Monday, December 13, 2010

House Should Fix Obama's Regressive Tax Compromise

Meanwhile, back on the tax cuts topic, the Senate achieved cloture (83-15) to proceed to debate on the temporary extension of the Bush Tax Rates coupled to Obama's payroll tax holiday, unemployment insurance, AMT adjustment, and bunch of other middle class goodies. @BarackObama tweeted:
Today’s Senate vote on tax cuts is a substantial victory for middle-class families across the country—and I urge the House to act quickly.
Lest we forget, all business in Congress is backed up behind the passage of this tax bill, including the DREAM Act, DADT Repeal, and the New START nuclear treaty. To be precise, all business in Congress is backed up behind Republican demands that the wealthiest 2% of the country get their money before Congress proceeds to the peoples' business. So what exactly is in the bill that we expect the Senate to pass in three days?

The Christian Science Monitor reports that for every dollar that goes into extending the Bush Tax Cuts, there are two dollars for extensions of the Obama tax cuts and additional tax cuts for the middle class. Let's look at some super-rudimentary math: using Ezra Klein's suggestion that the tax deal inclusion of an additional tax cut for the wealthiest 2% of Americans will cost roughly $100 billion over the next two years, and the estimate that millionaires who inherit their fortunes will keep an additional $68 billion over the next ten years, we get $168 billion in tax giveaways for the wealthiest 2% of Americans, most of that is concentrated above the $1,000,000 income mark. In the context of Reuter's estimate that the Senate bill will cost roughly $1 trillion, that means the wealthiest 2% of Americans will receive about 17% of the tax cuts in this bill. That doesn't include the benefits that they get from the tax cuts that are more fair like the payroll tax holiday and AMT adjustment which apply to everybody's taxes up to a certain income. All told, the wealthy 2% are taking home one out of every five dollars in this tax bill.

For all the talk about how Democrats gave some and Republicans gave some, and a compromise was born, this number provides a stark and compelling counterpoint. The wealthiest 2% of Americans are not truthfully in a recession; they're making more than $200,000 per year for an individual and more than $250,000 as a family. They're doing pretty well by definition. The average American gets a $3,000 tax cut next year, and the wealthiest 2% get an average of $27,000. That's almost a maximum individual donation to the Republican party! That's a damn regressive tax cut, and that's what the Republicans wanted. There may have been a compromise, but what good is that? President Obama seems to believe that liberals are only disappointed in his tone or posture over tax cuts. He is ignoring his supporters' ideas of what fairness and justice look like.

It is bound to disappoint liberals (and the reality-based community) that President Obama is referring to the absence of the tax cut package as a "massive tax hike." The reality is that the plan is a massive tax cut for all Americans. But maybe there's a very good reason for that phrasing. In two years, President Obama will be running for reelection against the Bush tax cuts. He is avoiding claiming now that "tax cuts will help the economy" by saying the less pro-low-tax-rates statement "raising taxes during a recession will stall growth." The former establishes a general principle that if we want the economy to grow and Americans to prosper, we should cut taxes. The latter formulation only suggests that under certain conditions taxes should not be raised. Coming back in two years when (hopefully) conditions have changed, the President can make the case that he will be doing what is best for the economy. After all, he has already indicated that his communications strategy will be highlighting the cuts in government function that are either popular or will have demonstrable effects on the economy.

So what happens if the House decides to pass the bill, but revert the millionaire inheritance tax to tax at 55% like it used to (while still raising the amount that is free from taxation from $3.5 million to $5 million)? With only that at issue in conference, the House could get its way without much negotiating. Will Senate Republicans filibuster a joint resolution because it doesn't give enough money away to the top tenth of a percent? My guess is that they wouldn't. The optics of defending the millionaire inheritance tax cut aren't great (but the money is good). If the House wants to get a better deal but not throw out all the tax cuts for the middle class and the $200 billion to try to get businesses to invest in equipment, this is a tempting target.

The tweak could undermine the President's ability to present himself as the lead negotiator of the Democratic Party next year, but like I've said before, I'm not too worried about losing the President's negotiation skills. Anything that Republicans want to send him will have to win passage in a Democratic Senate and will be subject to Obama's veto pen. If they want to secure any accomplishments to report back to their constituents (who were, let's remember uniquely motivated to vote this year), they'll have to negotiate with two parties- Senate Democrats and the President. Splintering Democratic responsibility for negotiating the Republican legislative agenda may be a good strategy to keep their unpopular ideas in the news.

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