Opinion

Felix Salmon

Tax cuts, Oprah-style

By Felix Salmon
December 6, 2010

The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!

This is clearly a win for the Republicans, who get everything they want for the rich. The tax cuts on incomes over $250,000 a year will last for two years, versus just 13 months for the extension of federal unemployment benefits, and just one year of lower payroll taxes. Meanwhile, all the Congressional opposition to this deal is going to come from Democrats, who are basically being asked to sign off on exactly the same bill that George W Bush would have asked for, with a spoonful of unemployment-benefit sugar to help the medicine go down. A lot of them will be wistfully eyeing David Leonhardt’s list of what could be achieved with the $60 billion going on those tax cuts for the rich, and wondering how a Democratic president could find himself doing this.

This is expansionary fiscal policy, alright, but a large chunk of it is concentrated in exactly in those areas — like tax cuts for the rich — which have the lowest multipliers when it comes to kick-starting economic recovery. What the country needs is spending, and this bill instead looks very likely to give us hundreds of billions of dollars of saving.

The unemployment-insurance and payroll-tax aspects of the deal will be welcomed as exactly the kind of stimulus this economy needs: substantially all of them will be spent rather than saved. But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt. Essentially, we’re replacing private debt with public debt. Just like Ireland!

And the political dynamics of taxes — easy to cut, impossible to raise — will remain: this decision essentially kicks the can two years down the road, when we’re going to have exactly the same fight all over again. On the one hand, the scheduled expiry of the tax cuts did concentrate minds impressively, and result in Real Bipartisan Agreement. But on the other hand, no one thinks that good legislation is made while sitting under a Damoclean sword.

So while this is a much better deal than many feared, I’m not convinced that it augurs well for the next two years of legislative wrangling. But hey, nearly all of us will end up with extra cash for the next couple of years. Which will make us a bit happier, even if it does little good from a fiscal perspective.

Comments
24 comments so far | RSS Comments RSS

I think that Business Insider actually nailed their evaluation of this earlier – it seems at first like a big Repub win, but think about it – when the UI extensions expire, Dems will appeal for them to be extended… How will anyone policitize that issue when there are no tax cuts for the rich expiring at the same time?

on the other hand, in 2 years, when the tax cut extensions expire, the Republicans won’t be able to hold renegotiations hostage to UI benefits (at least not concurrently)… see?

Posted by KidDynamite | Report as abusive
 

Figures.
KidDynamite: No, it means they will be holding something else hostage in 13 months time, and not in 2 years. Probably demanding social security cuts this time, as they are just “irresponsibly” expensive – especially considering the Social Security taxes are used to pay for the Bush tax cuts (this is why the SSTF is empty – the taxes are being appropriated by the rich). Because they *will* find something else – after all, they are the republicans: if there is one thing they can do is politicize shit. (As opposed to the dems, who can’t establish their own vocabulary in the media at all.)
And are you really sure the democrats will win the next elections, especially if this rather sad excuse for a president, whose only “bipartisan” trick is to roll over and play dead as soon as someone says “no” to him, runs for for another term? (And no, I’m not suggesting anything racial here, simply that he’s a horribly weak-spined politician.)

Posted by Foppe | Report as abusive
 

“This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!”

Great line, Salmon. Applause.

Posted by ottorock | Report as abusive
 

Wow, this is amazing. When will Americans learn that they eventually need to STOP THE SPENDING, particularly on policies which aren’t considered conducive to economic growth like tax cuts for the rich.

Unbelievable.

Posted by Mike.Gayner | Report as abusive
 

So who is paying for these tax cuts? Santa Claus?

Posted by TFF | Report as abusive
 

TFF, the Chinese and OPEC are paying for the cuts through the dilution of the US debt that they hold.

Posted by DavidMerkel | Report as abusive
 

The self-interest of America’s rich is completely overwhelming in its narrow mindedness so clearly on display here. Who cares about the country’s debts so long as their bank accounts get bigger? What’s even more astonishing to a European is that people actually vote for them!

Posted by FifthDecade | Report as abusive
 

One feels that the US has an appointment with the bond market in the near future: dark alley, bad side of town, moonless night.

Posted by crocodilechuck | Report as abusive
 

I thought you guys had a deficit, and here it’s just Santa’s big old endless bag of goodies for everyone!

(And here some people say that I can’t do simple calculations…)

Posted by hsvkitty | Report as abusive
 

It seems that everyone gets the payroll tax cuts. God knows Larry Ellison needs it; he’s been gypped out of the Making Work Pay tax credit for all these years.

Posted by comment1 | Report as abusive
 

I share crocodile’s fears…

Typical bubble mentality. All is rosy and can continue indefinitely, until suddenly one day it falls apart.

Posted by TFF | Report as abusive
 

If I were on that deficit comission I’d wrap the final draft report in toilet paper and deliver it to the oval office bathroom.

What a sham that whole process turned out to be… we the supreem comission have determined that taxes need to be raised and spending needs to be cut.

Ok well times are pretty tough now because under-worked under-educated ageing westerners are getting pissy about competing with younger better educated harder working Asians and South Americans for the worlds natural resources… so we’re going to cut the payroll tax in ADDITION to renewing all the expiring tax cuts.

Wow… how stupid do you have to be to buy 10 year treasuries under 3% now.

Invest in yourselves and your families my friends… we have a date with the Greeks and the Irish.

Posted by y2kurtus | Report as abusive
 

The rich are us too. The whole tax system needs to be revised, with fewer loopholes and tricks to get out of paying them for the really rich (those making one million or more each year) and also there needs to be more tax paying by those who are not well off but are still doing OK. When 40 percent or more citizens pay no income tax at all there is something very wrong with our system. I’m for tax cuts for everyone and less spending on unproductive programs designed to get the democrats voted back in office. If you can’t find a job in two years, what makes anyone think you will find one in three? Maybe we should do away with the income tax altogether or make a lower tax rate with no deductions at all.

Posted by zotdoc | Report as abusive
 

The GOP is in a no-lose situation. If taxes rise and the economy falters it’s Obama’s fault (say good-bye in 2012). If the Bush tax cuts pass, thank you GOP!!! The Dems just can’t match the GOP for framing the debate. It’s just politics and has nothing to do with governing.

Posted by CTS2 | Report as abusive
 

zotdoc, the reason why 40% of the population pays no *income tax* is because they pay 15-20% of their income in social security tax, state sales and property taxes, and in user fees that have been added to their burden in the last 30 years of starving the baby.

Remember, if your family makes $50,000, you are making less in real dollars than you made in the peak of American middle class well being, the Jimmy Carter years.

Very simply, $50,000 does not support a family of four in the United States.

Of course, the villain in this is health care costs and deunionization, but you probably opposed health care reform and hate unions……

Posted by Dollared | Report as abusive
 

IT is called “Deception” and “Fraudulent Politics” for money and power.

The Bush is one of most insane greed and fraudulent mislead in history.

Posted by BeautifulBible | Report as abusive
 

Just have to second ottorock’s comment!

“This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!”

WAY too true!!

Problem is, of course, how the hell to pay for all this!!!!!
Unlike Oprah’s show, wherein the sponsors, or her, purchase all the cars they give to the studio audience …

In a microcosm, that is PRECISELY the problem with the United States as of late 2010: we all want it, we all want it for free, and we all want somebody else to pay the tab!

What is worse, profoundly sadly, is it also seems we don’t, generally, want to share one single bit of it with anybody else — to pay for any “commons”!

I, for one, am most desirous, for example, of de-funding my personal portion of the wars in Iraq, Afghanistan, and Pakistan! The U.S. Federal government could use my taxes to fund education, green energy, jobs, etc. instead!

I am, however, in favor of continuing to fund my local fire and police departments.

Sadly, WObama does not seem to care much about my preferences … (as long as Wall Street is happy, he is happy! so it seems)

Posted by MadAsHell2 | Report as abusive
 

>> nearly all of us will end up with extra cash for the next couple of years . . .

Your elitist roots are showing again, Felix. I don’t fall into the category of people with a taxable income of over $250K, and I suspect that most of your readers don’t, either. These are the only folks who will see more cash for the next two years.

Posted by Curmudgeon | Report as abusive
 

Hm, if I get extra cash next year, that means extra cash for the next couple of years since next year is part of the next couple of years? Maybe. But, point taken. I should have said for the next year.

Posted by FelixSalmon | Report as abusive
 

I’m very disappointed in Obama. I thought he had a backbone.

Posted by 2Cents | Report as abusive
 

Deflationistas may need to pack up their bags and go home.

What seemed obvious to me is just dawning on die-hard deflationists like Mike Shedlock.

Yes, yes, in theory if the government did absolutely nothing and let the credit crunch happen we in a big deflationary spiral. But one of the greatest economic lies ever told is that once deflation catches on it cannot be stopped. The opposite is true: it is inflation that has often jumped the rails without warning.

Even with Q.E. there were arguments of ‘yes but the money is not reaching the *real* economy because there is no lending.’

Well here we are: New, printed money is buying newly issued treasuries to finance tax cuts that go straight into the real economy. The chance of the Fed selling these treasuries back into the market soon (or ever) is practically nil so it really is new money.

It takes mere days for the Fed to decide on Q.E. and mere weeks for pols to agree to deficit-financed tax cuts. And this in a climate of tough new fiscal resolve?

There is a reason why sovereign inflationary crises outnumber deflationary crises by about 100 to 1 in the history of nations.

Posted by DanHess | Report as abusive
 

e majority of the country did not watch the debates, so they honestly do not know what situation the president was put in……..so why sugar coat the process at he press conference….tell it like it truly was….for christ sake place the blame, say names…make a face, do something. I wonder what i will do with my 600 extra dollars for the year……I wonder what the rich will do with their extra 200,000 for the year…..I bet they will immediately create jobs, just like they have in the past 10 years…..

Posted by funnyfu70 | Report as abusive
 

@funnyfu70, almost as funny as the Oprah line. And sadly, also too true….

“I wonder what the rich will do with their extra 200,000 for the year…..I bet they will immediately create jobs, just like they have in the past 10 years…”

Posted by hsvkitty | Report as abusive
 

I’ve read your blog on the tax act extension(oops forgot you call it a taxcut)and found it very misleading. first of all these tax brackets have been in place since 2001 and 2003. For almost 10 years and the unemployment extension is only the 6 th one since 2008. You make it sound like the unemployment checks are going to go for buying new products. On the contrary they are going to first pay the rent,second food for the table,third gas for the car,fourth cable tv and fifth other bare essentials. Now that just keeps the economy where it is and makes it no better.

On the other hand giving business the information they need to decide what direction they are going to next year is what this bill will do too. If I’m a business ownerI want to know how much my taxes are going to increase or decrease this year. Despite what the democrats think businesses include the cost of paying taxes into the cost of doing everyday business.(Psst..that’s passed on to the customer in what they pay for a product)

Finally this is not a tax cut but maintaining the same tax brackets the way they have been for 10 years. If it expires then it will be a tax increase. By the way since millionaires all sit back and save there money must mean the bum down the street must be hiring to write graffeeti on rail road box cars. Where is your logic????

Posted by GeorgePajamas | Report as abusive
 

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