What were the other possible tax cut deals?
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.
| December 7, 2010; 11:00 AM ET
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