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Posted at 11:00 AM ET, 12/ 7/2010

What were the other possible tax cut deals?

By Ezra Klein

No deal: Paul Krugman made the case for this yesterday. In a "no deal" scenario, Republican demands to extend the tax cuts for high-income earners are met with simple refusals from the Democrats. The two sides can't agree, and the tax cuts expire. This sparks a bitter showdown, with the Republicans blaming Democrats, and vice-versa. It also hurts the economy, as markets both adjust to the idea that taxes might increase and that the two political parties prefer outcomes that neither side likes -- and that the public opposes -- to compromise.

Partial deal: Two months ago, President Obama could've simply issued a veto threat against extending the tax cuts for income over $250,000. Multiple high-profile Republicans had admitted that there was little they could do in that scenario. The tax cuts for the rich would have expired. The rest of the tax cuts would have been extended permanently -- at a much higher total cost to the deficit. But an angry Republican Party wouldn't have cooperated on unemployment benefits, the tax extenders or the payroll tax cut.

Bad deal: Democrats simply get rolled in the negotiations. There's a two- or three-year extension of all the tax cuts, and a short extension of unemployment benefits. That's about it.

Better deal: Democrats get more out of the negotiations. There's a two-year payroll tax cut, and a vote to lift the debt ceiling (which will have to happen in February, anyway). There's also a direct spending component of some kind, probably on infrastructure.

I find ranking these quite difficult. The Partial Deal was the White House's preference, but I think extending the bulk of the tax cuts in perpetuity is bad policy. On the other hand, it's likely to happen anyway. No Deal might take care of that problem, but it's potentially damaging to an economy that remains weak and a market that remains skittish. Better Deal looks good in some ways, but all this money will eventually have to be paid back, so the more you spend, the more deficit reduction you'll have to do later -- and there's no guarantee that the mix of policies we use for deficit reduction will be good.

The reality is that it's hard to judge this deal without knowing the deals that will come after it: First, on the tax cuts in 2012, and second, on deficit reduction. And you might even add a third set of questions for 2011, like whether the payroll tax cut gets extended.

My expectations for the deal were low enough -- Bad Deal, essentially -- that it's better than what I thought the White House was going to come out with. But it's hard, at this point, to say how it will look in a few years. What I think we can say is that it looks good to an administration with an eye on 2012. This deal gets as much money into the economy between now and then as seems politically possible -- in fact, maybe a bit more than seemed politically possible a few days ago. It also gives the White House an issue that, if the polls are to be believed, they should be able to hammer the Republican nominee with in 2012. Whether they've got a plan for what happens after that is anybody's guess.

By Ezra Klein  | December 7, 2010; 11:00 AM ET
Categories:  Taxes  
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Comments

Not only can they hammer the GOP with it in 2012, but they can make it part of a broader theme of fiscal responsibility, which could expose the GOP as unconcerned about the deficit, and could amount to a master stroke of triangulation.

Posted by: jduptonma | December 7, 2010 11:20 AM | Report abuse

One important thing Obama could have asked for (and the Dem Congress can still add to the tax deal) is paying 65% of COBRA costs (and for good measure, any private insurance plan as well) for unemployed people. This will double the cost of unemployment insurance, but will be stimulative as well as humane.

If the Republicans choose to choke on it and torpedo the whole deal, let it be on their heads. While not cheap, this would still be several times less expensive than the extension of the tax cuts, so any born-again deficit averse religion will be seen as the hypocrisy that it is.

And one more thing, insist on it being for 3 years, until ACA kicks in. I suppose they could call it a "refundable tax credit for COBRA or individual insurance" or something to make it easier politically, and position it next to the tax cuts, where it belongs. Just like the tax cuts, it is a much needed short-term stimulus, but not sustainable for more than a few years.

Posted by: radurusu | December 7, 2010 11:31 AM | Report abuse

potentially damaging to an economy that remains weak and a market that remains skittish.

Argh. Forget the market. Let it react and get the attention of the people who care. Then there may have been a better deal - or a great deal. Holding the stock market hostage is a better plan than holding the poor hostage b/c nobody cares about the latter.

Posted by: eRobin1 | December 7, 2010 11:34 AM | Report abuse

Partial deal - Democrats would have had a much stronger hand in negotiations if they had passed middle class tax cuts months ago. They may have had to cut on deal on high income tax cuts to get unemployment benefits, etc., but they'd have been bargaining from a much better position.

Given the circumstances, this is likely the best we can do.

Should the left wing of the party should always voice dissatisfaction? The advantage is it may push things in the right direction and gives the right the satisfaction of punching hippies. Are there any real disadvantages?

Posted by: fuse | December 7, 2010 11:36 AM | Report abuse

Ezra - Who from the Dem Congress has you under their thumb that you feel the need to let them off the hook simply because Obama didn't promise a veto?

Reid & Pelosi COULD have brought the tax vote to the floor BEFORE the election, but CHOSE not to.

The media & liberal commentators continue to give them a pass on this fight.

Posted by: kromerm | December 7, 2010 11:47 AM | Report abuse

Ezra,

This is a good start for a deal. Instead of opposing this outright, Congressional democrats need to come to the table and push for more stimulus for the poor. Here's what they should push for:

1) Extend unemployment benefits for the 99ers. These 2 million people are suffering the most from the recession.

2) Bigger Payroll tax holiday- this is pretty well-targeted toward the middle class and it should be a bigger part of the package.

3) More infrastructure spending- this will lose some Republican votes, but there could be a few who still stay on.

For every Democrat who opposes this package regardless of what is in it: Should those millions of unemployed Americans continue to suffer, starve and die prematurely just because you oppose $100 billion for the rich? Should millions of working class Americans suffer from this bad economy just because you oppose this $100 billion? I think this $100 billion is really wasteful, but as progressives, we need to show that we care more about helping the poor than sticking it to the rich.

Posted by: wcampb17 | December 7, 2010 11:47 AM | Report abuse

If you read Krugman today you might reconsider the statement that

"What I think we can say is that it looks good to an administration with an eye on 2012"

A lot of the refundable tax credits and UI will expire after 2011. This will mean a slowdown of the economy...at precisely the wrong time.

Also on the 2012 tax cuts question, Democrats obviously fear a showdown on tax rates...even though polls say they shouldn't...i'm thinking there's good reason for why they avoid this fight.

I think it was a good deal for the country but will hurt Democrats in 2012

Posted by: Mazzi455 | December 7, 2010 11:58 AM | Report abuse

From the 'Best Deal' "Democrats get more out of the negotiations. There's a two-year payroll tax cut, and a vote to lift the debt ceiling"
.
How exactly is the DEMs voting to increase the debt ceiling remotely a good thing?
.
Make the GOP do it next year when all the Tea Party 'heroes' are in office. Making the other guys take tough votes is how you counter their BS rhetoric. Taking those tough votes yourselves so they don't have to isn't a winning strategy.
.
The GOP will simply tar and feather the Dems for raising the ceiling even though they would have done it themselves.

Posted by: rpixley220 | December 7, 2010 12:06 PM | Report abuse

"It also hurts the economy"

Ezra!

Please note how much, or in this case how little.

I'm sure you read the Krugman posts today. This package lowers unemployment by only about 0.35% over two years. And it's front loaded, so like .25% in 2011, and .15% in 2012. So it actually has a trending up effect in 2012 when trend is more important than level for elections.

Moreover, with no deal, the deficits are $4 trillion lower over the next ten years, so the Fed might have been willing to do substantially more stimulus. Thus, the net effect on the economy and unemployment might easily have been zero -- or negative -- from this deal.

Posted by: RichardHSerlin | December 7, 2010 12:15 PM | Report abuse

On the other hand, the Republicans have been sadly successful in convincing people that tax cuts are great for the economy and tax increases are terrible.

As you note, unemployment will still be bad in 2012 either way. With a tax increase the Republican machine will boom incessantly that unemployment is still high because Democrats raised taxes.

Thus, this might have actually decreased the odds of a President Palin, and that would mean we’d get these tax cuts anyway, but with a few trillion on top for the rich.

But couldn’t this message be successfully fought? Especially with deficits projected to be $4 trillion lower over a decade as a result? Obama is always scared to really fight the Republican narrative, something which could do great long term good.

Still a possibility Democrats in congress could stop this according to the Times today.

Posted by: RichardHSerlin | December 7, 2010 12:18 PM | Report abuse

"No Deal might take care of that problem, but it's potentially damaging to an economy"

Ezra, to really evaluate this don't you have to have an idea of how damaging? How much? I mean I know the Republicans want to make fuzziness in vogue to obscure their damage, but isn't the smart thing to do to try to quantify things?

0.35%

0.35%

I think that estimate from a Nobel Prize winning economist is worth considering in your assessments.

Posted by: RichardHSerlin | December 7, 2010 12:26 PM | Report abuse

I am baffled by this deal. If the idea here is provide additional stimulus to the economy so that the President is well positioned for 2012, why was this deal not linked to passing the FY11 budget and raising the debt ceiling? Both those are issues that Republicans will hold over Obama's head and demand spending cuts minimizing any stimulative impact of this deal. I just can't believe the Whitehouse can be that naive. Ezra or someone please explain.

Posted by: Skippy21 | December 7, 2010 12:28 PM | Report abuse

Ezra: "The reality is that it's hard to judge this deal without knowing the deals that will come after it"

That is exactly right.

This deal will have short-term benefits for the unemployed or for those worried about a stock correction and higher paychecks for the middle-class (with corresponding short-term but moderate economic benefits), but this deal is just the kind of short-term thinking that we have done in the past to get us to this dismal point. This deal is more about preserving the status quo than it is about making the changes we need to be better.

I predict the GOP will NEVER accept tax increases for anyone. 2012 will come and pass and we will be right back where we are today, with a dismal economy and poor employment numbers and rising deficits and we're going to play this game again and again and again.

And just like as happened in California, the GOP will continue to whittle away at the "Beast" and starve it by steadfastly blocking any tax raises even as the Dems agree to smaller and smaller packages for the poor and middle-class. Eventually, the Dems will be unable to get any money for anything (except the DOD) and the GOP game of Stave The Beast will have fully succeeded.

What we should have done as a country is the kind of stuff Stiglitz talked about in the wonkbook today.

Posted by: lauren2010 | December 7, 2010 12:57 PM | Report abuse

And another factor:

This makes Obama yet again look wimpy and demoralizes the base (although not as much as it would have with the expected total cave).

Posted by: RichardHSerlin | December 7, 2010 1:08 PM | Report abuse

Stupendous miscalculation of not bringing this fight up sooner. Had this issue been acted on at the beginning of last year the political landscape of Washington just might look a little less republican for the next two years. I think that a lot of people may have buyers remorse now?

Posted by: edeckel | December 7, 2010 2:07 PM | Report abuse

Ezra,

I think Democrats really need to insist on making the middle class tax cuts permanent, while granting only a temporary extension for the rich. That way, if there is a stalemate in two years, Democrats will be in a much better bargaining position.

You didn't mention that. I think that's the one point where Democrats really need to take a stand. They might also insist on a bump up in the estate tax rate in two years.

Posted by: mroberts45 | December 7, 2010 2:10 PM | Report abuse

How about another option: if the dems actually had any spine at all, they demand BOTH a temporary extension of unemployment benefits and letting the cuts expire for those making more than $1mil. Do they actually think the Republicans would stand against it? IF they brought it down it would be quite the pyrrhic victory, for their party and the economy, and they'd never let it happen.

As interesting to me is the Beltway Dems' complete lack of connection to the rest of their party. They have NO IDEA how much they've pissed off so much of their base. This has hurt them more than republican attack ads will.

Posted by: Xerxes501 | December 7, 2010 2:28 PM | Report abuse

Who are we kidding? Democrats are going to vote for and sign this law, and then they're going to run against it? Please.

Obama saying right now he thinks it is a bad idea and the public thinks it is a bad idea. So he just admits he is surrendering. It will happen again and again.

Posted by: Hopeful9 | December 7, 2010 2:33 PM | Report abuse

"No Deal: It also hurts the economy, as markets both adjust to the idea that taxes might increase and that the two political parties prefer outcomes that neither side likes -- and that the public opposes -- to compromise."

Do you really believe that with the first paychecks of January 2011 that the Democrats wouldn't be able to win the public relations battle on this issue and force the new Congress to capitulate? Jeez, the public already agrees with the Dems. How much more so when it ceases to be theoretical and becomes real. I'd guess the Congress would pass the 98% deal within one month of convening for the new session. I am at a complete loss why anyone assumes that the GOP's hand in this card game is a winning one -- so long as Obama is willing to call. Does anyone not grasp that (a) the Republicans want to help billionaires more than they want their mothers' love and (b) no one has to do anything for those billionaires taxes to go up Jan. 1?

Maybe Obama doesn't so much need to invite Republicans over for drinks so much as he just needs somebody - anybody - over to help him practice his poker skills.

Posted by: Jamesaust | December 7, 2010 10:31 PM | Report abuse

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