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Monday, December 31, 2012

As in December 2010, trading tax cuts

The pending debt ceiling deal is shaping up as quite a Rorschach test. On the left, Michael Cohen crows that the GOP caved, while Noam Scheiber is convinced that Obama has finally and definitively destroyed his negotiating cred.  Reception on the left was shaped this morning, as the deal came gradually into focus, by an uncharacteristic freakout from Jonathan Chait. Just returned from vacation, Chait seemed to be reacting more to Obama's offer several weeks ago to start income tax hikes at the $400k level than to overnight developments (though the overnight news did move that higher threshold to the realm of the more limited deal).  Me, I wavered between "poles of hope and fear... Dec 2010 tax deal vs.crappy Jul 2011 deal Boehner did O favor of pulling out of. ' My hope:  "Perhaps cliff deal postmortem will look like 12/2010 - jaw-dropping headline concession offset by lower profile plusses."

My sense at this point is that the pending deal does look something like the 2010 agreement: a steep headline price paid to preserve core Obama priorities, with judgment yet again to be deferred until another round of deficit reduction is negotiated in 2013. On that second point, Obama laid down a key marker in his press statement this afternoon: that all subsequent spending cuts would have to be offset by tax hikes of equal value.  It's unclear how he would enforce that: his ability to do so depends both on how the sequester is handled and how he plans to make good his proclaimed refusal to negotiate under threat of a debt ceiling default. If he can make his own ground rules stick, then this is indeed a good deal.

The deal resembles the December 2010 agreement insofar as in both cases, the two sides found it easier to trade favored tax cuts than to either cut spending or raise revenue (surprise...).  In exchange for holding households earning $250k--$450k nearly harmless (though they are subject to some deduction limitations), the Democrats will have secured (if the deal goes through) 5-year extensions of Obama's tax credits for low- and middle-income Americans (expansions of the Earned Income Tax Credit, the Child Tax Credit, and the credit for college tuition), alternative energy, and business investment, along with a one year unemployment benefit extension. Thus Obama continues to forego hardball to maximize future revenue in favor of easing financial pressure on the needy and nonwealthy, stimulating the economy, and advancing his energy policy.  Long-term, I suspect he thinks that revenue can be squeezed out of the GOP in stages, but that the economy and Americans with stagnant incomes need help now.  Those who insist that our chief challenge is to stimulate the economy rather than reduce the deficit ought to be pleased.

Also characteristically, Obama gave ground on symbolism in exchange for substance. A $5 million threshold for the estate tax is a grotesquery, but not much income is at stake, compared with the Dems' proposed $3.5 million threshold (the Dems do get a modest rate boost from 35% to 40%). Starting the income tax hikes at $450k annual household income rather than $250k gives ground on a 5 year policy commitment but also doesn't forfeit that much revenue -- less than $100 billion over ten years.  It's important to keep in mind that almost $600 billion of Obama's original proposed 10-year revenue hike was to come from capping deductions at 28% of taxable income, and Obama has held out further revenue increases as a condition of further spending cuts.  Since that proposal is more or less congruent with Romney's promise to reduce deductions mainly for the wealthy and with the general professed Republican willingness to reduce tax "loopholes," my guess is that it, or something like it, will be a part of future negotiations.  

As the endgame approaches, I keep returning to Obama's extended press conference announcing and defending the deal he cut in December 2010: it impresses me as just about the most forceful and thorough articulation of his priorities and strategies that I can recall (as well as an expression of his weak points: unwillingness to credit the full extent of Republican intransigence and unwillingness to force a crisis to fight for fundamentals).  Much of it illuminates the current deal, e.g.:
we’re going to keep on having this debate [over appropriate tax rates]. We’re going to keep on having this battle. But in the meantime I’m not here to play games with the American people or the health of our economy. My job is to do whatever I can to get this economy moving. My job is to do whatever I can to spur job creation. My job is to look out for middle-class families who are struggling right now to get by and Americans who are out of work through no fault of their own.

A long political fight that carried over into next year might have been good politics, but it would be a bad deal for the economy and it would be a bad deal for the American people. And my responsibility as President is to do what’s right for the American people. That’s a responsibility I intend to uphold as long as I am in this office. ...

what this package does is provide an additional boost that is substantially more significant than I think most economic forecasters had expected. And in fact, you’ve already seen some, just over the last 24 hours, suggest that we may see faster growth and more job growth as a consequence of this package. I think the payroll tax holiday will have an impact. Unemployment insurance probably has the biggest impact in terms of making sure that the recovery that we have continues and perhaps at a faster pace.

So, overall, every economist I’ve talked to suggests that this will help economic growth and this will help job growth over the next several months. And that is the main criteria by which I made this decision.

Look, this is something that I think everybody has to remember, and I would speak especially to my fellow Democrats who I think rightly are passionate about middle-class families, working families, low-income families who are having the toughest time in this economy.

The single most important jobs program we can put in place is a growing economy. The single most important anti-poverty program we can put in place is making sure folks have jobs and the economy is growing.

We can do a whole bunch of other stuff, but if the economy is not growing, if the private sector is not hiring faster than it’s currently hiring, then we are going to continue to have problems no matter how many programs we put into place....

And, as I said, there are a whole bunch of things that they are giving up. I mean, the truth of the matter is, from the Republican perspective, the Earned Income Tax Credit, the college tuition tax credit, the Child Tax Credit -- all those things that are so important for so many families across the country -- those are things they really opposed. And so temporarily, they are willing to go along with that, presumably because they think they can beat me on that over the course of the next two years...
Surprise: Obama is a Keynesian. As for the long term...
my job is to make sure that we have a North Star out there. What is helping the American people live out their lives? What is giving them more opportunity? What is growing the economy? What is making us more competitive? And at any given juncture, there are going to be times where my preferred option, what I am absolutely positive is right, I can’t get done.

And so then my question is, does it make sense for me to tack a little bit this way or tack a little bit that way, because I’m keeping my eye on the long term and the long fight -- not my day-to-day news cycle, but where am I going over the long term?

And I don’t think there’s a single Democrat out there, who if they looked at where we started when I came into office and look at where we are now, would say that somehow we have not moved in the direction that I promised.

Take a tally. Look at what I promised during the campaign. There’s not a single thing that I’ve said that I would do that I have not either done or tried to do. And if I haven’t gotten it done yet, I’m still trying to do it.

And so the -- to my Democratic friends, what I’d suggest is, let’s make sure that we understand this is a long game. This is not a short game. And to my Republican friends, I would suggest -- I think this is a good agreement, because I know that they’re swallowing some things that they don’t like as well, and I’m looking forward to seeing them on the field of competition over the next two years
And so the long game continues into overtime...or rather, into the second half.  If this deal goes through, we will see what happens with the sequestered cuts and with the debt ceiling. We will see whether Obama can pair further revenue hikes with spending cuts largely of his choosing (e.g., those he has already proposed).  We will take one more roll with him, and try to determine whether we're rolling left or right.


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