of us wonder is why the President refuses to call the Republicans out and make them actually cast a vote against unemployment benefits and for the richest 1 % of the country.

              

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