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And now what? Life after the tax deal

A food line from a sculpture at the FDR memorial in Washington, D.C. (Photo by woodleywonderworks/flickr.com)

With the Obama-Republican tax deal having passed the Senate and the House as well, I guess I’ve gotten the compromise I’ve been asking for.

To be honest, I’d thought I’d feel better about it.

What the deal does

In short, the tax deal gives both the Republicans and the Democrats the one thing they wanted most. For the Republicans, that one thing was extending the Bush Tax Cuts to everyone, especially protecting those making over $1 million a year in income. I emphasize the protection of those people making over $1 million a year in income because we saw Senate Republicans (and a few Democrats) vote against the opportunity to both reduce the deficit and maintain the Bush Tax Cuts for everyone but the very very rich.

Clearly, the most important thing for the Republicans – which they got with the current tax deal – is maintaining lowered tax rates for the richest 2 percent of Americans, rather than lowering the deficit or, for that matter, investing in infrastructure and education that will be the pathway to future prosperity.

On the other hand, the Democrats got the thing that they most wanted: extension of unemployment benefits for the long-term unemployed. Here’s how the New York Times summarized the expansion:

“The bill would also keep jobless aid flowing to the long-term unemployed for 13 more months, maintaining extended limits, which now range from 60 weeks in states with less than 6 percent joblessness to 99 weeks in states where the unemployment rate is more than 8.5 percent. Benefits normally last for 26 weeks.”

While the Republicans insisted on legislation that didn’t jive with their deficit-reducing campaign promises, the Democrats stuck to their long-stated commitment to extending unemployment benefits.

At a time when there are six candidates for every open job, and we know that people receiving unemployment benefits immediately pump most if not all of that money back into an economy that is wallowing due to lack of consumer spending and confidence, extending unemployment benefits is not only the right thing to do for people struggling to get back to work, but also is a necessary boost for our economy - unlike extending the tax cuts for Americans making over $1 million, who have proven themselves unwilling to invest their money back into the economy either through spending or hiring.


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Some stimulus

The upside for both parties is that this tax deal offered much-needed political coverage (thanks to right-wing misrepresentation of the success of the stimulus) to provide much-needed additional stimulus to an economy in which the private sector, despite having been bailed out by taxpayers, refuses to begin hiring again. Liberals who are optimistic about this tax deal point to the stimulatory effects of the deal. Here’s how Ezra Klein, economics blogger for the Washington post, describes it:

“So is this a good deal? It’s a lot better than I would’ve told you the White House was going to get if you’d asked me a week ago. There’s some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended – notably the unemployment insurance and the tax credits – probably would’ve expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.”

The problem with stimulus in the form of tax incentives, especially to the wealthy, rather than direct government spending in jobs and infrastructure is that it provides, according to many economists, a less-effective boost to the economy. But, perhaps Klein is right that this is the best we could have hoped for.

What Americans think about the deal

According to a recent Pew Research Report, Americans from both parties show strong support for the tax deal:

“The agreement between President Obama and congressional Republicans to extend tax cuts and unemployment benefits is getting strong bipartisan support. Overall, 60% approve of the agreement while just 22% disapprove.”

These poll results confirm what Republicans like Dick Cheney have long-suspected: As long as you talk tough about the deficit and the size of government, Americans won’t be upset when you insist on measures that hardly anyone, not even Glenn Hubbard, the architect of the Bush Tax cuts, believe are good for our country’s long-term deficit problems.

So now what?

Let’s hold our noses and grant that this is the best deal that President Obama and the Republicans could come up with. Now what?

Corporations and the wealthy need to quit complaining about uncertainty about higher tax rates and start spending and hiring. The American people have endured more than their fair share of uncertainty when we used ours and our childrens’ tax dollars to bail out the failing financial system, which benefited the wealthy much more than average Americans. The lower and middle classes are likely to continue the long process of getting rid of their debts (deleveraging), so the rich now need to do their part to carry the economy – especially on the heels of this latest deal.

The people of the United States have done everything we can - perhaps too much – to reassure corporations and the wealthy that they can continue paying this near-historically low rate of the cost of living and doing business in America. Corporations and the rich had better start spending all that cash they are sitting on immediately through hiring and capital investment. Otherwise, having,  as we’ve done so often, privatized the profits and socialized the risks of the wealthiest Americans, the rich should abandon their pretenses of being either entrepreneurial or socially responsible, and admit that they will happily take advantage of their wealth and position to increase their wealth and position.

Furthermore, if the rich don’t re-invest their money in American jobs, they should be publicly shamed by Americans from all points of the political spectrum as unpatriotic, modern-day robber barons.


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Class warfare?

Many conservatives claim that asking corporations and the wealthy to do their part is a form of class warfare. My simple response: They started it.

As I’ve argued before, many economists, like Edward Glaeser, contend that the rich have used their ability to lobby the powerful to bend the system to unfairly benefit them. In the words of NMSU professor Chris Erickson, they have:

“…manged to corrupt the system so that the benefits are flowing more to them than would be justified in a completely free market. One of the ways to balance so that we get an outcome that is more consistent with a free market is to tax the rich… I think a higher tax rate on the wealthy is justified in the current circumstances.”

In other words, if they want to think of this as class warfare, they should remember that the Pearl Harbor of this conflict happened when they used their money and influence to distort the system. For more details, check out this breakdown from The Fiscal Times:

“According to the IRS, the top 400 earners in the U.S. grossed a whopping $137 billion in 2007 (the latest data available). A household making $50,000 a year is taxed at 17.4 percent, assuming no write-offs. Yet the billionaires were only taxed an average rate of 16.7 percent, amounting to $22.9 billion.”

It’s shameful that the top 400 billionaires pay a lower rate of taxes than a household making $50,000 a year. I’d argue that if there is a class war underway, the rich started it by using there power and money to avoid paying their fair share. But that’s my simple response.

My somewhat more complicated response to whether this is class warfare: It’s not. Typifying public discussion about the costs of democracy and freedom, and how those costs should be allocated, as class warfare is merely a ploy to short-circuit meaningful discussion. We need to be able to discuss our problems reasonably.

But really. What now?

This tax deal proves that congressional Republicans have little credibility when they claim to be concerned about either the debt or long-term deficits. On the other side, President Obama has invested a lot of political capital in this deal, with the  hopes that it will encourage corporations to start hiring again. If they do not, Obama will be stuck with a deal that angers his base and doesn’t improve the economy. To that end, according to the Wall Street Journal, he’s gone on a “charm offensive” to do just that:

“The White House has been pursuing a charm offensive with the biggest U.S. employers in recent weeks, hoping to convince them to plow some of the $2 trillion in cash they are sitting on into expansion and hiring in the U.S.”

The debate about the Bush Tax cuts, and, in effect, our long-term deficit problem, will be continued when the cuts are scheduled to sunset again in 2012, just in time for the next presidential election. Perhaps President Obama is right that these concessions will provide the short-term stimulus that our economy needs, and we can address the Bush Tax cuts (and the long-term deficit problem) after more people are employed again. Only time will tell.

In the meantime, perhaps this imperfect deal will pave the path for future compromises that actually benefit the long-term well-being of America, rather than the narrow constituencies of our two-party system. I’d start with finding ways to address the troubling decline of inter-generational mobility that has bedeviled the working and middle classes in the last few decades.  This will provide access to prosperity for all Americans, not just the already wealthy. Again, only time will tell.

Nick Voges is the blogger behind NMPolitics.net’s Zeitgeist. E-mail him at nick@nmpolitics.net.

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3 comments so far. Scroll down to submit your own comment.

  1. The polls are the most interesting piece here. I’m shocked! Americans actually believe that giving a gigantic tax break to multi-millionaires will actually help the economy? Of course, 70% of our population can’t locate the United States on a world map. So, you know… consider the source. Poll a bunch of people who campaigned for progressive candidates (and who, coincidentally, all know how to read) and I guarantee the statistics of that poll would produce different results.

    It’s just another example of how the American people are led like sheep to slaughter and will believe, without question, what they are told on Fox News. Huh. What a bunch of idiots we are. How can we have any pride in ourselves? One of George W. Bush’s great presidential statements was, “One of the hardest parts of my jobs is to conect Iraq to the war on terror.” But you have to give him and his cronies credit. They did it. They had all the idiots jumping at the bit to kill innocent people. But I digress. The point is this: stupid people keep breeding.

    So, what now? How about more birth control commercials on Fox News?

    As usual, great piece, Nick!

  2. Not so amazingly, when the majority of Americans agree about certain things they are just being duped but when the majority agrees about something else, they are enlightened and inspired.

    Thankfully we can count on the media to give us the real story.

  3. There are so many things wrong with this, it is hard to tell where to start. However, I find it amazing anyone can justify the government bureaucrats and politicians taking our tax money and spending it on pork and other payoffs to their Democratic Party special interests and calling that a “stimulus” (which did not work very well at all, look at where we are), while attacking lower tax rates, which put money directly into ALL people’s pockets to spend immediately (just like unemployment compensation), and calling that a giveaway to the rich. Again, even money that is invested or saved does not disappear from the economy, that is how economies grow. Consumptive spending is lke a sugar high, it is not sustainable.

    As for Dr. Erickson’s opinions, it seems the majority of Congress and the American people (in numerous recent polls) have rejected that soundly as shown in the Obama Tax Rate Extension bill just passed. But he can continue to pursue making the tax codes much more progressive than they already are if he likes, good luck on that one. The problem we have is government spending, not tax revenues. Tax revenues will go up due to this excellent bill, just wait and see, but how about spending? That is where progress needs to be made now on the deficit and debt. Is the only issue maximizing the government’s return? I think not. The issue of lower taxes and a government that lives within its’ means is what all should be concerned about. Governments that use taxes and regulations to punish success and reward failure will get more failure and less success, that has been proven time and time again.

    I would also argue a 2 year extension of existing tax rates if far from “providing certainty” in the business world. It’s just another political game and fight that will continue for the next two years, with a very uncertain outcome. That, along with the continuing onerous regulations in states and federal agencies hardly changes anything, wrt certainty, for the business world and their views of expanding their businesses, when cycle times from investment to returns is commonly more than two years.

    As for class warfare, one of the main arguments (ignoring the fiscal issues which were a red herring thrown in by hypocritical Democrats seeking cover) against the Obama bill was that it somehow wasn’t “fair”. When about $100 billion of direct benefits went to “the rich” and only $400 billion went to “the poor and middle class”, that was deemed “unfair”. OK, let me ask what is “fair” and who decides and on what basis? Is it a per capita quota as Pelosi claims? Then what is the quota allowed? When Obama was asked during the campaign why he wanted to raise capital gains taxes on the rich, when all experience has shown lowering them produces more government revenue, he said it was a question of “fairness”. OK, so how does the definition of that one go? Would taxing the rich at 50% do it? How about 75%? 100%? What economics is that based on? Would Dr. Erickson agree on what would be fair?

    There is a story about Michael Harrington, a socialist activist who worked for the George McGovern in 1972. He went around campaigning for George’s idea that any income or estate over $500,000 be taxed at 100%. When he proposed this to a group of mostly African American and Latina garment workers in NYC, the women became outraged that the government would confiscate huge chunks of earnings that they could see passed down to their family if they or their children were ever to be successful enough to earn that. Even when he tried to convince the workers they could never be that successful (or their children), the workers rejected it and said they had dreams and they didn’t want to be punished and singled out for retribution because they were successful. I think that says it all, but if you would like to believe the American dream is dead, fine, most people would disagree with you, it still happens everyday.

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