The White House just announced that it has settled on the details of the deal it has been cooking up with Congressional Republicans over the coming expiration of the Bush tax cuts. In return for a two-year extension of all the Bush tax cuts — including those for the richest two percent of Americans and those on capital gains and dividends — currently expired unemployment benefits will be extended for 13 months, there will be a two percent reduction in payroll taxes for one year, and both the expanded Earned Income Tax Credit and Child Tax Credit enacted in the 2009 Recovery Act will be retained.
The deal also includes reinstating the currently expired estate tax in a way proposed by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) — 35 percent with a $5 million exemption (which means that $5 million can be passed on tax free). President Obama had proposed permanently setting the estate tax at the 2009 level of 45 percent with a $3.5 million exemption. Under current law, the estate tax comes back next year at a 55 percent rate with a $1 million exemption.
“I’m not willing to let working families across this country become collateral damage for political warfare here in Washington,” Obama said in a statement. “Sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be the wrong thing to do.”
So in return for continuing the fiscally irresponsible and economically unsuccessful Bush tax policy, Democrats receive a desperately necessary extension of jobless benefits of the sort that used to be completely uncontroversial until this Congress came to town, as well as some helpful tax breaks for the working class that Republicans likely would have supported under any circumstance.
As the Center on Budget and Policy Priorities noted, what Obama had proposed doing prior to this deal was cheaper and better for the economy:
Extending federal UI for one year and some of the Obama tax cuts (expansion of the child tax credit, improvements to the earned income tax credit, and the higher education tax credit) for two years would generate more economic activity — including creating 500,000 more jobs next year — than would a two-year extension of the Bush high-income tax cuts. It would also add $30 billion less to deficits over the 2010-2015 period than extending the high-income tax cuts would.
CAP economist Adam Hersh added that, in comparison to the roughly $60 billion that will be spent on tax cuts for the rich in 2012 alone, “the $50 billion President Obama has proposed for financing critical infrastructure investment would yield $60 billion in economic activity and 500,000 jobs.”
But the most pernicious piece of this deal is the estate tax cut. It will amount to another $7 billion in tax breaks in 2011 that benefit no one but the ultra-wealthy. Under Obama’s plan, just 0.25 percent of estates in the country would conceivably have to pay the estate tax, but Lincoln and Kyl proposed spending billions to lop another 0.11 percent off of that.
Now, many are arguing that this is a way for the Obama administration to bring in new stimulus spending through the back door, boosting the economy in the short-term. While this is true, conceding on the Bush tax cuts and the estate tax is a big price to pay in terms of perpetuating irresponsible and unaffordable Republican tax policy.