AUTHOR: FiscalFutureDaily, Site Administrator
Dec 07, 2010

The White House and congressional Republicans have brokered a deal on the Bush tax cuts, a bargain that’s likely to add $900 billion to the deficit over the next two years. Some commentators (particularly those who wanted the tax cuts to expire, at least for the wealthy) are furious over the deal; while others seem to think it’s a mildly pleasant surprise. If you’re worried about the need to stimulate the economy in the short term, there are things to like here. If you’re looking for ways of curbing the long-term growth in the deficit and the national debt, however, that’s going to be a debate for another day.

The Details of the Deal

The basic outline of the bargain is laid out in these stories in the National Journal and in Wonkbook. Essentially, the deal provides:

• A two-year extension of the Bush tax cuts for everyone
  
• A return of the estate tax (right now there’s no estate tax) but at a lower rate than in 2009: 35 percent on estates worth more than $5 million.
  
• A 13-month extension of unemployment insurance
  
• A one-year payroll tax cut for employees (but not for employers)
  
• For businesses, a deduction of the full cost of new investments for another two years
  

There’s a real long-term versus short-term tradeoff here. The plan does provide a short-term push to the economy, incorporating all three of the ideas the Congressional Budget Office has suggested would be most effective (extended unemployment benefits, the payroll tax holiday, and the business deduction). But the deal would increase the deficit by $900 billion, and doesn’t include anything to deal with our long-term deficit and debt problems.

So how are people reacting to the deal?

Better Than Expected

Ezra Klein of the Washington Post Wonkbook is pleasantly surprised at the bipartisanship in the deal, although not particularly impressed with the substance:

“I’ll admit it: I didn’t think they had it in them. A temporary extension of the Bush tax cuts? Sure, they could manage that. Fear is a powerful motivator in Washington, and nothing scares politicians like the threat of a tax hike on their constituents. But an actual, negotiated deal, in which the two parties sit in a room and give things up, and compromise on positions they’d taken in public, and walk out with a deal that accomplishes more than was strictly necessary? I didn’t see that one coming..”

At Salon, Steve Kornacki says “actually it’s a pretty good deal,” particularly since it allows the administration to move forward on other issues like the START treaty:

“Is extending tax cuts for the richest Americans (and blowing another hole in the deficit in the process) a steep price to pay for all of this? Absolutely. But that’s politics: Obama took the best deal he could possibly get. And he got enough out of it that Democratic voters, who still like him enormously, can rationalize their way to supporting it (or at least not feeling betrayed by it) — no matter how much grief Obama takes from liberal activists and commentators.”

A Second Stimulus?

At Economix, New York Times reporter David Leonhardt runs through the alternatives and concludes:

“The apparent deal over the Bush tax cuts highlights why the Democrats probably had to accept the extension of all the Bush tax cuts. No politician is likely to use this word — at least no Democratic politician — but the deal amounts to a second stimulus bill.”

Economist Paul Krugman makes some calculations and says the plan still comes up short as a stimulus measure:

“Millions of new jobs? Millions? Not by my arithmetic.

So, was this worth it? I’d still say no, although it’s better than what I expected over the weekend. It still greatly increases the chances of the Bush tax cuts being made permanent — especially because the front-loading of the stimulative stuff actually worsens Obama’s 2012 electoral prospects.

Overall, enough sweetener has been added to diminish, but not eliminate, the bitterness of the disappointment.”

At Libertarianism, Jeffery Maron says a payroll tax isn’t terrible but is less than ideal:

“I doubt the tax cut will stimulate much employment. Firms are unlikely to hire new workers just because they are cheaper for one year.”

At Capitol Gains and Games, Andrew Samwick argues we really need to be spending on roads, bridges and other infrastructure, and says “If this is working together, I’ll take gridlock.”:

“A weak economy is not an excuse to spend money we don’t have on things we don’t need.”

But What About the Deficit?

Derek Thompson of the Atlantic agrees that this bill amounts to a second stimulus package, but says the deficit debate just got worse:

“From a long-term perspective, however, this deal is a potential budget-buster. There is no official cost estimate, but it will certainly add hundreds of billions of dollars to the 2011 deficit. This makes the case for deficit reduction all the more necessary in the next few years. ..Today, Americans at every income level got a major stimulus. But tomorrow’s deficit debate just got louder and more urgent.”

EconomistMom, aka Diane Lim Rogers, isn’t surprised:

“It’s what I expected, because it’s the typical pattern we’ve seen for the past several years. “Bipartisan compromise” means both sides get what they want, because deficit financing of these policies seems like the painless way to get out of gridlock. Rather than mutual sacrifice, it is mutual grabbing. We can never manage to “trade off”–we only “pile on.” “

Stan Collender, at Capitol Gains and Games, says the deal shows that the fiscal commission didn’t have an impact:

“If you still have doubts that Bowles-Simpson failed to change budget politics and deficit dynamics, just take a look at the tax/unemployment benefits/estate tax/god-knows-what-else deal announced late yesterday: Less than a week after the commission ended, congressional Republicans once again have eagerly agreed to policies that will dramatically and substantially increase the deficit. So much for the notion by commission supporters that what it did represents a sea change in the way we’ll deal with this issue and an indication that the budget times have changed.”

And at The Hill, the headline writers put it bluntly: “Deficit cuts on ice.” The story by Erik Wasson and Sam Youngman reports that “the tax-cut extension deal hammered out between President Obama and congressional leaders may pre-empt a serious deficit-trimming effort any time in the first half of 2011.” They say that the bipartisan summit on the deficit proposed by Sen. Kent Conrad has little support. Money quote from Thomas Schatz, the head of the Citizens Against Government Waste: “After extending the Bush tax cuts, it would be hard to turn around and say you’re proposing a tax increase.”

More Ideas on Controlling the Deficit

The fiscal commission report wasn’t the first plan to attempt to control the deficit and national debt, and the Center for American Progress shows it won’t be the last. Their First Step plan, the latest of a series of CAP reports, outlines five different revenue options as part of a goal to balance the so-called “primary budget” (what the government spends excluding interest) by 2015.

The First Step: A Progressive Plan for Meaningful Deficit Reduction by 2015

We Have Problems With Our Copier, Too

The federal government has been forced to “quarantine” more than $1 billion worth of its new $100 bills because of a printing error. They’ll have to be burned – but of course, there’s more where that came from.

Chart of the Day

As Congress considers whether to actually pass this deal, it’s worth looking at the deficit projections as they stand now:

 

 

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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.