Initial Thoughts on the Tax Cut Deal

The deal is out. Ezra Klein has details, and here is the New York Times. It strikes me as exactly what the administration was hoping to get. They had been pushing for this combination of a payroll tax cut and business credits since at least September, so a entirely tax-cut driven second stimulus package.

My initial thoughts on the deal:

1. No Raising of the Debt Ceiling. This should be a no-brainer and a deal-breaker for liberals considering supporting this bill. No Democrat should support this compromise without this issue being addressed. The debt ceiling is going to be hit sometime early next year, between February and April. Alan Simpson is already bragging about how this vote will be a “bloodbath”, forcing the austerity agenda into action. It would not surprise me if the new Congress moved to cut back on the stimulus program and force deep cuts at that moment when this new stimulus is getting going, and the idea that Obama will show leadership in averting this crisis can no longer be assumed.

Since this is a compromise, there should be no room for the GOP to turn around and slash aggregate demand a third of the way into 2010. This compromise gives cover for each side to extend deficits to benefit core constituencies. If the GOP comes to slash the budget (and of course leaving the high-end tax cuts in place), liberals will have been rolled. And Digby is already catching the pundits processing this deal by concluding that Obama needs to call for deficit cutting in the State of the Union, earlier than the debt ceiling issue. I could see 2011 being the year of a hundred little pay-freeze type moves, and the debt ceiling raising would be the focal point of it.

Since Obama is giving the Republicans exactly what they want, and they appear to seriously want it, this should be pushed to be included. Unless the administration wants to get cracking on Social Security, in which case a debt ceiling crisis is a perfect opportunity.

2. Repealing the Bush Tax Cuts: Gone, Goodbye. It is not very likely that the on the upper tax cuts will be pulled back in 2012. I simply don’t see a way in which the situation is any better then – unemployment is still projected to be at 8%+, with a fragile recovery still in its infancy. The idea that Obama’s team will be in any better position to trigger it then is weak. At that point, following the deficit commission, the idea will be lowering the tax rates and broadening the base, which means that we’ll probably be focused on lowering the high end marginal tax rates even further while removing subsidies. Except that I also expect those subsidies to be gamed.

Regardless, there is now much greater uncertainty than it was before, though the Financial Services Forum doesn’t think so. Huh.

3. Are We Starting the Deficit Commission Plan? Ever had a dinner that you thought was dinner, but the other person thought was a date? Does the deficit commission think we are on a date with this plan? I’m really worried that liberals will find themselves in the position that they’ve de facto signed up for the deficit commission’s recommendations by taking their first recommendation on the Social Security payroll tax cuts. Administration officials are already saying this is paid out of general funds, no need to worry. But I am worried.

4. Business Expensing. The business expensing are accelerated. My opinion on this is, following JW Mason’s reading of Goolsbee’s early research, is that this mostly shifts rents around rather than generates new demand. Goolsbee replied to that critique and the relevance of his early work at that link. I’ll leave it to you to determine your opinion.

5. Are Tax Cuts Extra Weak This Recovery? So tax cuts are a weak form of stimulus. And what is extra interesting is that this paper, Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered?, going off some survey data, found that people were less likely to “mostly spend” the 2009 tax cut as opposed to the 2008 one. 12% less likely, with 4% more “mostly pay debt” and 8% more on the “mostly save” category. The new social security cuts will replace this behavioral tax cut.

There’s debate as to why this is: some think that it involves the quirks of behavioral economics, where people think Obama raised their taxes instead of instituting the largest middle-class tax cut ever because Obama never told them. I think it is more likely to be involved with the large debts Americans took as a result of the credit bubble. If we had cramdown, so we had an impartial judge vetting out some of the bad mortgage debt that the bailouts should have taken care of, I’d be more comfortable with tax funds going straight to deleveraging. As it is, I’m less comfortable. (Felix: “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.”)

Rather than straight fund deleveraging, I’d rather see infrastructure get built. The new workers can pay down debt and we all get a public good out of the chaos. This is especially relevant since Wall Street seems happy to take the proceeds, park it at the Fed, collect money and give themselves bonuses.

6. Extending unemployment benefits is a smart idea. The latest and greatest numbers show that the increase in employment from the demand side outweigh the decreases in employment from the supply side, and that’s before you consider liquidity effects. If that is gibberish, extending unemployment benefits is a go on the economic arguments, even before you get to the issue that it is humane to not starve workers caught in the aftermath of a bubble consisting of Wall Street creating toxic debt instruments. This does nothing for the 99’ers though. And like the tax cuts, it doesn’t do as much as create new demand as maintain old demand; not stimulus, just anti-contractionary.

7. No Benefit From The High-End Tax Cuts. Don’t let anyone spin you. We’ll see unemployment come down somewhere between 0 and 0.1% from extending the high-end tax cuts. We are being asked to take on a massive deficit with nobody able to really confirm the net effect on employment is distinguishable from zero. That’s compared to the 0.2% to 0.5% for middle-class tax cuts.

I’m not sure what to think or to do next. Your thoughts?

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17 Responses to Initial Thoughts on the Tax Cut Deal

  1. Chris Dornan says:

    My first thought is what a clear and nest summary.

    My second thought is how much the Democrats are in disarray and how well the GOP is playing this. Clearly looking after rich people and keeping the economy flat, proclaiming urgency of the deficit while making it worse at every turn, plays very well for them — short, medium and long term (as long as the executive is in enemy hands anyway).

  2. Victoria Else says:

    When the debt ceiling is debated, I hope that the defense budget is a major target of progressives. Though we can’t win this one in total, pushing hard on cutting defense spending should mean some savings are realized.

  3. jfxgillis says:


    You have the debt-limit extension exactly backwards. Dems and liberals should treat it as a dealbreaker if it gets in, not if it’s left out.

    The House Republicans will HAVE to raise it whenever it’s due because the Banksters won’t let them not raise it.

    If enough of Boehner’s Tea Party crazies defect, that gives Nancy Pelosi a nice if symbolic and ephemeral lever to torment Boehner with. If Boehner can whip the votes in the GOP caucus, the House Republicans have to eat it.

  4. Ed says:

    Was there ever a point at which you considered it a serious possibility that the White House and Congress would *not* swallow the Simpson-Bowles commission recommendations unquestioningly? If so, I am surprised and disappointed. The only pushback will be against the meager recommendations for defense spending cuts, which will almost certainly be line-itemed out in the name of Freedom and Protecting America and Supporting the Troops and whatnot. I mean, don’t we need 6th-gen air superiority platforms while China and Russia struggle to turn out pirated copies of our 4th-gen technology?

    None of this has anything to do with economic stimulus or sound fiscal policy. It has everything to do with rolling back the hated welfare state. That is the only goal. No one is trying to create jobs, balance the budget, or seriously speak to any of the canards offered up daily by Boehner and the gang. Do not be distracted. This is a quest to gut Social Security (excepting, of course, current beneficiaries upon whom Tea Party USA so heavily leans), drastically cut back Medicaid, and selectively impose other forms of “austerity” on non-defense spending.

    Sometimes war is about achieving a particular geopolitical goal, and sometimes war is simply about killing and destroying the enemy because you hate them. The GOP is not fighting to affect change, a la the Battle of Normandy. This is more like the Battle of Verdun; a war of attrition, and they know they will win every time because Obama always, always caves. It rarely even takes more that a few casualties before he’s at the negotiating table frantically giving away territory.

  5. Ed says:

    PS. Regarding the Dear Leader’s negotiating skills, I’m not entirely sure that we can characterize extending unemployment benefits as a good idea if it’s achieved by trading $200B in top-bracket tax cuts.

    Is 13 months and $25B in unemployment benefits worth 24 months and $200B in tax cuts (which, who are we kidding, will be extended in perpetuity)? I’m not talking about the tradeoff in economic terms; I mean in real-world political terms. It’s sad enough that a party with the majority for two years feels the need to bend over to get modest concessions out of the minority. The lopsided “deals” coming from the White House are getting embarrassingly close to “If you buy me a new Porsche, I’ll let you drive it once.”

  6. “Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt.” – Orszag from a few posts down

    Has he or anyone in the administration actually run specific numbers and talked about them with Obama?

    Here’s Krugman from a post today, “…so add 0.35 points to the CBO numbers. [unemployment .35% lower over two years]”. And you have to wonder too if we’ll even get that. With no deal, projected deficits are $4 trillion lower over the next ten years. This could make the Fed willing to add substantially more stimulus than otherwise, giving us that same 0.35 or more. So this may have actually increased unemployment, as well as adding hundreds of billions or trillions to the deficit, and increased the odds of a President Palin, especially since they front loaded it. There’s more stimulus in 2011 than 2012, so around election time they effect on the unemployment trend will be upward, when trned is more important in elections than the absolute level.

    Do they run these numbers and discuss them? Or is Obama again being overly scared of looking too liberal and too un-post-partisan-fairy-land?

  7. On the other hand, the Republicans have been sadly successful in convincing people that tax cuts are great for the economy and tax increases are terrible.

    As you note, unemployment will still be bad in 2012 either way. With a tax increase the Republican machine will boom incessantly that unemployment is still high because Democrats raised taxes.

    Thus, this might have actually decreased the odds of a President Palin, and that would mean we’d get these tax cuts anyway, but with a few trillion on top for the rich.

    But couldn’t this message be successfully fought? Especially with deficits projected to be $4 trillion lower over a decade as a result? Obama is always scared to really fight the Republican narrative, something which could do great long term good.

    Still a possibility Democrats in congress could stop this according to the Times today.

  8. But wait, Ezra has the CBO numbers which are very different from Krugman’s back of the envelope estimate, 2.1 million extra jobs over the two years.

    Now, according to the BLS, “The number of unemployed persons was 15.1 million in November. The unemployment rate edged up to 9.8 percent”


    Suppose those 2.1 million jobs are 1.3 million in 2011 and 800,000 in 2012. That means about a 1% drop in the unemployment rate in 2011, and about a 1/2% drop in 2012.

    Much bigger than Krugman’s figures but still trending the wrong way. And big enough to be worth this?

  9. Pingback: Initial Thoughts on the Tax Cut Deal « Rortybomb | Ameripride Tax Group Services

  10. Pingback: The American Spectator : AmSpecBlog : Did Obama Get What He Really Wanted?

  11. Update again: A Times estimate of the cost is at $900 billion, at:

    Of course that’s well worth paying to prevent a President Palin, or any Republican. If a Republican’s in the White House, we’re getting these tax cuts for the rich anyway, plus a few trillion on top.

    But did this really increase Obama’s chances in 2012 much, or at all? Or did it hurt them?

  12. Pingback: President Obama makes a tax deal, unemployment benefits go on, Democrats get what they want and more, Democrats are unhappy…go figure « quinnscommentary

  13. Brian says:

    I do not fully understand your analysis of the improvement in unemployment between the two possible tax cuts. You compare the 0-0.1% improvement for >250K cuts to 0.2-0.5% improvement for the >250K cuts. But it’s my understanding that the <250K cuts also cost around 4 times as much, so on a per dollar basis the improvement in unemployment seems pretty equal to me.

    What am I missing?

  14. sanctimonious purist says:

    I hate tax cuts for poor people that are not permanent. They start budgeting for it. If you want to give them a rebate fine. Otherwise in two years when the rates go up they will start feeling the return to normal situation as a financial constraint. Good luck campaigning on what will be seen as a tax increase two years from now.

  15. Pingback: On the Deal : Lawyers, Guns & Money

  16. Pingback: rortybomb on the Tax Cut Deal | Increase Our Taxes

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