Is DeMint crazy to oppose Obama-GOP tax deal? No.

December 8, 2010

For many conservatives, the thumbs-up from Rep. Paul Ryan of Wisconsin is reason enough to support the Obama-GOP tax deal — well, that and the fact so many liberals are in a purple rage about it. And certainly there is nothing wrong about letting individuals and businesses keep more of their money — even for a little while. But Sen. Jim DeMint of South Carolina, another lover of tax cuts and hater of bloated big government, says he will oppose  and even filibuster the ginormous stimulus package. Here is DeMint on the Hugh Hewitt radio show:

I’m glad the President recognizes that tax increases hurt the economy. I mean, I guess that’s progress. But frankly, Hugh, most of us who ran this election said we were not going to vote for anything that increased the deficit. This does. It raises taxes, it raises the death tax. I don’t think we needed to negotiate that aspect of this thing away. I don’t think we need to extend unemployment any further without paying for it, and without making some modifications such as turning it into a loan at some point. It then encourages people to go back to work. So there’s a lot of problems with it. I mean, and frankly, the biggest problem I have, Hugh, is we don’t need a temporary economy, which means we don’t need a temporary tax rate. A permanent extension of our current tax rates would allow businesses to plan five and ten years in advance, and that’s how you build an economy.

DeMint might have a point, several actually – and the implications are huge. The perceived failure of the 2009 Obama stimulus plan has again discredited the idea that government can spend America back into prosperity. But liberals, including many in the White House, protest that conclusion. They argue that the $900 billion package was both clumsily designed and too small given the depth of the Great Recession. But sorry big spenders, you only get one chance to fire a trillion-dollar bullet.

Of course, Republicans may find themselves in the same position if the $900 billion (mostly) tax-cut plan fails to reignite job growth in 2011 and 2012. Oh, the folks with the Keynesian demand-side, static analysis economic models say not to worry.  Wall Street firms such as Deutsche Bank, Goldman Sachs and JPMorgan — as well as the Congressional Budget Office —  think a) extending the Bush tax cuts, b) cutting payroll taxes, c) allowing business to immediately expense investment and d) funding more unemployment insurance will add as much as a percentage point to GDP growth next year and reduce the unemployment rate by around a third of a percentage point.

But if this new trillion dollar bullet doesn’t work as promised, the power of the tax-cut message would be greatly undermined.  And there is good reason to think the results will be disappointing:

1. DeMint thinks America needs a “permanent economy,” not a temporary one. Milton Friedman would agree. Uncle Miltie’s Permanent Income Hypothesis says short-term changes income don’t change spending habits, changes in long-term expectations do. PIH has been backed up by numerous studies (such as here and here and here) and argues for permanent tax cuts, not ephemeral ones.

2. The much-hyped payroll tax cut is not a supply-side cut. The Institute for Policy Innovation nails it:

One of the proposed provisions in the deal to extend the Bush tax cuts is a temporary 2 percentage-point reduction in the Social Security payroll tax, from 6.2 percent to 4.2 percent. Tax cuts that stimulate real economic growth operate at the margins–affecting an additional dollar of income, or an additional dollar of savings and investment–not the first dollar of income. Supply-side tax cuts encourage additional production by stimulating additional work, saving and investment.

A payroll tax cut is not a supply-side cut and won’t have much impact on economic growth. Rather, it embraces the Keynesian idea that the economy is stimulated by putting a few hundred dollars in people’s pockets so they can consume more.  … If there has to be a payroll tax cut, it actually makes more economic sense to give it to the employer half of the payroll taxes than to the employee. That would at least mitigate some of the risks of hiring new employees that have been imposed by Obama administration policies.

3. All of these temporary tax cuts will do little to lower policy uncertain among business and investors. There is still plenty of reason to worry about taxes and spending in the near future. Business is already sitting on a mountain of cash, and even Goldman Sachs wonders if the expensing provision will do much in this environment:

The proposal includes expensing of business investment in 2011, similar to the policy that the president proposed in September. This should reduce corporate taxes by about $100 billion next year if enacted, but would increase corporate tax liabilities in future years. Given low interest rates and significant spare capacity, this proposal is likely to have a limited effect on corporate behavior.

4. The 13-month renewal of emergency unemployment benefits will almost certainly keep the unemployment rate higher than it would otherwise be. Research from the San Francisco and Chicago Federal Reserve banks suggests the unemployment rate would be 0.4 percent to 1.7 percentage points lower if not for the extended unemployment benefits.

Republicans didn’t own the Mega-Stimulus. They will own Mega-Stimulus 2.0 in the eyes of the public. Before they sign off, they may want to seek a second opinion Dr. DeMint.

8 comments

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Under #4, your sources actually suggest the rate would be 0.4 to *0.7* lower.

Posted by nbculver | Report as abusive

[...] good questions about progressives and the so-called Bush tax cuts.James Pethokoukis explains why it’s not wrong to oppose the pending tax deal, from an economic point of view. And really, isn’t that the only point of view that really [...]

We can be deficit hawks AND oppose higher taxes. A simple mantra: http://bit.ly/fFjXYS

Posted by WinklerSD | Report as abusive

[...] the tax deal that I do – and he’s decided they’re show-stoppers (Hugh Hewitt via Reuters). I’m glad the President recognizes that tax increases hurt the economy. I mean, I guess that’s [...]

[...] the tax deal that I do – and he’s decided they’re show-stoppers (Hugh Hewitt via Reuters). I’m glad the President recognizes that tax increases hurt the economy. I mean, I guess that’s [...]

[...] Very unhelpful, these people. [...]

I’m sorry, but I’ve been trying to find info on this increase on taxes and the “death tax” in particular. What is this death tax and how are such taxes going up if we are in fact cutting taxes…?

Posted by pazyamor819 | Report as abusive

The problem Republicans are going to run into is that this is being referred to as a tax cut. Except for the payroll tax there are no cuts-it is just an extension of existing tax rates. Keeping rates were they are at might prevent additional hurt to the economy but it is not going to stimulate growth.

Posted by sierraT | Report as abusive

[...] at Reuters, Jim Pethokoukis explains why Jim DeMint opposes the reported Obama/GOP deal on extending the current tax rates. For many [...]

I agree with the president that we have no choice but to accept this deal. However, I’ve been watching for a fiscal conservative who opposes the agreement for what I consider the right reasons.

I’d like to have someone to vote for in the next presidential election. Jim DeMint is not the guy.

Opposing the death tax is ridiculous. Dead people don’t need money and think it’s reasonable for the deeply-indebted country that created the conditions for their success to expect to demand a large portion of that wealth back. People who remain alive in this country don’t need an aristocracy.

I”m looking for someone who genuinely sees ALL federal spending as borrowing because that’s what it is when a country’s annual budget is deeply in the red… the Red Sea of Debt.

I’m looking for a candidate who also sees the need to pay this debt down as fast as possible. That means absolutely no give-aways to anyone including families and corporations and it means higher taxes for everyone who has money and I mean everyone… including me. I don’t want to hear anyone saying “not me” and that goes for corporations and all families, rich or poor.

Handouts should never come from governments because they do a miserable job of deciding who is worthy of my money.

I can only support those higher taxes in conjunction with painfully massive cuts in spending that will remain in place until the debt is gone.

It makes no sense to give the government more money while they are still spending like drunken sailors on shore leave.

Are their any potential candidates with enough guts to do what obviously needs to be done? Maybe, but he or she would have to be incredibly wealthy because neither the DNC or the RNC would ever assist a candidate like the one America needs.

Posted by breezinthru | Report as abusive

Tax cuts for the Rich don’t work. Period. End of arguement.

Posted by dcrimso | Report as abusive

@dcrimso,
You’re right, spending cuts for all people work. Period. End of argu(e)ment….

except for the fact that while most of America has taken pay cuts, the government gets just a freeze. We need to limit government spending as a % of something, perhaps GDP. When the economy suffers everyone pulls back spending, except the government.

Why does it make sense for the government to keep spending and to sustain this spending take more from the people? Both should sacrifice, only one does.

Posted by BHOlied | Report as abusive

@breezin,
you said [Opposing the death tax is ridiculous. Dead people don’t need money and think it’s reasonable for the deeply-indebted country that created the conditions for their success to expect to demand a large portion of that wealth back. People who remain alive in this country don’t need an aristocracy.]

while I agree that dead people don’t care, I’m pretty sure their heirs do – and thats the point. And why does the event of death create more tax liability? Taxes are imposed upon transactions, service, and products – is death any of those? Why should death be taxed again?

[Handouts should never come from governments because they do a miserable job of deciding who is worthy of my money]

Agreed, are you saying then that Social Security and Medicare should be ended? What about unemployment benefits?

Posted by BHOlied | Report as abusive

[...] This post was mentioned on Twitter by Jimmie, Tom Giovanetti, TimChapman, Mike Cornell, GOP Establishment and others. GOP Establishment said: In which unicorns are awesome >>> http://blogs.reuters.com/james-pethokouk is/2010/12/07/is-demint-crazy-to-oppose- obama-gop-tax-deal-no/ [...]

[...] Yesterday Dan Riehl in his “Jennifer Rubin Should Do Her Homework Before Going After DeMint“ points us to Reuters Breakingviews James Pethokoukis’ post “Is DeMint crazy to oppose Obama-GOP tax deal? No.” [...]

[...] Paul Ryan is for the deal, but Senator Jim DeMint opposes [...]

[...] Homework Before Going After DeMint“ points us to Reuters Breakingviews James Pethokoukis’ post “Is DeMint crazy to oppose Obama-GOP tax deal? No.”“Money & Politics” columnist Pethokoukis explains: “DeMint might have a point, several [...]