The Untold Cost of the Tax Deal
The White House is peddling its tax-cut deal as a needed stimulus plan, a boost to the economy that will create jobs and generate growth. This new-found concern for jobs is laudable, if startling from a White House that has been hawking deficit reduction for months – with a three-year freeze on domestic discretionary spending announced last year, the president’s deficit commission rolling out its austerity plan two weeks ago, the president announcing a federal pay freeze last week. You can get worse whiplash following this president’s economic message than watching a tennis match up close.
So now the White House is in full court press – the president, vice president, Larry Summers, David Axelrod – selling the deal as a vital plan to create jobs and get the economy going. Goldman Sachs, we’re told, has changed its growth estimates.
But, in fact, this is far more a deal to keep the economy from slowing than to get it going. The White House is over-promising once more, making the same mistake it made in the original recovery act—underestimating the scope of the crisis, and hyping the plan to address it.
Take a close look at the deal. Basically, it is an agreement to keep tax rates at the same level – for the very rich to the middle class (the poor fare worse). The Bush tax rates are extended. The expanded Earned Income Tax Credit and child tax credit is extended. Unemployment insurance is extended. Dividends and capital gains keep their special rate. The alternative minimum tax remains limited. None of these add a boost to the economy; they simply avoid constricting the economy. (Sadly, the only people facing higher taxes are families making less than $40,000 or individuals making less than $20,000, who will lose refunds they received from the President’s Make Work Pay refundable tax credit that wasn’t part of the deal).
Three elements are new. The unconscionable estate tax deform offers an average million bucks or so in extra tax breaks to the heirs of the wealthiest few thousand families in America – but even if there is an epidemic that lays waste to the elderly rich, it will have no effect on jobs.
The president’s team is touting the corporate tax break that allows companies to write off investments completely in the next year. But its effect on jobs is likely to be very limited. Companies are sitting on trillions in cash; they aren’t investing because they don’t have customers, not because they don’t have money. Worse, the larger companies are using much of their investment to build plants abroad where markets are growing. Unless carefully drafted, the measure will end up subsidizing them to ship jobs abroad.
The third measure is the payroll tax cut for employees. The administration touts this as “progressive” since it reduces the employees’ share of the payroll tax that applies to only the first $106,800 of income. But of course, those who make more get a greater tax break than those who make less – someone making the six-figure maximum will get a break about $2,100, a $50,000-a-year earner will get less than half that.
This is likely to help the economy. It will come as a small increase in take-home pay, more likely than a lump-sum refund to be spent rather than saved. However, the break totals $120 billion for one year in a nearly $15 trillion economy. We’ve got more than 20 million people in need of full-time work. States and localities are looking at another round of layoffs. Home values aren’t recovering, and Americans have only begun to dig themselves out of excessive debt. Just as the George Bush tax-break stimulus passed in early 2008, this boost will come and go without much notice. The increased consumer spending it generates may provide insulation from another downturn, but it is a long way from the jobs agenda we need – or from providing the elixir the White House is touting.
Worse, the plan is all tax cuts. This not only has the White House embracing the conservative theme that tax cuts stimulate the economy and create jobs; it abandons the centerpiece of the president’s reform agenda: the need to invest in areas vital to our future – education, infrastructure, innovation – to generate jobs in the short term even as we build a new foundation for the economy going forward. The president gave a powerful speech in North Carolina last week laying out this agenda. It was lost in the brouhaha over tax cuts. And next year, if the president repeats the case, he’ll face a Republican majority in the House pledged to slash $100 billion – 20 percent — out of domestic spending next year having already given away the store in tax cuts.
Liberals are up in arms about the unconscionable tax breaks lavished once more on the very wealthy while most Americans are still struggling. The president argues, forcefully, that that was the necessary price of an agreement that will boost the economy. But an untold price of the deal is that the White House is bolstering the conservative tax cut mantra in selling it, even as it weakens the president’s own vital case for the need to invest in America.