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Making Sense of the Obama Compromise on Tax Rates

Making Sense of the Obama Compromise on Tax Rates

The Obama compromise, which renews existing tax rates for middle class and wealthy Americans and continues tax incentives aimed at speeding economic recovery, is not as simple as it seems.

At first it appears that the President allowed wealthy Americans, who have done exceedingly well in the past decade and generally survived the economic crisis with losses — but not foreclosures or unemployment — to win a battle in class warfare.  It is true that letting the Bush tax cuts (for Americans earning more than $250,000) expire would have forced the wealthy to contribute significantly more to the public budget when high unemployment and underemployment were causing a great deal of stress and suffering to middle and lower class workers. In a simple contest over redistribution of wealth, wealth won.

In the larger context, the President’s compromise may have been a significant achievement.  The President is working to stimulate the economy to speed economic recovery.  The best way that he could have done this without continuing tax cuts for upper incomes would have been to let those tax cuts expire and separately to provide a major new stimulus to the economy.  This could have taken the form of a half-trillion dollar infrastructure program or multi-year green-energy committment to make American energy consumption more efficient and take a leadership role (now held by China) in developing green-energy technology.  However, there was not enough support in Congress, let alone the public at large, for such a major new stimulus program.

Without new stimulus spending, the higher tax rates, as Bush tax cuts expired, would have taken money out of the private economy.  This money would go as tax revenue to pay down the deficit, but would not create new public spending or jobs without additional stimulus legislation.

This is the real problem.  The economic recovery is not yet fast enough or strong enough to endure, without harm, tax hikes, absent a corresponding increase in stimulus from another source.  Yet no other stimulus was politically available.

This put the President in the position of having to accept a renewal of all the Bush tax cuts, to keep the economy from losing steam, at least while the economic recovery was weak.  The two-year tax-cut extension was the estimate of that vulnerable window of time. 

Importantly, the high-income tax cuts were not the whole deal, they were only the Republicans’ bargaining chip.  As David Leonhardt reports in the New York Times, the President got unemployment benefits extended, a cut in the payroll tax and some business taxes and college tuition tax credits in addition to continuing the lower tax rates for middle-income earners.  The President’s package amounts to significant new stimulus over and above continuing the Bush tax rates.  Economists like Paul Krugman and Christina Romer have said, since the financial crisis, that more stimulus was needed to keep the economy growing and to support employment.  The fight in Congress and in the general public has been about how much to spend on stimulus, in light of the deficit and the Republican preference for free-market solutions and lower stimulus spending.

Seen in this light, President Obama was able to provide significant governmental support for ecoonmic and job growth, at the cost of lower tax rates for the wealthiest two percent of Americans.  Obama ran for office asserting that wealthy Americans should pay a greater share of the nation’s tax burden to insure that all Americans could afford health care and the continuance of social safety-net programs.  However, the economy was not yet in crisis, the unemployment rate not near 10%.  In the current circumstances, the President must focus first on supporting the economy with stimulus and spending, even in the face of the deficit and his stated belief that wealthy Americans should, in the long term, contribute more. 

As the growth rate improves, and unemployment comes down, it will be appropriate to cut spending and raise taxes to balance the budget and make decisions about fair contributions from different income earners in society.  For those who believe in a more progressive income tax with higher earners paying more than the historically low levels they pay today, the real fight will be in two years’ time, when the economy is stronger, and the primary consideration of a tax hike on the affluent will be social justice and the great disparity in incomes between rich and poor, rather than the impact on the overall economy. 

Economists will still argue about how much impact tax hikes on wealthy Americans will have on the wider economy, and politicians will continue to argue about the social justice goals of a progressive tax system, but the context should be quite different.  Hopefully, substantially more of the millions of unemployed Americans will be back at work and the growth rate will have continued to improve.

UPDATE DECEMBER 11, 2010:  Bill Clinton discusses tax compromise

Marc Seltzer is also a contributor to SupremePodcast.com, a weekly U.S. Supreme Court case review podcast.  A complete collection of all Marc Seltzer’s writing and podcasts is available at marcseltzer.com.

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Marc Seltzer © 1999

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58 comments

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4:56PM PST on Dec 12, 2010

maybe i should have paid more attention in my economics classes...i just wasn't that interested...the issues are very complex...and i think that i just don't know enough about the economics of the problems to have a solid opinion....i'd rather that the tax cuts end for the rich...but maybe we do need another two years to help the economy....i think this is a huge gamble...but it might pay off....and then...the rich will really need to pay taxes...huge taxes....

2:57PM PST on Dec 10, 2010

I encourage you to listen to Senator Sanders here:

http://www.huffingtonpost.com/2010/12/10/bernie-sanders-filibuster_n_795087.html

I have just sent this email to my Senator. Please, rattle your Senator's cage as well.

Dear Senator Rockefeller,

I wish to voice my support for the position of Senator Bernie Sanders in relation to the debate on the Bush Tax Giveways to the Rich and the agreement recently reached between the White House and Congressional Republicans.

I encourage you to listen to Senator Sanders and vote down the agreement and let the Bush Giveaways expire. Then, work hard in the next session to address these issues from fresh ground. The Rich do not Need more of Our money handed to them. If Trillions of dollars are going to be handed out again, hand to people like me. I will Spend it, infuse it into the economy, buy American goods, etc. Those at the top will get their hands on it when it "trickles up" to them anyway!

Please, fight to right our Ship of State before it flounders and is the runation of Us All!

Thank you,

7:49PM PST on Dec 9, 2010

That's going to be funny watching Obama running in 2012 with raising taxes as part of his platform... LOL...

7:37PM PST on Dec 9, 2010

I understand the tax laws I just can't figure out why certain things are the way they are.

6:55PM PST on Dec 9, 2010

I glad he made this compromise in order to continue unemployment insurance (and I am employed).

5:44PM PST on Dec 9, 2010

How can a rich beyond belief Republican vote against giving a senior a pitiful $250.00 but they did You can bet if they sure would cash the checks if it did pass greedy bastards

5:15PM PST on Dec 9, 2010

Taxes in the USA are such a mess, no one can understand them.

4:20PM PST on Dec 9, 2010

In order to make sense out of it there has to be at least a little sense in it, but there isn't. Sen. Bernie Sanders has threatened to filibuster the bill if major changes are not made. Help support his efforts.

http://www.care2.com/news/member/641665621/2671544

2:47PM PST on Dec 9, 2010

Stupid rich people

12:55PM PST on Dec 9, 2010

I would have let the tax breaks expire before negotiating with the Reprehenslican terrorists. But, maybe Obama is smarter than we give him credit for? Only time will tell.

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