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Obama-GOP Tax Deal: A Win for Politics, Not Policy

4 years ago
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Okay, tea partiers, is this what you really wanted? Republicans holding middle-class taxpayers and unemployed Americans hostage so the well-to-do get budget-busting tax cuts that will be less efficient in generating jobs than other economic initiatives?

On Monday, the GOPers succeeded in hammering out a compromise with President Obama that will extend the Bush tax cuts for all taxpayers for two years, including the well-to-do. For caving on the tax breaks for the rich, Obama won a 13-month extension of unemployment insurance, a 2-percent payroll tax credit, $40 billion in tax breaks for families and students, and quicker write-offs of business equipment. The deal includes a compromise on the estate tax that is also of benefit to the wealthy. Though Obama yielded on the upper-income tax cuts, he and his White House aides will argue they got a decent deal, given that the unemployment insurance, middle-class-targeted tax credits and other programs add up to about $215 billion for two years, while the tax-cut bonuses for the rich total about $95 billion for two years.

Many on the left will likely jeer Obama for reneging on his vow to oppose continuing the Bush tax cuts for the top brackets. Some on the right will claim congressional GOPers are acting in an un-tea-party manner, with horse-trading that adds hundreds of billions of dollars to the deficit. But at least the rich will be happy.

All politics aside, there is a policy matter at the core of this mud-wrestling match: What's best for the economy?

In his most recent paper, Mark Zandi, the chief economist at Moody's Analytics (he was a top economic adviser to John McCain during the 2008 campaign) looked at the economic impacts of extending the tax breaks for the upper brackets versus the benefits of extending unemployment insurance. He found that the latter -- which the Republicans have opposed for months -- do much more to boost the economy:
Extending emergency unemployment insurance benefits would provide the most economic bang for the buck, defined as the near-term increase in real GDP per dollar of tax cut or spending increase. Emergency benefits go to those who have been out of work longer than the 26 weeks covered by regular benefits. With more than 40 percent of the 15 million-plus unemployed American workers in this predicament, many families depend on this program to meet daily living expenses.
He adds that "with five unemployed workers for every current job opening (compared with fewer than two in normal times), most jobless workers and their families need the benefits."

Zandi compared two different scenarios: an extension of unemployment benefits coupled with the middle-class tax credits Obama sought and a two-year extension of the upper-income tax credits. With the former, he found, there is 0.4 percent more GDP growth and a 0.4 percent greater drop in the unemployment rate, with 1.1 million more jobs created over a five-year period. And with this package, he calculated, there would be $30 billion less added to the budget deficits over five years.

So it's a no-brainer. Throwing tax cut bonuses at the wealthy is a much less efficient way to juice up the economy -- and the deficit costs are higher. (Zandi supports extending the tax cuts for the rich -- but not because this will have a significant economic impact. He merely thinks it would be better for stability not to mess with those rates.) What the GOPers just won was a victory for politics, not policy -- and not for hard-pressed Americans (and their kids and grandkids who will inherit the deficit costs of these ineffective tax cuts). Obama couldn't figure out how to prevent this.

In his paper, Zandi notes, "The U.S. recovery is at a critical juncture. . . . Until the jobless rate is falling definitively, the recovery will not be securely on track toward a self-sustaining expansion. . . . The Federal Reserve, Congress, and the administration must remain aggressive in their policy support until that happens." But they must support efficient and cost-effective policies, and this deal shows how tough that is.


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Tagged: mark zandi

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AL

If Mark Zandi was the chief economic adviser to John McCain no wonder he lost the election. Any one that would equate UN-employment insurance to job growth by providing stimulus to create jobs by a lower tax rate should go back to economics 101. Granted those unemployed need help from the rest of of us but that will tend to prolong the stimulus needed for a growth economy, and should not be extended into infinity.

December 08 2010 at 2:33 PM Report abuse +2 rate up rate down Reply
Charlie

As I stated elsewhere, the solution is simple. (1) Meet privately with Senate Democrats and Nancy Pelosi to discuss the plan. (2) Guarantee you have the votes to carry it out. (3) Pass the compromise, as is, with 60 Senate votes. (3) The moment the bill is signed, Pelosi introduces reconciliation bill with amendments including stopping the tax cut for those over $250,000. (4) House passes reconciliation bill. (5) Reconciliation bill passes the Senate with 51 votes. (6) Unless you guys care to take a few minutes to overturn DADT and to pass the bill for election transparency, I think the work of the lame duck session is done. Take a well deserved break for the holidays and we'll see you in January, or for the folks getting replaced, we'll see you in two years. (Unfortunately, we're going to be on auto-pilot for two years. Dems, stand your ground.)

December 07 2010 at 3:40 PM Report abuse -4 rate up rate down Reply
ugacrew

America is imploding because of its hate and greed. One Nation under God? A nation divided against itself for whatever reason cannot stand. God bless America? No, God Have Mercy on America.

December 07 2010 at 2:09 PM Report abuse +4 rate up rate down Reply
Mike

God aready had mercy on America. You just don't see it. First question. Who's the rich. Is it rich corporations? Before or after the payment of dividends ? The press does not tell you. What tax bracket does corporations pay in this U.S. vs. other parts of the world ? The press does not tell you. Do you want to leave what you made and paid taxes on for your whole life to your children ? What is fare ? the press does not tell you. Should you tell your kids they can only make so much. Well, I guess it is the job of the government, huh. I no that the government knows best for you, I can sure understand why you dont't. I also can understand why your kids will never have anything, you took it all including oportunity and a future.

December 07 2010 at 1:50 PM Report abuse +3 rate up rate down Reply
JERRY

I am totally disgusted with the deal that just transpired with the American government, and those conservative shysters, if this doesn't expose them to the American voters for who and what they are we are lost, it shows us one thing they're not concerned about the national debt, or how unemployed Americans survive in these hard economic times created by their constituents, the only thing I can say is God have mercy on America.

December 07 2010 at 9:38 AM Report abuse -9 rate up rate down Reply
charles

Two thoughts 1) These are not tax cuts. It maintains the current tax rates, tax cuts would have been prefered and stimulative 2) It gets a little old to keep talking like its the 'governments money". In the United States people have the right to earn as much money,legally, as their talents allow them. It is not the governments money to somehow give out like childrens' allowance. Once EVERYONE starts paying into the system and has 'skin in the game' to quote Joe Biden then we will have a government held accountable for its actions. At this point with barely 50% paying income tax,3 year unemployment insurance(lets call it welfare after a year to be honest), tax credits to those who pay no taxes its no wonder there is a 'make the rich pay' mentality. Its a very sad comentary on the culture we have become.

December 07 2010 at 9:11 AM Report abuse +14 rate up rate down Reply
jtzeph

The first four lines of this article tell it all, a complete misrepresentation of reality. How long did it take David to find Mark Zandi, an economist who in this case agrees with the absurd notion that unemployment benefits for 99 weeks are anything but a noose hung around the necks of those who refuse to work for 2 years. The most annoying aspect of this persistant drive to extend these benefits is the obligatory assertion that all these recipients are unemployed " through no fault of their own". To claim that someone who is out of the work force for TWO YEARS, is acting in good faith stretches the credulity of the leftists who insist.

December 07 2010 at 8:47 AM Report abuse +7 rate up rate down Reply

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