Tuesday, December 14, 2010

In Defense of the Tax Deal

Today, the United States Senate, by a wide margin, cleared the way for the recent tax deal agreed upon by President Obama and Republican leaders to eventually pass the upper chamber, meeting a key test vote in which only a few Republicans a handful of liberal Democrats opposed.

For those who haven't followed the news in the last week, the Republican leadership and President Obama have agreed on a tax package that will extend the Bush tax cuts for two years, including for wealthy Americans and reduce the payroll tax for one year. In addition, the bill will have a large estate tax (35%) for amounts over $5 million for the next two years, as well as a 13-month extension of unemployment benefits.

Understandably, liberals who want government to tax us to death and want to continue class warfare are opposed to this deal, even though it would extend unemployment for another year and includes a signficant tax reduction for the middle class. The fact is, liberals want to tax anyone who makes any money, becuase they beleive in a redistribution of wealth, plain and simple.

What surprised us here at Kaw & Border is the fact that a few conservatives -- such as the Tea Party Patriots, Erick Erickson, Sen. Jim DeMint, and others -- have come out against the deal. Certainly, the deal is not perfect:

- The estate tax coming back at all is bad.
- The unemployment benefits extension is questionable, particularly since there isn't a funding mechanism in the bill.
- The tax cuts aren't completely permanent -- only extended for two more years.

No, this deal isn't perfect. However, rarely in process of legislating are deals perfect. In our eyes, the conservatives who oppose this deal need to reminded of a few important common-sense considerations:

The first fact is that in the current Congress, the Democrats have wide majorities, and even when we take over in January, we only will control one of the three bodies necessary to enact legislation -- the House. And while conservatve ideals are certainly on the advance in Washington, the fact is if you actually want to make progress on those principles, you have to come to terms with the fact it takes 218 votes to pass something in the House, 60 in the Senate, and the President's signature.

Secondly, due to the nature of the expiring Bush tax cuts, action was needed NOW - not in January, or Americans of all tax brackets would be seeing a huge tax increase. You can't one hand campaign on extending the Bush tax cuts, and then when Obama agrees to 95% of what you asked, balk because you had to give something in return, particularly when that something was extending unemployment benefits at a time when 9.8% of Americans don't have a job and others are worried they'll be next.

Thirdly, while some conservative activists may say 'let them expire' and get a better deal later -- the fact is that reeks of playing politics with people's incomes. Yes, Republicans needed to hold out for an extension of the tax cuts for all Americans, not just those under $250,000 -- and they got that, to the anger of liberals. So, we've gotten Obama to agree on tax cuts, made liberals angry, and we're thinking about opposing this? In short, don't punch a gift horse in the mouth.

Fourth, we need to remember the concept of incrementalism while at the same time recognizing the political realities, which sometimes compromising on the small stuff in advance of the larger aim. In this case, we know that Obama still wields a veto pen, still holds the Senate, and in the short term, still carries the House. With that environment, to get these kinds of concessions is absolutely remarkable. As Keith Hennessey said in this blog post:

If someone had told me, the day after Election Day 2008, that tax rates on income and capital would not increase for the next four years, I would have laughed at them. Now it’s about to come true, and Presidents Obama and Clinton are helping make it happen.

And some want to oppose it because it’s not enough?

The fact is, we can't compare this to our ideal policy because for the next two years, it is impossible to get our preferred policy. Yes, we all want to extend the tax cuts permanently. But what is to stop Republicans from going ahead and proposing this once we take office in January? We can still criticize Reid for stopping it or Obama for vetoing it, right? We are two weeks away from the end of the year, so it is not like we have more time to negotiate this before tax hikes would go into effect -- pass the two year tax cut extension now and try to do the permanent one later.

In essence, we agree with this column in the conservative journal The American Spectator by Philip Klein, who takes issue with Charles Krauthammer and others trying to call this Stimulus II, and details the noncontroversial, borderline, and controversial parts of the legislation. In it, however, he deals with the crticism that tax cuts are the same as spending hikes:

While it's true that from a budgetary standpoint, a reduction in revenue to federal coffers will increase the deficit, just as an increase in spending would, the difference is that a tax cut allows individuals to keep more of their own money, whereas expenditures represent the government confiscating wealth and distributing it as they see fit. Seeing tax cuts as a cost to government is to accept that all income earned belongs to the government in the first place.

So, the "this adds to the deficit" argument is fundamentally weak to us. First of all, 82% of the bill deals with the tax cuts - either the Bush tax cuts or the payroll tax cut proposed by Obama -- which would meet the long-held conservative belief of giving more people their own money. Whether that money is in the form of the income tax or the payroll tax is not important to us, because it's all money out of our pockets -- it's taxes, period, and the payroll tax is the one that hurts the most among people struggling day to day.

Republicans, in short, need to be careful about being seen as simply for tax cuts for business. Yes, those need to be cut drastically too -- and those tax cuts are extended under this bill, which will help businesses create jobs who would like to in the next to years. On the other side of the coin though is the taxes seen in the paychecks Americans receive at the other end of the employer-employee transaction, taxes that would go to things like food, car payments, and such. Conservatives need to remember those Americans as much as anyone else.

Again, there are parts of this bill that we don't like -- the unemployment benefit extension is questionable, but keep in mind, we are at a period of very high unemployment, and while, as Scott Brown (who supports the bill) noted, it would be best to have a funding mechanism for it, picking a fight over unemployment benefits at a time when unemployment is 10% might not be a good way to go for Republicans.

Finally, there are a few pork barrell points of this bill, as Philip Klein also notes in his article:

But the most controversial element among conservatives is the $55 billion in so-called "tax extenders," (see a list of them here). These are various tax breaks for businesses, including tax credits for ethanol and biodiesel. Earlier today, I spoke with Ryan Ellis of Americans for Tax Reform, and he pushed back against describing these as earmarks, because they allow businesses to keep more of their own money. While it would be ideal to get rid of all the various deductions as part of a broader corporate tax reform that lowered rates from where they are now (40 percent including states, making it the highest in the world), Ellis argues that in the absence of such reform, it's better that some businesses are able to get some form of tax relief.

So, in essence, as The Weekly Standard points out in its editorial supporting the deal entitled "Good Deal", we should not let the perfect become the enemy of the good.

Other conservatives dislike the deal because it would raise the estate tax from zero in 2010 to 35 percent in 2011 and 2012. But this is just another instance of letting the perfect be the enemy of the good. If no deal is reached, the estate tax will reset to 55 percent next year. Furthermore, there’s nothing to stop Republicans from cutting the estate tax in the future. So why let it get in the way of preserving current tax rates on income, capital gains, and dividends now?

And that is the crux of our position here at Kaw & Border. For now, with two weeks to go until the tax cuts expire, we are getting one a bill that was just a dream a few short weeks ago. When we take the House and six additional Senate seats in January, there is nothing preventing us from trying to achieve even more. But to oppose the broader B- deal because it's not an A+ now seems short-sighted and would have the direct result of doing exactly what we don't want -- and that's "pocket passing" a massive tax increase on the American people. As The Weekly Standard column noted, "the most important stimulus in the current deal is that no one will see their taxes rise in 2011."

This bill doesn't mean the end of the tax debate, but rather simply moving from our own 20 to the 50 yard line. Or, if you want to look at it more broadly, the country's policies just ticked to the right a few degrees. That's a good thing.

In that spirit, we urge conservatives to two things:

One, support the bill and embrace the tax cuts; and two, continue fighting for additional, deeper, more permanent tax cuts and broader tax and spending reform.