Obama's Tax Cut Deal: So Much For Deficit Reduction

It looks like the rich, and everybody else, are on track to keep their tax cuts for now.

Tax Cut Deal At A Glance

The deal President Obama reached with congressional Republicans would:

— Extend the Bush-era tax cuts, including for the wealthiest Americans, for two years. The president had wanted to end the tax cuts on income in excess of $250,000, while the Republicans had wanted to make the cuts permanent for all income levels.

— Prevent the alternative minimum tax from hitting an additional 21 million households.

— Extend unemployment benefits through the end of next year for workers laid off for more than 26 weeks and fewer than 99 weeks. Obama pushed for this and for continuing tax breaks from the stimulus package for working families and small businesses in exchange for extending the Bush tax cuts to the wealthiest.

— Reduce Social Security taxes paid by workers for one year, from 6.2 percent of income to 4.2 percent. For example, a worker earning $40,000 a year would receive an $800 benefit.

— Temporarily reinstate the estate tax at a rate of 35 percent for estates worth more than $5 million. Democrats had favored a 45 percent rate, starting at estates worth more than $3.5 million.

— Extend a variety of tax breaks:

  • for lower- and middle-income families — such as the earned income tax credit, the child credit and the college tuition credit.
  • for businesses, including a research tax credit. In addition, they can write off 100 percent of capital investments next year.
Sources: NPR, The Associated Press, The White House

So, it follows that liberals are furious with President Obama for negotiating away a major campaign promise to rescind Bush-era tax breaks for the wealthy, and Republicans are crowing about the prospects of a big win.

And worry about the nation's exploding debt?

That's so last week.

The two-year tax cut extension deal that the president forged with Capitol Hill Republicans and now is desperately trying to sell to his own party — including congressional leaders — would add more than $700 billion to the nation's debt.

Obama during a press conference Tuesday offered a spirited defense of the compromise. He said his policy is not to negotiate with hostage takers unless the hostage is being harmed. "In this case the hostage was the American people, and I was not willing to see them get harmed," Obama said.

The deal includes an extension of unemployment insurance and middle-class tax credits, a 2-percentage-point decrease in payroll taxes employees pay in 2011 (which the president said Tuesday would "add about  $1,000 to the take-home pay of the average family"), and an estate-tax exemption up to $5 million.

It's an expedient Beltway deal that won't, on its own, translate into financial catastrophe — especially if the country can keep borrowing money cheaply from China, say experts like Calvin H. Johnson, a University of Texas, Austin law professor and former tax lawyer.

But it once again avoids addressing the nation's blooming spending-vs.-revenue problem and compounds a deep dysfunction in its 25-year-old tax code.

"In the short term, all of this is perfectly fine — and I buy the core arguments that given the unemployment rate, this is not the time to be a Hoover and a sourpuss and contract the economy," says Johnson, a persistent proponent of a national tax code overhaul.

"But it simply puts off the day we have to deliver bad news in the form of either tax increases or spending cuts," he says.

Nothing in the compromise is funded or offset with spending cuts.

What Happened?

The White House faced a political reality: Bush-era tax cuts expire at year's end, and Senate Republicans pledged to block any attempt by Democrats to rescind tax cuts on income above $250,000.

Or above $500,000.

Or above $1 million, for that matter.

With 58 votes in their Senate caucus, Democrats needed to attract at least two Republicans to beat back the party's filibuster promise. And they couldn't, even with polls showing the American public generally supportive of rolling back cuts for the wealthy — polls Obama pointed to during his press conference.

"This is a democracy — we make rules not by Gallup Polls, but by Congress," says Meir Statman, author of the recent book What Investors Really Want and a finance professor at Santa Clara University. "And you need 60 votes in the Senate to get your way."

The president "caved," Statman says, "because he doesn't have the votes and, in my view, he pushed as far as he could."

Indeed, the president during the press conference said that he has "not been able to budge" Republicans on the issue of the tax cuts.

Tax cuts for the wealthy is "their holy grail," he said. "I haven't persuaded the Republican Party. I haven't persuaded Mitch McConnell. I haven't persuaded John Boehner."

The White House has been spinning the compromise as resolving the "impasse on taxes," and as a better alternative to allowing the 2001 and 2003 cuts to expire for all Americans.

In a background briefing Monday evening, administration officials said the White House remains "strongly opposed to tax cuts for the wealthiest," and predicted that the case against such cuts will be re-prosecuted during the coming presidential campaign.

Indeed they will, say observers like Claire Hill, a University of Minnesota law professor who has written about the rhetoric of taxes and views the White House deal as a failure by Obama to effectively frame the tax cut issue.

"This is a squandered opportunity for Democrats — there's so much they could have done," Hill says, including pushing back on GOP characterization of allowing the temporary cuts to expire as a "tax increase" and pushing Republican leaders to identify cuts to pay for continuing the tax breaks for the wealthy.

Nobody Likes Taxes. Duh.

Talking about taxes is complicated, because, says Statman, stating what he says is the obvious: "We all hate to pay taxes and we all, on every income level, have our schemes to pay taxes" — or not.

Couple that with what Statman characterizes as the fact that Americans don't want to pay taxes, but don't want spending that benefits them — from Social Security and Medicare, to national defense — touched, and you've got a deep and growing problem.

"People are behaving like children — they want to have their candy, and not pay for it," he says. "We all want fairness in the tax system, but we all mean different things when we think of what is fair."

What is no longer fair, by any dispassionate assessment, experts say, is the nation's tax code, which hasn't been updated since 1986 and will be further roiled by all the temporary cuts and benefits extensions embedded in the Obama-GOP compromise. Johnson views the code as already broken — filled with what he characterizes as "loopholes, rats' nests and bramble bushes."

The president during his press conference said that the tax code needs revamping because nobody now thinks it's either "fair or efficient."

It's the late billionaire Leona Helmsley who best summed up, Johnson said, the ongoing problem. During her trial for income tax evasion, Helmsley was quoted by her housekeeper as saying: "We don't pay taxes. Only the little people pay taxes."

"We need to have a tax code that is honest and provides an accurate description of what your standard of living is," Johnson says.

That means rooting out loopholes, he says, and ensuring the broadest tax base as possible.

"Our own tax system is awful," says Johnson. "People are living off loophole money, and standards of living are far higher than are being reflected" in taxation.

Some billionaires agree: Warren Buffett recently said on ABC that tax cuts for the rich don't "trickle down": "That has not worked in the last 10 years, and I hope the American public is catching on."

White House Sales Job

Earlier in the day, Vice President Biden headed to Capitol Hill to win support for the compromise from sore Democrats. During Tuesday's press conference, Obama addressed the growing resistance to the deal among his party's congressional leaders.

Obama's argument? The package will help create jobs, and will give the middle class tax relief it needs in an economy that continues to be weak and lacking jobs.

Said the White House official on the Monday evening conference call with reporters: "We tried to find a deal where Republicans got something, and so did we."

"We hope people will agree."

Tax cuts for all? Who's to argue?

Now, anyway.

Statman says he believes that people will have a capacity to learn about the financial imperatives facing the country. He points to the Reagan administration, when the tax code was changed, "loopholes closed and there was horse trading that did some good for a while."

This is a teachable moment, he suggests.

Americans, however, need to be fast learners.

"This country," warns Johnson, "is just a little ways from a budget catastrophe."

To Democrats, Obama said: "Let's understand this is a long game."

To Republicans, he said: "I look forward to seeing them on the field of competition in the next two years."

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