The short-term tax deal, emphasis on ’short-term’
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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57 comments Add your comment
MrLiberty
December 7th, 2010
6:26 pm
JF McNamara – yes, CBS news as a source of sound financial reporting. Better try an informed source. There is nothing sound about SS and there never has been. Since its inception it has been taking from the current payers and giving to the current recipients. There has never been a “lockbox”, it has always been a Ponzi scheme. We are the latecomers to the pyramid party. When it began it had 16 payers for each taker. Now it has about 2. Do the math. It was supposed to take until 2015 before it began paying out more than it takes in. That happened in February of this year. The tipping point has passed.
It is not a question of whether the government can steal more money from more people (increase the cap) or give less to people (increase the retirement age) but truly a question of morality. The government is stealing from some to give to others. Many will collect far more than they have paid in while statistically black males will fare the worst.
This is not a retirement plan. An IRA or 401k can at least be passed on in a will. When you die, the government keeps everything left that you paid in or that they claim to “owe” you. It is a welfare program plain and simple.
At the root of the entire failure is the federal reserve and what it has done to our money. Simple savings of the 12% the government steals from you and your employer would be sufficient to retire happily on if the government was not printing money out of thin air to fund their excessive spending. It is that inflation that is destroying your savings and forcing you into risky investment schemes like the stock market. After Jackson got rid of the second national bank and before Wilson saddled us with the Fed, the gold standard produced decreasing prices and rising values of the gold dollar. Savings were sound and secure and safe investments produced sufficient returns for secure retirements.
At the heart of it all is the failed government. Why would we ever want to trust them with something as important as our future???
MarkV
December 7th, 2010
6:42 pm
Kyle, Your comments reflect the brainless suggestion which the Republicans propagate that regulation and tax uncertainties prevent businesses from expanding, hiring, etc. Naturally, some business owners claim that – what else would you expect them to say? Logically it is a complete nonsense. Imagine yourself to be an owner of a business that manufactures something or provides services. And you are not certain if the taxes won’t go up. Will you then say: “Oh, if the taxes go up, and I keep the same volume of production (or service), I will make less profit. Therefore, I won’t hire any more people to produce more (or service more), because … Or even: I will reduce my work force so that I will make even less money …
The plain and obvious truth is that the business will expand and/or hire if there is a demand for their products, and that has nothing to do with how much taxes they pay or new regulations. No wonder that CBO has scored providing unemployment benefits (which allow people to buy products or services) as most economy stimulating, and tax cuts as least stimulating.
Obfuscation Station
December 7th, 2010
6:53 pm
@left wing – Great points. The costs go far, far, far beyond the $1.1 B.
Ayn Rant
December 8th, 2010
5:24 am
The Bush tax cuts brought the federal budget from burgeoning surplus to deep deficit, and finally brought down the economy. Extending the cuts will drive the federal budget deeper into deficit.
It will create lots of jobs for the manufacturers of Asia and the luxury goods producers of Europe. It will delight and enrich our petroleum suppliers in the Islamic countries and Venezuela. It will create a few low-paying jobs in transportation and retailing in the US: Wal-Mart will hire some more shelf-stockers, cashiers, and greeters.
Living on borrowed money is a habit had to break. Borrowing more to squander on consumer goods rather than on capital improvements is a big mistake. Repeating the clear mistakes of the past is the sure path to economic collapse.
So, celebrate this foolish political compromise, and live it up on the paltry sum you’ll keep as the result. The reckoning will follow!
Port O'John
December 8th, 2010
8:59 am
There wasn’t any money to pay for the wars in Iraq and Afghanistan, but that didn’t stop the GOP from its headlong rush into those wars (the GOP just cooked the books and didn’t account for the war costs in the budget — that’s their answer. Now its time to take care of the wounded vets, and where is the GOP? Let’s have more tax cuts.
Okey Doke.
Intown
December 8th, 2010
9:32 am
I don’t like the deal. But, I can accept this pragmatic explanation:
“Now, I know there are some who would have preferred a protracted political fight, even if it had meant higher taxes for all Americans, even if it had meant an end to unemployment insurance for those who are desperately looking for work.
And I understand the desire for a fight. I’m sympathetic to that. I’m as opposed to the high-end tax cuts today as I’ve been for years. In the long run, we simply can’t afford them. And when they expire in two years, I will fight to end them, just as I suspect the Republican Party may fight to end the middle-class tax cuts that I’ve championed and that they’ve opposed.
So we’re going to keep on having this debate. We’re going to keep on having this battle. But in the meantime I’m not here to play games with the American people or the health of our economy. My job is to do whatever I can to get this economy moving. My job is to do whatever I can to spur job creation. My job is to look out for middle-class families who are struggling right now to get by and Americans who are out of work through no fault of their own.
A long political fight that carried over into next year might have been good politics, but it would be a bad deal for the economy and it would be a bad deal for the American people. And my responsibility as president is to do what’s right for the American people. That’s a responsibility I intend to uphold as long as I am in this office.”
— President Obama
Payroll-tax break might alter thinking on Social Security | Kyle Wingfield
December 8th, 2010
6:57 pm
[...] week’s typical Washington compromise on taxes has been accompanied by typical Washington drama: about who won and lost, about whether President [...]