AUTHOR: FiscalFutureDaily, Site Administrator
Dec 08, 2010

Most of the budget news coverage today is about the bitter divide between President Obama and Congressional Democrats, which is providing plenty of media fodder with rhetoric over “purity” versus “failure to fight.” But we’re also starting to see serious and useful analysis of the deal itself: what it does, and what it won’t do, for both the economy in general and for the rising deficit and national debt. And that’s what the public really needs, in order to decide whether this is the plan they want.

How Will This Work?

The Tax Foundation has a useful explainer, pointing out that the 13-month extension of unemployment benefits really means extending how long people are eligible for the stretched-out, 99-week benefit package.

“Aside from some congressional proposals to add more post-99 week tiers, extending unemployment benefits does not change the fact that benefits are capped at 99 weeks, after beneficiaries exhaust all the tiers. The deal means that [the 99-week package] will continue to exist for another 13 months.”

The Economix blog at The New York Times looks at “Just How Stimulating Is the New Tax Cut-Jobless Benefit Deal?”:

“Assuming this calculation is roughly on track, 3.1 million jobs is nothing to sneeze at. But if stimulus is what Washington truly wants — which many suspect, though the exact term “stimulus” has passed nary a politician’s lips — politicians would most likely get a bigger bang for the buck with a different mix of programs.”

Another New York Times story calculates that nearly everyone gets something from the tax provisions, but rich people get more:

“But the tax benefits will flow most heavily to the highest earners, just as the original cuts did when they were passed in 2001 and 2003. At least a quarter of the tax savings will go to the wealthiest 1 percent of the population… In fact, the only groups likely to face a tax increase are those near the bottom of the income scale — individuals who make less than $20,000 and families with earnings below $40,000.”

Howard Gleckman at the Tax Policy Center points out one side effect: the entire federal income tax code is now “permanently temporary, which is horrible tax policy.”:

“Like the dozens of special interest tax breaks that get extended a year or two at a time, we now seem on the way to doing the same for the basic structure of the income tax. It is the worst of all worlds, combining the uncertainty of temporary tax law with the massive (but hidden) cost of never-ending tax breaks.”

A number of bloggers are raising the question of what the proposed payroll tax holiday means for the long-term health of Social Security. The White House says the government will cover the payroll tax cut out of general revenue, “ensuring no negative impact on Social Security solvency.” Nancy Altman at FireDogLake says conservatives could push for the temporary payroll tax cut to become permanent, as they did for the Bush tax cuts:

“A permanent two percent cut in Social Security contributions doubles the 75 year projected shortfall. Scrapping the cap (eliminating the $106,800 maximum on earnings), totally eliminates the shortfall today. If FICA is cut by 2 percent, scrapping the cap gets Social Security only halfway there.”

Where’s the Long-Term Plan?

The Committee for a Responsible Federal Budget supports short-term economic stimulus but says the deal should include long-term budget controls:

“While we can’t say we were surprised that the tax cuts were extended, the scope of the package and the apparent disregard for its impact on our debt is striking. This plan will add billions to the deficit and may end up costing more than the stimulus, yet it was not tied to any future deficit-reduction measures. There has been no discussion of how to offset these measures or even any pretense of addressing their costs.”

The Concord Coalition, another major budget hawk organization, says the package should be followed up by major changes in the tax code:

“Extending the tax cuts for two years, along with the proposed one-year payroll tax reduction for workers, will provide breathing room for the economy to recover. It comes at a high price, however, and must not distract from efforts to put longer-term deficit-reduction plans in place.”

Reaction No. 1: Hold Your Nose and Vote for It

At the Center for Budget and Policy Priorities, Robert Greenstein says the plan has “surprisingly strong protections for low- and middle-income working families and [a] stronger-than-expected boost for the economy and jobs” despite an “egregious estate-tax giveaway.” On balance, he says Congress should approve it.:

“Congressional defeat of the package would create a need for new negotiations with the Congress that takes office in January. That Congress will be more hostile to unemployment insurance and tax credits for low-income working families, just as insistent on continuing the Bush upper-income tax cuts, and aggressive in pushing for even more egregious estate-tax policies. Many in the new House majority favor estate tax repeal.
In addition, defeat of the package could lead to a protracted period during which all of the tax cuts have expired and federal unemployment benefits have ended, damaging the economy and even possibly tipping it into a double-dip recession.”

While a lot of liberals are angry about the deal, prominent progressive economist Dean Baker writes “In defense of giving money to rich people.”:

“In spite of the Bowles-Simpson clown show, for the foreseeable future the deficit is our friend. We need to get money into the economy to sustain demand and employment…Of course we would be much better off if the $50 billion going to the rich each year instead went to other purposes, such as preventing cutbacks by state and local governments or rebuilding infrastructure, but if the question is whether the economy will do better with the tax cuts or a smaller deficit in 2011 and 2012, the answer is that we will unambiguously do better with the tax cuts to the rich.”

At the libertarian Cato Institute, Daniel Mitchell finds good and bad in the plan, but says “the good parts of the agreement is the avoidance of bad things”:

“To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.”

Reactions 2 and 3: Love It, Or, Hate It

Jeffrey Miron says “Three Cheers for Obama”:

“I have criticized Obama many times over the past two years, but today he deserves high praise. The new tax-cut deal is not perfect, but it’s pretty damn good.”

Baseline Scenario blogger James Kwak looks at the “Tax Cut Ironies”

“[President Obama] could easily have killed the Bush tax cuts and thereby done more good for our nation’s fiscal situation than anyone will be in a position to do for many years to come. Killing the tax cuts would alone reduce the national debt by roughly as much as the deficit commission’s entire proposal. And killing the tax cuts was the path of least resistance. Obama could have done it by doing nothing. Or he could have done it by taking a strong negotiating position and being willing to walk away from the table.”

Not all the critics are on the left, with the conservative and anti-tax Club for Growth saying “No Deal”:

“This is bad policy, bad politics, and a bad deal for the American people,” said Club President Chris Chocola. “The plan would resurrect the Death Tax, grow government, blow a hole in the deficit with unpaid-for spending, and do so without providing the permanent relief and security our economy needs to finally start hiring and growing again.”

Chart of the Day

If the deal passes Congress, you can extend the line on this chart for two more years:

 

 

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Fiscal Future Daily is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.