Quick thoughts on the tax compromise

Since one of the things I supposedly teach is the ethics of compromise, I guess I should take a crack at discussing The Deal (as far as we know about it from the Times so far).

There seem to be at least four (and a half) main issues.

1. Vulgar Rawlsianism. The Times says the President’s first priority was the extension of unemployment benefits, and I believe it.  Obama said as much himself at his press conference yesterday.  There’s something intuitively attractive (as well as crudely Rawlsian) about caring more about the jobless than about how much those at the top have, and some will say that this factor alone makes the deal worthwhile.  But the deal does nothing for the ninety-niners, those who have been jobless for more than that many weeks, who are even worse off. And it does nothing to prevent the Republican House from hammering the poor on the spending side.  So I think this is vulgar Rawlsianism indeed.

1a. Stimulus.  I know this is the meme of the day—Obama abandoned progressivity for the sake of juicing up the economy (see Ezra Klein, David Leonhardt)—but I’m not going to make much of it.  This is partly because as a non-economist I don’t have a properly qualified opinion, partly because those opinions I do tend to trust seem to think the deal will be pretty ineffective as stimulus, and partly because the question isn’t whether the deal will stimulate the economy, but whether it would stimulate the economy more than any other tax cut that Obama could have negotiated in January. After all, the GOP would hardly have left the new status quo alone, and with a new baseline of Clinton-era rates, Obama might have been in a better position to take tax cuts for the wealthiest, and estate tax capitulation, off the table, or at least force major concessions on those, through credible veto threats.  (Some say that Obama isn’t the type to make such threats—but if so, that’s his fault.)  Which brings up

2. Baselines, focal points, and memes. The whole point of the ten-year sunset on the Bush tax cuts (besides gaming deficit predictions) was to trap the Democrats into “raising taxes” in the future by letting them expire.  Obama hasn’t just fallen into that trap; he’s endorsed it, by embracing the idea that letting “taxes go up increase” during a recession would be bad policy (though granted, I think he avoided the words “raise” and “increase”).  This is very bad.  There’s also a strong distributional baseline problem. The reason it’s a bad idea to “give everyone” tax breaks is that the next time one proposes clawing back on a progressive basis, doing so will be an “increase,” not the status quo—just as happened this year.  A superficial Pareto efficiency now prevents a certain subset—the progressive subset—of what would otherwise have been Pareto-efficient deals later.*

3. Revenue. I agree with Matt Yglesias that one big problem with America is that we’re taxed too little to support the public goods we need, and that this compromise moves us precisely in the wrong direction.  This consideration also adds to the distributional concern: from now on, letting tax cuts expire for the rich will be “raising taxes,” while cutting programs for the poor or other public goods (yes, lack of homelessness and unnecessary death are public goods) will be “living within our means.” That said, one should realize that Matt and I are probably in the 14 percent minority that wouldn’t mind seeing all the Bush tax cuts expire, i.e. restoring the tax code of 2000.  Our position is very unpopular, and embracing it would be an enormous political risk.

4. Politics. This is the big Kahuna.  The President’s defenders will argue that the deal will be great politics.  It will make Obama look moderate and conciliatory.  (Third Way version of the argument: he ought to be moderate and conciliatory on other subjects.  Probably too-clever-by-half double-bank progressive version: this will let him more easily say no to Boehner on other subjects.)  And, by stimulating the economy (by stipulation), it will help Obama’s reelection chances.  If it does that, it will help Obama defend his legislative achievements—especially the Affordable Care Act, the most important domestic policy achievement since Medicare and Medicaid, and much more important than anything likely to be accomplished in the next two years—and do great things through executive action. Given that Obama actually has a substantial progressive legislative record to defend—completely unlike Bill Clinton, who enacted moderate Republicanism and then ran on a platform of preserving it against radical Republicanism—this has some force.  A case could be made that triangulation now has a moral and political implications very different from those of triangulation in 1995-96.

Against this: (a) The deal also makes Boehner and McConnell look moderate and conciliatory—a shocking misportrayal of reality that will make it that much harder to run against their intransigence. (b) A better economy will not only help Obama but help Republicans retain the House (the Senate will flip regardless). (c) Embracing Republican frames on taxes makes it that much harder to make a coherent case for Democratic government.  And(d) the purse is powerful: while a Republican House and Senate might not be able to repeal the ACA, they might be able to make it work so badly as to discredit it.

On balance, then, I think this is a bad and short-sighted deal.  But it’s not quite as obviously bad, and morally disgraceful, as some—commenters, fire away—will portray it.  And my impression of its badness derives largely from my unpopular view that our taxes overall are too low.

*This is a neglected,because buried, argument in Russell Hardin’s fine Indeterminacy and Society (Princeton, 2003), pp. 9-11.

Update: Point (1) was too flip. The truth is that I’m not unemployed, nor do I move in circles where a great many people are unemployed. If I were in either of these categories, I’d probably look at the deal pretty differently. One can still oppose the deal on balance, as I do, but those of us who do should remember that the lives of some desperate people are at stake.

Second Update: Corrected to reflect the transcript of Obama’s December 6 statement: “let taxes increase for these Americans [all but the rich] right now” was his formulation for what must be avoided.

Comments

  1. CharleyCarp says

    It's not a too clever by half double bank play to preemptively agree to those parts of the Republican agenda that poll well, so you can have your arguments with them on issues that don't poll as well. I don't think Obama would "win" a government shutdown based primarily on increasing taxes for upper income people; I'm not sure he'd win a shutdown on the same substantive issues as that of 95, given the better message discipline and delivery on the right, Citizens United, and the fact that many white seniors are not interested in supporting the black Muslim socialist radical even when he proposes their own ideas.

  2. Foster Boondoggle says

    Given the hard-right composition of the House next month as well as the number of "centrist" Democratic senators who would be likely to support making the upper-end tax cuts permanent, the die was cast on Nov. 4th. Obama did the best he could under the circumstances. The real crime is the Democrats' failure to bring up some version of the legislation a year ago when they would have had much more leverage.

  3. Dave Schutz says

    I'm a Fourteen Per Center as well, but I also generally think we are taxing a lot of the wrong things, and not taxing a lot of the right things. I'd be perfectly willing to leave income taxes where they are – even lower them some more – if we were to raise taxes on gasoline, carbon in general, consumer goods. A Tobin Tax. We should move the hedgies' income stream from capitol gains to ordinary income. Mortgage tax deduction (on everything over a, say, $150,000 house) is a disaster. I'm glad to see the estate tax coming back, and think it will be hard to kill now that it has a bipartisan imprimatur. So, to the extent that this may freeze current income tax rates in place, I hope that it will concentrate attention on other areas for the tax increases we should enact.

    To the extent that you make goods more expensive, and income taxes less forbidding, I think you encourage people to work harder – I think that's a good thing.

  4. Dennis says

    Once upon a time, a long, long time ago, I got dragged into a committee of state government setting licensing fees. There was a fixed amount of money that had to be raised (my recollection was that fees had to cover inspection costs), and the facilities ranged in size from tiny to huge.

    There was no proposal that made the deities (the political appointees) happy. Flat-rate (we have 250 facilities, we need to raise $X, so $X/250 is the number) was unacceptable because it taxed the small facilities too heavily. We proposed progressive fee structures in several variants based on different size measurements. That was unacceptable, because it taxed the large facilities too heavily. It wasn't that the large facilities were taxed that heavily, the problem was that almost all the fees were generated in the large facilities. I pointed out that most of the capacity was in those large facilities, and that considered on a capacity basis, these proposals were "fair." I was told that the large facilities wouldn't see things that way. This process went around and around for far too long. I don't remember any more what the resolution was, just the frustration of dealing with innumerate people.

    We are seeing something akin to this in the argument over tax rates. A flat tax is unacceptable because at the required rate it hits poor and middle income families too hard. A progressive tax rate is unacceptable because it treats the wealthy "unfairly." The unfairness doesn't seem to be stated in terms of the rates paid by individuals, instead the claim is that "too much" is raised from the wealthy as a class. Completely lost in the argument is the fact that the rates we are arguing about are marginal tax rates. If the Bush cuts had been allowed to expire for incomes over $250 000, someone making $500 000 would have received precisely the same tax "cut" (more correctly, paid exactly the same taxes) on the first $250 000 of income as someone who earned exactly $250 000. The half-millionaire would have paid higher taxes on her second quarter million.

    The simple fact is, in the United States of America, labor and wealth are treated very disparately. Both provide individuals a mean of making a living, but income earned via labor is taxed at a much higher rate than income generated through wealth. The tax exemption for hedge-fund brokers is just the tip of that particular iceberg. Dividends are not taxed as ordinary income, capital gains receive preferential treatment at least if you're wealthy. If the item of capital happens to be a tool you use to earn your living, like a Cremonese violin maybe not so much. The tax code seems to provide a near infinite number of ways to avoid taxation if you have enough money.

    I'm ready for a proposal from someone to start treating all income alike. That would at least be a step toward fairness. Truly fair would mean taxing income generated by wealth at a slightly higher rate than income generated by labor. I have but one lifetime, wealth seems to have a much longer lifetime. In the alternative, I'd settle for a high exemption and enormously high inheritance tax rates beyond the exempt amount.

  5. MosesZD says

    Well, Obama's supporters have defended his regressive torture policies, too. They've defended his Telecom immunity. They've defended his abuse of state secrets. They've defended his terrorist-bombings of women and children in this idiotic "War on Terror." They've defended his continuing abuse of human rights in Guantanamo. They've defended his throwing gays under the bus with DOMA and DADT. They defend the quasi-tax of the mandatory health-insurance participation fiasco without any meaningful cost controls. They've defended his cat food commission.

    So, I don't give a flying flip what Obama supporters support. Anyone who supports that shit isn't worth listening to…

  6. says

    Bad and short-sighted? That's one way to see it, I guess. I guess I'm part of the paranoid Left, because I tend to fear that it is bad and far-sighted.

    I always expected Obama to renew the Bush tax cuts for the wealthy. You can think he's politically inept, but I think Occam's razor cuts in a different direction. Obama is so far gone at this point, that he has trouble writing the scripts; the White House is claiming business tax-cuts as part of their half of the victory in this "compromise". Oooh, business tax-cuts! Really had to twist some Republican arms on that one, I bet.

    The payroll tax holiday is a dagger aimed at the heart of Social Security.

    America has not been willing to pay for its way in the world for at least a decade. Clinton's 1993 tax hike was the last hurrah for that kind of solidarity and sense of responsibility.

    The political systems' willingness to cut taxes in the face of huge deficits, but the same political systems' complete unwillingness to invest in infrastructure or education, or deal responsibly with war, peak oil, climate change . . . this is a suicidal combination.

    As for being part of a minority of 14%? Most Americans think the country is in serious decline, because it is. Most Americans want to see major infrastructure spending. Most Americans want to preserve Social Security. Most Americans want to see war in Iraq and Afganistan end. Most Americans would like to see a more robust response to 10% unemployment and declining wages, than a 13-month extension in the dole that does even reach the 99ers. "Most Americans" don't count, because America is a democracy in name only.

  7. says

    Figured I'd drop by this blog to see just how depressed you guys all were, but I have to say this is a pretty good post, and what's more refreshingly honest. That said, I think the Prez struck the best deal he could given the weakness of his position. Of course, he should have tried to strike a deal a year ago, not just because he could have done better (from D's point of view) then, but also for the good of the economy and the country. But that's 20-20 hindsight. After Jan 1, his position would have been untenable in Congress, where the GOP will have an actual majority in the House and a working majority on such issues in the Senate. As to the merits of the deal, the estate tax compromise is where we knew it was headed, and it will probably become permanent on more or less the same terms. R's give up the idea of eliminating it, D's give up the redistribution angle. I don't like the SS deal fiscally, where the system is already in deep trouble, but for one year it might make sense – this is a more regressive tax than it should be. As for unemployment, when you get past 99 weeks, there is already too much incentive not to work, but again for 13 months to keep it at 99 weeks – I can live with that until business starts hiring again. All in all, the solution we knew was out there, even if the Pelosi, Reid, Move.on crowd can't get their heads out of the sand.

  8. David in Texas says

    "It wasn’t that the large facilities were taxed that heavily, the problem was that almost all the fees were generated in the large facilities."

    The correct question, and answer to the correct method of imposing fees, should have been whether the inspection costs were proportional to the size or fixed regardless of size, since the fee was designed to recover inspection costs.

    "The payroll tax holiday is a dagger aimed at the heart of Social Security."

    Yes, it is hard to see this as a "compromise" since effectively the GOP gets a permanent tax cut (they will likely be in a stronger position when the "temporary" tax cut extension ends – certainly not significantly worse so as to permit a different outcome than this time), if the economy and job outlook improves (even if not because of the tax cut extension, since both are in an upswing) then the GOP will crow that lowering taxes for the wealthy creates jobs and be viewed as having the best economic policies despite having got us into this mess in the first place with those policies, and they get to put SS on even shakier ground.

    Now, what did the great progressive hope get in return? A very short-lived boost to a dwindling problem.

  9. David in Texas says

    ". . . there is already too much incentive not to work . . ."

    A lack of jobs is an incentive to not work like a lack of food is an incentive to not eat.

    But, hey, let's give businesses a tax break so they can spend money hiring employees to produce more inventory they can't sell . . . oh, wait, what smart business person would increase inventory in a time of low demand . . .

  10. Dennis says

    @ David

    Of course that's the correct question. But we were told the inspection costs weren't relevant to setting fees. The answer to the question is that there were some fixed costs in the inspection and variable costs that depended on the size. The fixed costs were mostly travel costs and varied considerably depending on the location of the facility.

  11. J. Michael Neal says

    Of course, he should have tried to strike a deal a year ago, not just because he could have done better (from D’s point of view) then, but also for the good of the economy and the country. But that’s 20-20 hindsight.

    It's also wrong. Go back a few months, and you will find Obama publicly imploring Congress to bring the tax issue to the floor before the elections. The problem was that Congress refused to do so. I suspect that the reason they didn't do so is that there were never the votes to pass middle class tax cuts alone. At least in the Senate, there would have been sufficient defectors among the centrist Democrats to amend the bill to include the upper end. Obama and the Congressional leadership always had a weak hand to play, because they couldn't trust their own guys.

    they get to put SS on even shakier ground.

    How? The deal includes the general fund paying to the SS trust fund the money that was foregone in the payroll tax.

  12. says

    J Michael – of course, you are right, he never had the votes to pass the extension of the middle class cuts without the upper income cuts. R's and moderate D's would not pass any decoupled measure, knowing it was bad politics (and arguably, worse economics). My point was he should have bopped the liberal base and made the deal he made today back then. But, whether the Prez is a true believer or not, (and does anyone really know at this point?), that would have been asking a lot.

  13. Andrew Sabl says

    Again, this is quick (sorry–very busy day) but J. Michael Neal is indisputably right on one point: the deal would specifically *not* deplete the Social Security trust fund and thereby endanger Social Security. The deal explicitly stipulates that general government revenues will be used to fill the hole left by the payroll tax cut. See Steve Benen's summary: http://www.washingtonmonthly.com/archives/individ….

    There are lots of reasons to oppose the deal (though I remain open to rebuttal). But that's all the more reason not to propagate false and inflammatory claims about it that aren't true.

    More later this week.

  14. says

    I'm sorry. But, there is only one priority left, one goal, to which all others — including the well-being of Amricans — must be subordinated. The GOP must be denied the presidency at all costs. Obama knows the horrors that would result: A rapid decline of all this country stands for and holds dear, as well as the fortunes of the vast majority of its citizens.

    If this deal gooses the economy enough to make Obama's reelection much more likely, it had to be done. It is uglty, it is cruel, but here we are.

    Am I wrong? Really? Go read the Ryan plan. Watch Sara Pslin's TV show or Glenn Beck's for more than the usual one minute. Watch any GOP House member for 5 minutes on C-SPAN. Peruse Media Matters. Follow events. Have a pulse.

    A GOP president and the wave Congress washed in with him/her is simply unthinkable. Thast is the choice.

  15. patrick II says

    The social security deficit may be filled by general revenue taxes in the short run, but that will only add to the deficit without addressing the underlying problem. If the total gross tax the government collects does not raise the republican strategy of "starve the beast" will eventually succeed.

    The U.S. is in this way similar to any business. The gross revenue it receives through various income streams (in the government case taxes) is put into various budget buckets for spending. We can afford social security if the overall income stream is commensurate with outflow, even if we use some money from general revenues — if our country is doing well, there is not too much debt, and enough general revenue. The republicans get to inhibit a short term revenue stream which is their preference anyway, and also get to inhibit the larger long term income stream of income tax.

  16. says

    What he should not have done, even while paying Danegeld to the party that would starve millions and arm Russia if they didn't get their tax cuts, was lie about it.

    It is not true that "economists of all parties agree that this is the best stimulus"; it would be closer to the truth that no economist thinks so: the center and left economists would prefer money that would be spent buying stuff – ideally productive stuff; the right economists deny that any government policy will stimulate.

  17. Brian J says

    Um, I wouldn't be so quick to assume the Senate will flip. The only seat that looks like it will be exceedingly hard to keep will be Nelson's in Nebraska, but we can try to replace him, if he loses, by knocking out Scott Brown, Ensign or whichever Republican replaces him, whichever Republican replaces Snowe as the Republican candidate, or maybe even Kyl or whichever Republican runs if the Teabaggers get Lugar. Cantwell, Whitehouse, Casey, and Klobuchar are almost certainly safe. Gillibrand and Manchin, too. Stabenow's probably in good shape since Obama is right now in Michigan. Tester, McCaskill, and Webb will be hard, but not that hard, and certainly not impossible. The same can probably be said for Sherrod Brown's seat and Bill Nelson's seat, although I'd need more information about those two. Our biggest worry is that someone like Kent Conrad will retire, at least as far as keeping the seat is concerned, and the same might be said for Webb.

    Anyway, has anyone considered the possibility that this is all a big fake out? I'm probably missing something obvious about why this wouldn't work, but suppose Obama proposes this in order to look like a responsible, compromising guy, knowing full well that the Democratic votes aren't going to be there to make it go through in at least the Senate, if not the House as well? So the deal fails, but he ends up looking like he tried to extend all of the cuts. Then, he can try to bring rates down the middle class only, possibly getting the payroll tax holiday and the unemployment benefit extension, while keeping the rates what they were on higher earnings. It's not at all clear if he'd get that, but he could dare the Republicans to vote against such legislation.

  18. says

    AS: ". . . the deal would specifically *not* deplete the Social Security trust fund and thereby endanger Social Security. The deal explicitly stipulates that general government revenues will be used to fill the hole left by the payroll tax cut. . . . the more reason not to propagate false and inflammatory claims . . ."

    Sometimes, I think Democrats couldn't win at TIC TAC TOE.

    There's a reason that Social Security is funded by a dedicated payroll tax, and has not been dependent on an annual general appropriation by Congress.

    This opens a door, which will be hard to shut. If Democrats couldn't avoid opening it, even when they had large majorities in both houses, they won't be able to shut it, let alone stop the Republicans from walking through it.

    I saw Ezra Klein on MSNBC dismissing the Trust Fund as an accounting gimmick. He's the liberal pundit on the liberal network.

    This country is completely screwed.

  19. jm says

    What, do you think the United States is a representative democracy or something? Only the useless eaters are screwed. Who cares about them? The oligarchs, their politicians and their apologists in the media are doing quite well, thank you, and, after all, if they're doing well the country's doing well.

  20. jm says

    What, do you think the United States is a representative democracy or something? Only the useless eaters are screwed. The oligarchs, their politicians and their apologists in the media are doing quite well, and, after all, if they're doing well the country is doing well.

  21. David in Texas says

    "But we were told the inspection costs weren’t relevant to setting fees."

    Speaking of reality-based communities and those that are not!

    But you are right in your implication that's political appointees in general: ignore the truth in favor of one's most cherished delusions.

  22. David in Texas says

    "The deal explicitly stipulates that general government revenues will be used to fill the hole left by the payroll tax cut."

    Then unspecified cuts are being made elsewhere.

    And because that is the case, when the deal expires you are likely to see a continuation of the reduction in the payroll taxes that was explicitly agreed to while the alleged countervailing provision for paying for the cuts from general revenue will be lost in the muddle.

    So, frankly I think you are being had and SS will, absent some miraculous recovery by the Dems during the next election cycle, in the end be "starved" by this deal.

    But hey, delusion is the sustenance of hope that one's hero has done well at the negotiating table.

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