Opinions on the tax deal announced last night by President Obama are all over the place. As Cato’s Dan Mitchell points out, where you fall on the deal depends on where you stood and what you expected beforehand.
I’m examining the deal in this light: Given the midterm election results, I didn’t expect a “permanent” resolution on these matters. Most policy decisions, whether about taxes or other subjects, are going to be made with a two-year time-frame in mind. For better or worse, we will probably get short-term policy patches to get us to 2012, and then in 2012 voters will be given competing ideas about where we should go afterward.
If you start from that perspective, the deal is OK.
That’s because the biggest flaws in the plan have to do with timing. From the private sector’s perspective, a two-year extension of current tax rates and a one-year payroll-tax “holiday” are better than a tax hike and no holiday — but only slightly better. This deal probably would have been more effective in terms of economic growth and jobs if it had been enacted back in 2008 or even early 2009 (assuming the time-frames would have been adjusted in kind — e.g., the tax-rates extension still would have gotten us to 2012).
There is some added certainty now, but only temporary certainty — which isn’t much certainty at all. And regulatory uncertainty — about health-care reform, about financial-sector reform, about EPA-imposed carbon restrictions — still has to be addressed. But at least they did no harm to the economy.
A one-year payroll-tax holiday might be a winning idea if you think we are one year away from the economy hitting its stride. Maybe we are, maybe we aren’t. But if most employers think we aren’t, then I’m not sure this change will have much of an effect on jobs. The fact that the 2-percentage-point reduction is only on the employee’s side of the tax further limits the policy’s effectiveness; in essence, this is a different packaging of the “Making Work Pay” tax cut, which I’ve argued before was not the most effective type of tax cut because it doesn’t change anyone’s incentives to hire or otherwise expand their business.
The “pay fors” for these policies will be determined when the next Congress convenes. Republicans who campaigned on the deficit/debt issue will be under pressure to find spending cuts to offset the costs of this deal.
All that said, here’s a scenario in which we get something more than a policy patch over the next two years — and in which this new deal helps us get it.
Maintaining the status quo on taxes might make it easier to have a debate between the president and congressional Republicans on the deficit-and-debt-reduction plans that have been dribbling out over the past few weeks, such as the Simpson-Bowles plan. At least this deal limits the political noise that would have come if either the president or the GOP felt like it entered the debate coming off a big tax loss. For such a debate, a two-year time-frame is better than one year or no years.
We may see reluctance from each side to give the other a political victory (and to take some political defeats along the way), and we may see congressional Republicans simply adopt the parts of the various plans that they like as they write budgets over the next two years. But a solution would have been more difficult on shifting ground.
– By Kyle Wingfield
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