Obama Bends Over

Remember when Democrats were the party of “tax and spend,” confiscating the wealth of the country’s hardworking people to promote progressive goals? Remember when Republicans were the steadfast fiscal stewards of the nation, proving their convictions by going so far as to vote against extending unemployment insurance benefits for millions of people? Those were the days.

But last week is over. Now, things have gotten a bit blurry. The recent deal brokered by President Obama and key Republican leaders is thoroughly bewildering. After weeks of bitter, time-sensitive quarreling, Republicans will reportedly allow a thirteen-month extension of unemployment insurance benefits, thus adding significantly to the deficit that they were supposedly against. In exchange for this concession (yes, here in the US, it is understood as a concession), they will deliver unto the minority of American households that earn over $250,000 per year a continuation of the 36 percent top marginal income tax rate (rather than the dreaded 39 percent). However, it should be noted that this 36 percent only applies to every dollar over $250,000; these fortunate households would have still received a tax cut on every dollar under $250,000 had the Democrats’ more progressive income tax plan passed the Senate.

In addition, the Republicans will grudgingly permit a return of the estate tax, one of the most progressive taxes in the US, after it had literally ceased to exist in 2010. However, whereas the exclusion amount (the initial amount on which one does not have to pay taxes) typically ranged between $650,000 to $2 million over the past decade, it will now be set at $5 million. And, whereas the maximum tax rate generally approached 50 percent, it will now cap out at 35 percent. Additionally, the payroll tax rate dedicated to funding Social Security will drop to 4.2 percent from 6.2 percent.[1] Of course, that tax rate only applies to “earned income” under approximately $106,000 – after that, the effective tax rate begins falling anyway.

At this point, you might be wondering how these large expenditures and concurrent tax breaks could possibly reduce the deficit. They won’t. This baffling arrangement will cost approximately $900 billion over the next two years. If that figure sounds familiar, it is because it is approximately the same amount as the 2009 Recovery Act (also known as “the stimulus”), which the Republicans denounced and derided all the way to November’s midterm elections.

But if the Republicans were so opposed to adding to the deficit – so much so that they even voted against providing assistance to 9/11 first-responders and their families – why on earth would they agree to this arrangement?

It’s a great question, with many great possible answers. For one, the Republicans likely know that, at the end of the day (and certainly in November of 2012), the deficit is Obama’s to defend. The president is already inspiring serious double-think as he touts the wisdom of the $900 billion compromise in nearly the same breath that he states, “I’m not about to add $700 billion to our deficit by allowing a permanent extension of the tax cuts for the wealthiest Americans.”[2] Weeks (perhaps days) from now, things will return to the standard narrative: Democrats’ reckless spending versus Republicans’ fiscal responsibility. Republicans are obviously in control of the near future and, to paraphrase Orwell, those who control the future control the talking points of the past.

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Secondly, Republicans must be secretly rejoicing that, somewhere along the line, many Democrats implicitly swallowed the supply-side economics argument – that is, that across-the-board tax cuts alone are capable of pulling the country out of recession. Remember when Democrats believed in massive public works programs that could stimulate the economy, relieve unemployment, and repair the infrastructure of the country? Now they believe in cutting Social Security taxes (instead of eliminating the $106,000 income cap or levying the tax on capital gains, dividends, and other forms of unearned income), which, conceivably also to the Republicans’ amusement, edges Social Security ever closer to the fiscal chopping block known as the National Commission on Fiscal Responsibility and Reform. Now they have to beg to save the livelihoods of two million unemployed Americans and, as a way of achieving this, they must suffer a humiliating defeat in the public relations war over the Bush tax cuts.

This last point is especially painful because the Democrats were trying to beat the Republicans at their own “but-what-about-the-deficit?” game. Extending the tax cuts for the wealthiest Americans will have little economic effect (bad for Democrats) and enlarge the deficit substantially (also bad for Democrats). Result? Republicans win.

Though the president himself speaks far too favorably of this deal [3], it would be unfair to pretend that the power distribution of Congress did not seriously influence the contours of this arrangement. In the end, it will indeed help many Americans caught in desperate and uncertain times. The problem is that it also helps those that did not need any help – those who already benefited from ten years of far below-average income tax rates – and all at the expense of the national debt. Senator McConnell – yes, THAT Senator McConnell – even praised the president, and future-speaker Boehner called the agreement “encouraging.” It may not be a total Republican victory, but if it looks like a duck and quacks like a duck … .

Summing up: Conservative lawmakers prevented taxes from becoming more progressive; Social Security solvency is being sacrificed; and Republicans won the battle over the Bush tax cuts – all of which will substantially enlarge the national debt – and the new Congress hasn’t even started yet.

1. The New York Times.
2. Ibid.
3. Statement by the President on Tax Cuts and Unemployment Benefits.