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Posted at 5:55 PM ET, 12/ 9/2010

The tax cuts and 2012

By Ezra Klein

Paul Krugman thinks the tax cut deal might hurt President Obama's reelection chances. To understand his argument, you need to see this graph from political scientist John Sides, which tests presidential election outcomes against income growth in the preceding four years and income growth in the year of the election:

economy and elections-thumb-475x816-183.png

Basically, election-year income growth matters much more than total income growth. Krugman's concern is that some of the provisions in the tax cut package -- namely the unemployment benefits and the payroll tax cut -- expire in 2011. That'll either make Obama desperate to cut a deal with the Republicans to extend those provisions -- setting up another hostage-taking situation -- or it'll allow the provisions to expire, which will make voters somewhat worse off in an election year.

I read the issue the other way: The payroll-tax cuts look like the Bush tax cuts in reverse. By slapping an expiration date on the cuts, the Obama administration got twice as much as they otherwise would've (Making Work Pay, the tax cut being replaced, was only half size of the payroll-tax cut in 2011). And just as it was very difficult to let the Bush tax cuts expire, it'll be very difficult to let the payroll-tax cut expire. So the likely outcome here is that Democrats got $240 billion of payroll stimulus rather than $120 billion. That sounds good for Obama's reelection.

Republicans could, of course, try to let the payroll-tax cut expire. But then, as they've admitted, they'll be raising taxes in an election year. And nobody likes to do that.

By Ezra Klein  | December 9, 2010; 5:55 PM ET
Categories:  2012 Presidential  
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It looks like Al Gore really blew a winnable election. All that moralizing about Clinton's was a joke. If Gore had said 'It's the economy stupid, not the fellatio' he would have won by 5 points. Running away from Bill Clinton was one of the dumbest things anybody has done in politics in a long time.

Posted by: jamusco | December 9, 2010 6:18 PM | Report abuse

And the provision mandating the the SSTF is to be made whole by general fund revenues is going to continue indefinitely as well? This is a huge problem moving forward.

Posted by: Ryan21 | December 9, 2010 6:22 PM | Report abuse

I think you're right on this and Krugman is wrong.

Republicans don't have the stomach to raise taxes.

The question is do they have the stomach to not not raise taxes by not having a vote on extending taxes. Will the Senate strike again?

Posted by: will12 | December 9, 2010 6:29 PM | Report abuse

Nobody is going to let the payroll taxes expire. They are just going to whine about them creating a deficit in Social Security and slash Social Security. The Village, including Ezra, refuse to look at this -- they don't need SS; most Americans do.

Posted by: janinsanfran | December 9, 2010 6:39 PM | Report abuse

It's really a puzzle why we are calling this stimulus, since there is almost no stimulus in the package. Almost everything is exactly the same on January 1st as it was on December 31st. The only exception being that workers have a few more hundred dollars in reduced payroll taxes, and businesses get to move up a tax credit by a few years.

So the same policies which have existed during are current essentially jobless recovery, which has been ongoing for 9 months to a year now, will continue BUT somehow they will produce an entirely DIFFERENT employment result in the next 12-24 months.

Is it me?

(Rick Santelli compared it this morning to stepping off a curb and not getting hit by a passing bus. It's great that you didn't get run over, but nothing else has changed in your life.)

Posted by: 54465446 | December 9, 2010 6:51 PM | Report abuse

The only thing worse than the payroll tax cut running out in an election year is the payroll tax cut being extended and weakening Social Security.

If they want to double the Make Work Pay Credit and extend it for one year (same money), I'm in. But there's a REASON the GOP insisted on a payroll cut instead...they are attacking he entire foundation of Social Security. Period. Full stop.

Posted by: chaboard | December 9, 2010 6:59 PM | Report abuse

"Republicans could, of course, try to let the payroll-tax cut expire. But then, as they've admitted, they'll be raising taxes in an election year."

Or they could do what they're doing now (it looks like successfully), hold them hostage to giant tax cuts for the rich and say it's all or nothing.

Then they could say they have to be permanent, that's why these tax cuts didn't work better, they were only temporary.

Posted by: RichardHSerlin | December 9, 2010 8:00 PM | Report abuse

I agree with those who say extending the payroll tax cut would weaken Social Security. Another thing is the payroll tax cut may be double in value but its effects are less beneficial to low income people than Making Work Pay. The only people who will see a tax increase from the deal is low income people for whom the flat dollar amount of the Making Work Pay credit was more than the amount of the payroll tax cut. The payroll tax cut is another part of the Republican redistribute-wealth-upward agenda.

Posted by: jfung79 | December 9, 2010 8:03 PM | Report abuse


It's complicated whether this is better or worse for Obama's reelection, but I just don't like the looks of it. What could assure me is if it meant a big decrease in unemployment, but a half percent or less? and less in 2012? trending in the wrong direction? That doesn't look like much of a help in Obama's reelection, and there are a lot of negative factors on top of that small positive.

Posted by: RichardHSerlin | December 9, 2010 8:04 PM | Report abuse

I did the calculation: Making work pay = $1.2 billion/yr to top 2%. Payroll tax holiday = 21$ billion/yr to top 2%.

Plus what everyone else said about undermining the Social Security compact. FDR must be rolling in his grave.

Posted by: bmull | December 9, 2010 8:36 PM | Report abuse

P.S. What are you talking about $240 billion. You're counting your chickens before they've even left Shanghai.

Posted by: bmull | December 9, 2010 9:19 PM | Report abuse

I'm afraid I'd have to put my money on Krugman here. Obama and Dems have proven that a policy being economically wise an extremely popular does not mean they won't brilliantly position themselves to have to give away the store to get it passed.

Posted by: lEG2 | December 10, 2010 9:36 AM | Report abuse

Ezra is admitting that the Democrat ideal is for the payroll taxes not to expire. But that's exactly what I and a lot of liberals are afraid of. We don't want more permanent temporary tax cuts, especially when they make Social Security LESS solvent. I don't think I see this as a good thing, no matter what it means for Obama's re-election chances.

Posted by: madjoy | December 10, 2010 10:36 AM | Report abuse

Krugman's argument here is a bit confusing (Kevin Drum and Ryan Avent both didn't understand it).

It is worth noting that he is comparing the Deal against Moody's baseline in Zandi's numbers and not the Dem plan. If we compare the Dem plan vs. the Deal for instance then the rise in GDP in 2012 (slope is what matters) then the Deal does better (here is the graph of all four Zandi options):

Chris Gaun

Posted by: chrisgaun | December 10, 2010 11:45 AM | Report abuse

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