The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!
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.
This is expansionary fiscal policy, alright, but a large chunk of it is concentrated in exactly in those areas — like tax cuts for the rich — which have the lowest multipliers when it comes to kick-starting economic recovery. What the country needs is spending, and this bill instead looks very likely to give us hundreds of billions of dollars of saving.
The unemployment-insurance and payroll-tax aspects of the deal will be welcomed as exactly the kind of stimulus this economy needs: substantially all of them will be spent rather than saved. But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt. Essentially, we’re replacing private debt with public debt. Just like Ireland!
And the political dynamics of taxes — easy to cut, impossible to raise — will remain: this decision essentially kicks the can two years down the road, when we’re going to have exactly the same fight all over again. On the one hand, the scheduled expiry of the tax cuts did concentrate minds impressively, and result in Real Bipartisan Agreement. But on the other hand, no one thinks that good legislation is made while sitting under a Damoclean sword.
So while this is a much better deal than many feared, I’m not convinced that it augurs well for the next two years of legislative wrangling. But hey, nearly all of us will end up with extra cash for the next couple of years. Which will make us a bit happier, even if it does little good from a fiscal perspective.