The Obama-GOP Tax Deal May Be Bipartisan, But It Isn't Stimulus and It Isn't Smart

By :: December 16th, 2010

A modest thought experiment: Here is a check for $858 billion. Your job is to boost short-term economic growth. What would you do with the money?

President Obama and a huge bipartisan majority of the Senate have given us their answer (and the House is likely to add its support tonight or tomorrow): They'd extend the Bush-era tax cuts, restore the estate tax but at an historically low level, cut payroll taxes for all, protect the middle-class from the Alternative Minimum Tax for another year, and continue jobless benefits for the long-term unemployed.

But upon closer inspection, very little of this massive increase in the deficit over the next few years will actually boost growth. If you care about the bang for the buck—and given our long-term fiscal mess, you should—this new law is a colossal waste of money. In fact, you'd be hard pressed to use $850 billion in a way that's less effective than much of what's in this package.

By my rough calculations, more than half —at least $450 billion—will do little or nothing to boost the economy in the short run. It won't increase demand for goods and services. It won't increase investment. And it certainly won't create many new jobs. It will, however, provide a fabulously generous tax windfall to those who need it least.

Would you, for instance, try to boost short-term growth by giving a few thousand super-rich estates a $70 billion tax cut? Or by continuing $55 billion in mostly dubious special interest tax breaks for NASCAR race track owners, Manhattan real estate developers, ethanol producers, and other worthies? How about giving $27 billion in tax cuts to married people for being married? Or slashing payroll taxes for all workers, including those making hundreds of thousands of dollars a year? The entire payroll tax cut will increase the national debt by $100 billion, and more than $3 billion will go to those making $500,000 or more (who get an average of more than $2,600 each).

That's not to say the deal is all bad. I would include some bits in a serious stimulus bill. For instance, I would use low-income tax credits such as those in the 2009 stimulus bill to put cash in the pockets of people most likely to spend it. I'd also keep tax rates relatively low, especially for low- and middle-income families. But those provisions account for perhaps one-third of that $858 billion.

Obama, Senate GOP leader Mitch McConnell (R-KY) and other supporters of the plan argue, of course, that "doing nothing" would lead to economic disaster. No doubt simply letting all of the Bush era tax cuts die would take money out of people's pockets in the midst of a soft economy, and that would be a bad thing.

But that's the false choice into which Obama allowed himself to get shoved. How did it happen that President of the United States found himself with only two fiscal policy options: Extending a collection of decade-old tax cuts, or letting them die?

In a sane world, government would design economic stimulus that made sense on its own terms. It would ask the simple question: What taxes should we cut and what spending should we adjust to maximize economic growth and job creation? But that's in some parallel universe, not in the Washington of 2010.

So hooray, we have bipartisan fiscal policy. But it is in large part a massive waste of scarce fiscal resources and nothing to be proud of.

6Comments

  1. Anonymous  ::  7:10 pm on December 17th, 2010:

    Unless a few thousand super-rich people die, the estate tax cut won't amount to much of a loss. I suspect that the number will be more like 10 or 15 (if you count the 5 who dies this year who could use these provisions rather than expiring law).
    The threshhold is meaningless when you are talking about the super-rich. Given the extent of asset inflation over the last generation, it is not inappropriate to separate mega-fortunes from simply having a nice nest egg and a McMansion.
    hat is most important is the tax rate. If the top income tax rate is 35%, then it is appropriate for the estate tax rate to match.
    The purpose of this bill was not to inject stimulus. Given that the root cause of the current crisis is the deflation of asset prices for a large number of households, either mortgage modification or inflation is the appropriate stimulus. If the White House ignores this, it does so at its own peril.
    The purpose of the deal was to avoid tax hikes that would exacerbate deflation, since almost all households would cut back on spending on the margins – with some unemployed households getting nothing at all because their extended benefits are now gone.
    Do no harm.
    Now, if the mortgage crisis had been dealt with appropriately by automatic modifications, the tax cuts for all could have been allowed to expire. Further, if the 2009 budget had included reconciliation instructions to make the tax cuts permanent on the middle class, we would not be discussing this now as the issue would have gone away. The problem was, the Democrats wanted to make it an electoral issue, but never quite got around to brining it up.
    This deal buys time for an emerging consensus on the need for tax reform, which was highlighted by both the Fiscal Commission and the Bipartisan Policy Center. It is actually good for the TPC, which should have some input into this debate.
    This is certainly not the end game, especially with the Debt Limit vote looming. I suspect that tax reform will be linked to it, either because the President wants it to be or because the Chinese will insist on it.

  2. Anonymous  ::  7:17 pm on December 17th, 2010:

    One more thing – had the amendment to modify the estate tax passed, dealing with it would have become the center of attention in the Senate, effectively killing DADT repeal, which instead is going to the floor on Saturday. Sometimes you win by losing.

  3. Anonymous  ::  4:44 pm on December 18th, 2010:

    I question your premise that there is a tax cut. If my AGI is $350,000 in both 2010 and 2011, and the schedule of marginal tax rates does not change, I expect to pay the exact same amount of federal income taxes. So where is the tax cut? In that sense, Mr. Binder, I agree – there is no stimulus. There is, however, an intelligent decision to avoid Hoover-like tax hikes in the teeth of a poor economy.
    (Please correct me where I am mistaken in fact. I can't find in the taxpolicycenter.org web site confirmation that the estimates of revenue loss are based on rates in the law or rates that have actually been in place for the past seven years.)

  4. Anonymous  ::  7:55 pm on December 20th, 2010:

    It depends on which baseline you use. We will see if this gets tax reform moving. I suspect it will – and that the reason the WH felt free to compromise was the fact that some GOP members think so too.

  5. Anonymous  ::  9:36 pm on December 21st, 2010:

    Thank you for your repsonse. Yes, I hope tax reform gets moving.
    I disagree about “baseline”. As a flesh-and-blood business guy, I care about my tax liability compared to the prior year, not against some mythical standard.
    As a sub-S filer, my 2009 AGI and 2010 AGI at $350,000 each generate roughly the same tax bill (adjusted for the various inflation adjustments, limitations about deductions, and similar “technical” adjustments). According to the TPC calculator, that outcome will continue into 2011. So for me, my taxes will have stayed steady. I will pay the same amount of taxes in 2011 as I am going to pay in 2010 as I did in 2009.
    No tax cut for me!
    That, from the perspective of actual people, is what matters.

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