The stakes are enormous: millions of Americans have lost their meager unemployment benefits; job creation is abysmal; unemployment is increasing; municipal and state governments are in dire need of revenue; the Bush-era tax cuts will expire on December 31st; and obstructionism in Congress is sure to be even worse in the next session.
Our formerly hopeful, now pragmatic President, knowing just how close our economy is to falling off the cliff, has embraced compromise to get help from Senate Republicans to stimulate the economy. The Republicans in the Senate, knowing that a two-year extension of the Bush tax cuts is precisely the issue they will need for the 2012 election, are willing to compromise all principles to throw some scraps at the poor by extending unemployment benefits for a year and a month (past the next holiday season). Both parties are anxious for the one-year cut in payroll taxes that is also in the deal.
So just how bad is the deal?
Allowing the unemployment benefits to expire makes almost no economic sense. The stipend is tiny, but merciful, and it goes immediately back into the economy providing stimulus we badly need. How long it should be extended is debatable, but ending it before we have job growth is the answer.
Allowing the tax cuts to expire will hurt the working poor: the bottom 10% bracket will disappear and go back to 15%, plus the earned income tax credits will expire.
Allowing the tax cuts to expire will hurt the middle class: tax rates will increase 3%; families will lose $500 per child in deductions and some tuition credits; and singles will lose the marriage penalty fix. The House has already passed a bill to extend breaks for the poor and middle class. Should the bill fail to pass the Senate, there may be plenty of support for fixing it next year – especially if the economy continues to flounder.
Allowing the tax cuts to expire will bother the rich: 30 years ago, the top marginal income tax rate was 70%, now it is 35% and would go back up to 38%. Dividends will be again taxed as ordinary income, which it is. The long term capital gains rate, now zero, will go back up to 10%-20% – temporarily cutting the capital gains rate can create an incentive to invest, while cutting the tax rate to zero and keeping it there, does just the opposite. Estate taxes will go back into effect with a $1 million deductible.
The Bush tax cuts were spectacularly effective in increasing the wealth of the richest Americans and turned our surplus to deficit. The next 10-year cost of extending the tax cuts is about $4 trillion,
“…three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending. And we’re not talking about government programs nobody cares about: the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare,” according to Paul Krugman.
But is this just a canard? Hard to know. This lame duck session of Congress is, mercifully, coming to an end soon. It seems likely the Obama-Republican compromise could pass the Senate, but whether the House will betray the same progressive beliefs as our President, is a toss up.