Obama's Tax Deal: What the Dems Lost

Obama's tax deal with harm him politically and might not spark an economic recovery. The president sold out to the GOP and didn't get anything in return.

1) It is hard to figure out what Obama was thinking in making this tax deal with Congressional Republicans.  I doubt that he imagined he would grow up to become a President who cuts taxes for the rich. Obama surely did not support the Bush tax cuts back in 2001.  Why the change?

Let's assume that Obama wants reelection in 2012.  By caving on tax cuts now, perhaps Obama is trying to deny Republicans their signature issue.  Yet, according to new reports, the deal will only keep the Bush tax cuts in place for another two years.  Come the next election cycle, tax cuts will be revived. You can depend upon it that come 2012 Republicans will give Obama zero credit for compromising in 2010.  Instead, they will once again hammer the Democrats for wanting to raise taxes and hold themselves out as the only party that can be trusted to keep taxes low.

Alternatively, perhaps Obama is desperately trying to revive the economy in time for the next election.  Maybe the proposed payroll tax cut will do the trick.  On the other hand, a two year extension only extends the legal uncertainties that in part have been keeping the economy depressed.  Further, the tax cut deal will push the country even deeper in the fiscal abyss.  Businesses know that at some point taxes will increase.  They have to increase.  Cutting taxes now will do nothing to allay investors' fears.

In short, the tax cuts will harm Obama politically and may end up squelching economic recovery.  He is selling out to Republicans and gaining nothing in return.

2) There is no guarantee that the deal will get passed this year.  Congressional Democrats howled the moment the deal was announced.  Ought not the White House to have at least consulted with them first?  If I were a liberal Democrat, I would not play along.  Obama needs some serious spine-stiffening.  In the game of tax cut chicken, he didn't just blink, he cowered.

3)  If this deal passes, it will deliver the estate tax a mortal blow.  For years, Democrats have argued (correctly) that the estate tax only affects a tiny sliver of the population.  At some point this argument backfires.  If a tax only affects a few thousand taxpayers a year -- and, at a top rate of 35%, hardly brings in revenue --why bother having it at all?  Faced with a one-way ratchet towards estate tax repeal, Democrats will eventually give the Republicans everything that they want.  I predict that in five years there will be no more federal estate tax.

4) This is not a popular view among conservatives -- indeed, for orthodox movement conservatives, it is borderline unthinkable -- but it is nonetheless true: If this deal passes, it will create a system that hardly taxes the wealthy at all.  I mean at all.  The rich will pay no more than 15% on their investments.  Any gains they can give away to charity (as the super-rich are obliged to do as a matter of class distinction) can escape even those low taxes.  At death, they will get a step-up in basis on all assets, thereby further escaping taxes.  As always, the rich can receive their inheritances income-tax free.  At a 35% estate tax rate, the government will in many cases not even recoup all the other tax freebies that it gives away to the rich.  By far, the single most tax-favored way to make money in the United States will be to inherit it.

5) The tax deal, by apparently extending the American Opportunity Credit, will further entrench the misguided bipartisan consensus in favor of massive subsidies for higher education.  Our political class fervently believes that everyone (other than of course the low-wage workers we import to do manual labor) is entitled to a high-wage, service sector job. In reality, most Americans are not suited for such jobs.  Our bloated education industry gets fatter and fatter even as real wages and productivity stagnate.

6)  It hardly even bears saying, but Republicans have no interest in fiscal responsibility.  Absolutely none.  While the government spends more than it can afford, Republicans busily hide from taxpayers its true cost.  There is simply no tax cut, however pointless or irresponsible, that Republicans will not support.