Tuesday, December 07, 2010

Merry Christmas to all...

(now living).  The deal between the administration and Republicans kicks the deficit can down the road, but I'm not so sure that's totally bad. I'm not alone in thinking this deal surprised as many as it irritated.

The deal has something to annoy everyone -- but also something for everyone. You're a Democrat? The tax cuts for the rich are extended, and the estate tax deal exempts inheritances up to $5 million while cutting the rate heirs pay to 35 percent. But that's why the Republicans like it. You're a Republican? The tax cuts are only extended for two years, and they're paired with 13 months of unemployment insurance, an extension of a variety of tax credits passed in the stimulus, and a new payroll tax cut -- all of them deficit-financed. But that's why the Democrats like it. You're a deficit hawk? The deal adds more than $700 billion to the deficit. And, let's be honest, you got nothing in return.
It's important, however, to keep the actual policy in perspective. If you're a Republican who argues that long-term uncertainty about tax rates and the deficit are the main problem for the economy, this deal only eases tax uncertainty for two years and it makes the deficit worse. If you're a Democrat looking for more stimulus, this isn't nearly enough, and most of what's there is just an extension of programs that are currently in place. In reality, the politics of the compromise might mean more to the market than the specifics of the policy: The two parties actually have the ability to sit in a room and come to a compromise. That has implications far beyond yesterday's tax cut deal. It suggests that we may see more get done in the next two years than many of us thought, and there'll be more capacity to respond to crises than some feared. [More]
The surprise for me is the payroll tax cut. This tax is the most regressive and hence, the most powerful stimulus tool available.  It puts money directly into hands that spend 110% of their income.
Under the plan, the Social Security payroll tax on individual wages would be lowered to 4.2% in 2011, from the current 6.2% rate.
A worker earning $70,000 would pocket $1,400 as a result of the tax cut. Social Security taxes apply only to the first $106,800 in wages, so the benefit for high earners tops out around $2,100. The employer share of Social Security taxes would not be affected.
Obama administration officials say there would be no effect on Social Security benefits or long-term solvency. But the government would have to borrow to make up the lost revenue to the Social Security trust fund. The plan's detractors say it would undermine the program and likely become permanent. [More]
For farmers the SE tax is our Voldemort.  No matter how much shiny steel we buy, it won't go away (via Sec. 179 magic), unlike income taxes. Most of us will happily take the $2100, I'll bet.

(No - wait.  For SE tax, this deal may mean $4200 since we pay both halves.  Not sure - I'll get more info ASAP.) Sheesh!  I didn't read my own post above.  It applies only to the employee contribution.

And there is an estate tax deal that looks suspiciously like a FB talking points memo.
On December 6, 2010, President Obama announced that he reached a deal with Republicans to extend the federal estate tax and other tax cuts.         
Under the deal, the estate tax exemption would be up to $5 million for individuals and $10 million for couples. The tax rate would be 35%.  The exemption and rate would be in effect for two years. [More]
Plus capital gains stay at 15%!  So there should be great rejoicing in farm country, no? (This is me holding my breath...)

The more I think about this budget-bashing compromise, the more I think it will prove good for the economy long and short term.  We need to tackle unemployment first, and the deficit will tell us when time is up on that (I still agree with Bartlett about a date around 2020).

But if this thing passes it will require Republican fingerprints all over it, and the deficit will be a shared problem going forward. While bad news for Senators like Dick Lugar who are too moderate for their own good, it will prove problematic for many others who could face Tea Party hard-line opposition.

I salute those on the right who do stand and deliver after reaching this deal, and like Ezra above confess to pleasant surprise that any compromise was reached as fast as this.  It does bode well for a slightly better two years ahead.

And if the right can't deliver the votes, it certainly says much about their leadership and party unity.


JR said...

This is bad on all fronts. We in the tea party movement wanted smaller gov. The Repubs seem hell bent on defeating Obama instead of defeating big gov. All the repubs are glad that Obama caved. Well guess what he got about 90% of what he wanted and he is able to still put us in the poor house. So quit attacking Obama and start attacking GOV. i am 38 and I am going to be paying for this crud for ever. I have said it before when are we going to pay for what we are doing? Shame on both sides of the aisle.

Anonymous said...

It is not "bad on all fronts". I am a retired farmer with family continueing to farm a rather large acreage. My worry was estate taxes for my children and this compromise takes that worry away!