There are four basic issues with the tax deal President Obama announced Monday: economic stimulus, fairness, the federal deficit, and (surprise! It has nothing to do with the basic issues) social security. Let me take them in order.
1. Economic stimulus. In times of recession, government is supposed to put more money into the economy than it takes out — i.e., run a deficit. It can do this in two ways: spend more, or tax less. Spending more provides a more direct link to jobs, since jobs are created directly by the spending; it also allows government, through democratic processes, to determine what the public priorities are. We could spend a lot on a high-speed train network, renewable energy, education, and other things everyone agrees are desirable. Tax cuts for working people also lead pretty directly to jobs, since people are likely to use the money to increase consumption. Tax cuts for the rich are another matter — the rich can consume as much as they want already (that’s what “rich” means), so they will invest the money. In the 1980s, Reagan argued that there wasn’t enough investment money around to get the economy moving, so he turned to tax cuts as a “supply-side” stimulus. Whether or not that was right then, it is certainly not right now. The problem is just the opposite — because most available investments are risky, investors are sitting on their money. So tax cuts from the rich are not likely to lead to jobs at all.
2. Fairness. Ever since the Reagan administration, the capitalist class has been continuously increasing its proportional share of the national income. There are many parts to this: lower taxes for the rich, higher taxes for the poor; eliminating the estate tax, so that the children of the rich can be rich without having to work; limiting the power of labor unions, the major institutional force for greater equality, by weakening the labor laws (see Michael Goldfield’s book The Decline of Organized Labor in the United States); and now, the Citizens United decision permitting corporations to spend unlimited money to influence elections. This involves more than fairness – it’s also a matter of power. Money buys power, so as the rich get richer it becomes harder and harder for the rest of us to bring fairness back into the system. The progressive alternative was to give everyone a tax cut (that is, extend the existing tax cuts) on income less than $250,000 per year. The compromise accepts the Republican alternative to give those with higher incomes an additional, larger tax cut. This is contrary to fairness, and should be rejected. (The package does contain one progressive component, extension of the Earned Income Tax Credit. This is the only part of the tax package that gives more to the poor than to the rich.)
The Federal Deficit. As I said in the stimulus portion above, a deficit is a good thing right now, but it should be the kind of deficit that goes away with prosperity. Spending more on unemployment compensation is a good example; with prosperity, unemployment goes down and so does spending. But extra tax cuts for the rich are a permanent hole in the government’s ability to do positive things.
Social security. The most outrageous part of the deal is the “temporary” cut in payroll taxes. For years the establishment has been howling that the social security trust fund is going broke. It isn’t, but that’s the topic for another essay. However, it will go broke if we cut the flow of revenue into the fund. All the conservatives complaining about social security should be complaining about this – they are not, only because they understand that this payroll tax cut will achieve their real objective: destroying social security. As Jed Lewison has been pointing out on Daily Kos, there will be just as much pressure to extend the “temporary” payroll tax cuts when they expire as there is to extend the “temporary” Bush tax cuts today. Labor Notes has a good article with further analysis of this point.
Obama’s tax deal gets some temporary good things by making some bigger bad things permanent. I hope it is defeated.