Responding to conservative critics of the tax deal

Responding to conservative critics of the tax deal

Like most negotiated legislative compromises, the tax deal has its critics at both ends of the spectrum. I support the deal and will take one more chance to respond to conservative criticism before this afternoon’s cloture vote.

Here is Rush Limbaugh:

Obama’s adding all these pork projects, more ethanol subsidies. That’s not what the election’s about. They could go a long way helping themselves making it clear they’re not going to buy a two year deal, with a certain tax increase in 2013, for hundreds of billions of dollars, including new ethanol subsidies. What kind of deal is this? OK, yeah, we’ll take it, say the Republicans, we’ll take two years of the same tax rates, and then we’ll take increasing tax rates in 2013, and the ethanol subsidies, yeah what else do you want?

… Even the Republican leaders have been part of the system for decades. False deadlines, foolish deals, and it need not be. I now hope this deal fails, I say it, directly and officially. If the deal fails, the Democrats are in control, so it is they who will be raising taxes. Let the tax rates go up, on January 1st, let ‘em go up. Wait for our cavalry to show up and deal with this the right way. They had two years to deal with this. They’ve had the two years of Obama’s presidency to deal with this and they haven’t, on purpose. They want the tax rates to go up, and they’re selling -that we agree to two years of the tax rates not changing? How about permanently the tax rates not changing, then we’ll talk to you? Two years, and we got thirteen months of unemployment compensation. The only way you can describe that thirteen months is, look at all the spending that is. Look at all the spending. Three years of unemployment compensation benefits, in exchange for a 35% death tax, a 2% cut in the payroll tax, and two years of tax rates on income not changing. They had two years to deal with this. The new Congress coming in will fix it, if the GOP leadership will allow it.

Here is Club for Growth President Chris Chocola:

This is bad policy, bad politics, and a bad deal for the American people. 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.

Instead, Congress should pass a permanent extension of current rates, including a permanent repeal of the death tax, and drop all new spending. A month ago, the American people repudiated Washington big government.’ It’s time for both parties to finally hear that message and act on it.

I find that most arguments about a negotiated compromise boil down to the simple question, “Compared to what?” Mr. Limbaugh and Mr. Chocola are comparing the deal to their preferred policy. I judge the deal compared not just to my preferred policy, but also to where we are now, and to where we will be if there is no deal and taxes go up 19 days from now.

Let’s examine each of the complaints in turn.


Complaint: “[Republicans] could go a long way [toward] helping themselves [by] making it clear they’re not going to buy a two year deal … Let the tax rates go up, on January 1st, let ‘em go up. Wait for our cavalry to show up and deal with this the right way.”

Response: I agree that the bill would be much better if the 2010 tax rates were made permanent. But if there’s no deal, we’ll have the current law rates for only another 18 days. Two years is better than 18 days.

Mr. Limbaugh suggests that by killing this deal, “The new Congress coming in will fix it.” How? Let’s assume that a new Republican House passes a bill that makes the 2010 rates permanent, and permanently repeals estate and gift taxes, and makes these changes retroactive to January 1st. That bill would have to pass the still-Democratic Senate, and then be vetoed by or negotiated with the same Democratic President. Unless you think that a House-passed permanent bill will fundamentally change the balance of those negotiations with the President, waiting for the cavalry doesn’t do much good.

I could be convinced to allow a temporary tax increase if I thought the political pressure generated by it, or the arrival of the new Congress, were likely to fundamentally rebalance the negotiations to make a longer extension more likely. I don’t think that’s the case here, so I’m against imposing even temporary pain on the American people.


Complaint: “… a two year deal, with a certain tax increase in 2013 …”

Response: I think just the opposite. This deal increases the odds of winning the 2012 fight. And I think we have a better chance of extending the 2010 rates beyond 2012 because they will now sunset once again in an election year. The Left would have had a better chance of winning the long-term fight if they had made a further tactical concession and had agreed now to a three year rather than a two year extension. Republicans like to debate taxes in election years. It helps win the tax policy fights and it helps win seats.


Complaint: The unemployment insurance spending isn’t offset.

Response: I agree. This is bad. It’s $56 B of deficit increase. I don’t have a problem with expanded and extended unemployment insurance benefits when the rate is as high as it is now, although up to 99 weeks of benefits is extreme. If I could make one change to this bill, it would be to cut other spending by this same amount, effective beginning three years from now, after the economy has had plenty of time to fully recover. For me the downsides of this deficit increase are far outweighed by the upsides of preventing rate increases.


Complaint: “… by making it clear they’re not going to buy a two year deal, for hundreds of billions of dollars …”

Response: This suggests Republicans are “giving” the President and Democrats “hundreds of billions of dollars” of things that Republicans don’t want, in exchange for “only” a two-year extension of current law rates. I think this overcounts the components of the bill that Republicans generally oppose, and it severely undervalues the benefits of preventing income and capital tax rate increases.

Let’s look at where the deficit increases in this bill come from.

All figures are from CBO and JCT, are relative to current law and are 10-year totals:

  • Prevent income tax rate increases ($408 B)
  • Prevent AMT increase next year ($137 B)
  • Prevent estate tax from returning to $1M exemption and 55% rate in 2011 ($68 B)
  • 2% payroll tax holiday ($226 B)
  • Temporarily extend business expensing provisions ($22 B)
  • Extend unemployment insurance ($57 B) and
  • Grab bag of tax “extenders” ($55 B).

I think I just have different policy preferences than Mr. Limbaugh on this one.

I strongly support $613 B of the above policies – the first three.

While the bill would be better without these (or with the unemployment benefits offset), I’m happy to accept the following policies in a package:

  • the half of the 2% payroll tax holiday that’s actually a tax cut, which increases the deficit by $112 B;
  • extending unemployment insurance, for $57 B;
  • extending the business expensing provisions for $22 B.

I’d prefer to drop the business expensing provisions ($22 B), and the other half (the “refundable” part that is just an entitlement payment in disguise) of the payroll tax provision ($114 B), and I could easily cut the tax extenders at least in half if you let me ($28 B).

If I tally “things I really like” and “things I can accept” and compare them to “things I don’t like,” the numbers look good to me. Not great, mind you, but good. And for a divided government this looks to me like a great deal.


Complaint: “Obama’s adding all these pork projects, these ethanol subsidies.”

Response: This is unfair. The ethanol tax credit extender is not an Obama Administration demand. It is demanded by corn state Senators of both parties. The same is true for most of the tax extenders. They are mostly special interest tax provisions, and I would be thrilled if we could eliminate most of them. It is incorrect, however, to attribute them to the President or to one party in Congress.

Both parties have dirty hands on this. So while it’s legitimate to complain about the inclusion of these provisions in this deal, it should not be surprising and it should not be described as something Republicans “gave” to the President in the negotiation. This is, unfortunately, routine for Washington. I support changing that routine, but I wouldn’t blow up this bill because it doesn’t fix some bad practices of the past.


Complaint: “I now hope this deal fails, I say it, directly and officially. If the deal fails, the Democrats are in control, so it is they who will be raising taxes.”

Response: Then you’re hoping that every American who pays income taxes will begin to get smaller paychecks at the beginning of next year. You’re willing to allow tax increases on everyone who pays income taxes so that political blame will fall on Democrats. I think it’s abundantly clear that Democrats failed to govern by leaving this issue until the last minute. I’m not willing to allow tax increases just to further stress that political point.


Complaint: “The plan would resurrect the Death Tax.”

Response:

  • Estate and gift tax in 2010: zero
  • Estate and gift tax in 2011 if there’s no new law: $1M exemption, 55% rate
  • Estate and gift tax in 2011 if the deal becomes law: $5M exemption, 35% rate.

If you compare the estate tax component of the deal to where we are now in 2010, it’s “resurrecting the death tax” and looks like a bad deal. If you compare it to the policy if there’s no law, it’s a substantial improvement. The same could be said, however, about any numbers between these two extremes.

I’d prefer permanent repeal. Given the configuration of a Democratic President and a Democratic Senate, I think Senator Kyl did a good job negotiating a fair compromise that is worthy of support.


Complaint: “The plan would … grow government …”

Response: How does it “grow government?” By once again extending unemployment insurance benefits? I think that’s sloppy language. The health bill expanded government. The cap-and-trade bill expanded government. Tax cuts don’t expand government, spending increases do. The only significant spending increases in this bill are extensions of provisions in current law. So I’d agree the bill keeps certain spending components in place, but that’s not “growing government.”


Complaint: “The plan would … blow a hole in the deficit with unpaid-for spending”

Response: See above. CBO scoring shows that most of the deficit impact is from the tax side, not the spending side. I agree the bill would be better if the spending were offset. While “blow a hole in the deficit” is a judgment call, I think it’s way off base here.


Complaint: “Instead, Congress should pass a permanent extension of current rates, including a permanent repeal of the death tax, and drop all new spending.”

Response: Sure, but if you can’t get all that, are you willing to take four-fifths of a loaf?


It’s incredible to see how the debate has shifted and how expectations have changed.

In 2001 there was a big policy battle over cutting the top income tax rates from the Clinton levels. President Bush and a Republican Congress enacted a law, with support from moderate Democrats, cutting income tax rates for all income taxpayers.

In 2003 President Bush won that battle convincingly by repackaging the top individual rates as small business rates. The debate then shifted to a big partisan policy battle over reducing the double taxation of dividends. The results of the Bush years were lower tax rates for all income taxpayers and lower tax rates on dividends and capital gains.

In 2008-2010 President Obama and huge Democratic majorities tried to undo these policy victories. They tried to raise tax rates on income and capital. They failed, and that failure will extend through President Obama’s first/only term. If someone had told me, the day after Election Day 2008, that tax rates on income and capital would not increase for the next four years, I would have laughed at them. Now it’s about to come true, and Presidents Obama and Clinton are helping make it happen.

And some want to oppose it because it’s not enough?

(photo credit: Tony Tsang)

13 responses

  1. Pingback: Tweets that mention Responding to conservative critics of the tax deal | KeithHennessey.com -- Topsy.com

  2. "Response: See above. CBO scoring shows that most of the deficit impact is from the tax side, not the spending side. I agree the bill would be better if the spending were offset. While “blow a hole in the deficit” is a judgment call, I think it’s way off base here".

    I'm not sure I follow you on this one, Mr Hennessey. While the words are not your's, linguistically to "blow a hole in the deficit" doesn't make a lot of sense in this context. (I think that is sloppy language). Rather, it "blows a hole in the budget". And, a hole is a hole regardless of whether it is blown by increased spending or reduced tax revenues, so unless your referring to the silly language usage, why would this be "a judgement call", much less "way off base"?

  3. The real issue here comes down to whether Jon Kyl negotiated the best possible deal for Republicans. His negotiation history suggests no (he allowed the unconstitutional Native Hawaiian bill to proceed in exchange for a water project in Arizona). Jon Kyl's inept negotiating several years ago when the GOP had the votes to force permanent repeal of the death tax is another example.

    One way to ensure that your side gets a bad deal is to sit down at the negotiation table when you have little leverage. Right now, the Republicans have no leverage in the House and only 42 votes in the Senate. Compare that to one month from now, when Republicans will control the House and be within a spitting distance of a Senate majority.

    Why negotiate now? The proponents of this deal would have us believe that the economy will come crashing down if we don't have a deal in place RIGHT NOW. That's an odd belief since the GOP could almost certainly nail down a far better deal less than a month from now. In the meantime, Treasury could freeze the withholding tables, so income taxes wouldn't go up in the interim. The death tax would go up, but I'm almost certain that everybody on the GOP side would happily trade 3 weeks of a higher death tax rate in exchange for a bigger exemption and lower rate thereafter.

    Instead of waiting until the GOP had maximum leverage, Jon Kyl allowed a DEFEATED SENATOR, Blanche Lincoln, to help dictate the terms of the deal. That's not an effective strategy for victory – it's political malpractice.

  4. What about the argument that we could get a much better bill by waiting just a few weeks, when the new Congress takes session, permanently extending the current tax rates (making them retroactive to January 1, 2011)?

    You don't think we could do much better that what the lame duck Congress is offering?

  5. I do believe we have a better chance in January, with a Republican House, a Defacto control of the Senate with over 20 Democrat Senators up for election in 2012, and Obama. Does anyone truly believe Obama would veto it, and allow the economy to go into a swoon?

    The idea that Republicans are allowing business as usual, with Reid and Pelosi buying votes AGAIN, makes me sick to my stomach. November 2nd was all about stopping this, along with wasteful spending, and increasing the deficit — no matter now small!!

  6. Keith,

    thanks for the break down of the tax deal. Your analysis of the 2% payroll tax reduction suprised me, I thought that it was all a tax cut but you stated half (114$B) was really an entitlement. This is the first time I have heard of this spending, which would be the largest spending in the deal. I would appreciate it, If you could explain how the White House and the Senate Republicans manage to accomplish this spending, while calling it a tax cut.

    Also, I would like to know your thoughts on how the deal may affect the unemployment rate and how that would then affect the deficit.

    Again, thanks the analysis, that I don't see anywhere else.

  7. Pingback: Fiscal Future Daily: The Wheels Grind Slowly, Conservatives Strike Back, and What the Public Thinks « Choosing the Nation's Fiscal Future

  8. Pingback: Corie Whalen » Blog Archive » Our Debt Crisis Matters

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