[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.”
- 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)