The deal on extending the tax cuts

The NYT is reporting that Obama and the Congressional Republicans have made the following deal regarding the tax cuts. On the whole, it's better than I expected. Herewith some comments on the reported details:

1) Extend all the expiring individual income tax rate cuts for 2 years - Well, we knew this was going to happen. The only alternative, which was that all be allowed to expire, is something that I and many others would have been OK with, but it wasn't in the cards. What I find mysterious is Obama's willingness to have this guaranteed to come up again in the 2012 presidential campaign. Taking the same stance that he took in 2008 might face extra credibility problems this time around. But I further address this problem below, perhaps a bit more hopefully (for a change) than I ought.

2) Extend unemployment insurance to the end of 2011 - Vital as stimulus (to the tune of $60 billion that's extremely well-directed), and it wasn't going to happen otherwise. Extending long-term UI may create serious incentive problems when labor markets are tight, but that obviously isn't the current situation.

3) Reduce the 6.2% Social Security payroll tax on employees by 2% for one year. Once again, probably about as good stimulus as one could have hoped for (and scored at $120 billion, which is certainly bigger than anything else on the table). The targeting could have been a lot better, given that the tax cut grows with income until one hits the annual cap on taxable wages, and high-income earners then get the full amount. But comparable stimulus was not otherwise going to happen. Note that this will cause Social Security financing to look worse, since the lost revenues will be attributed to the Social Security Trust Fund. Some who are eager to preserve current Social Security may dislike this accounting effect, but I think there's a need to address the program's long-term fiscal problems (along with the rest of the fiscal gap), and perhaps anything that motivates government actors to act on sustainability issues sooner (though after the current recession) has something to be said for it.

4) Estate tax to be restored with a $5 million exemption and a 35% top rate. In a distribution-neutral and revenue-neutral framework, this might be a reasonable place to aim with the estate tax, and indeed conceivably a preferable one in efficiency terms to restoring pre-2001 law. (By those neutralities, I mean that other adjustments are made to keep overall distribution and revenue constant, relative to the case where a pre-2001 estate tax was restored.) To be sure, the estate tax deal is NOT being made in any such framework. But, as a matter of political economy, I don't think a more progressive estate tax than they're agreeing to here is long-term feasible anyway. So I don't regard this as a terrible outcome in a realistic overall sense.

5) The deal also reportedly includes extending the tuition tax credit, expanding the earned income tax credit, and an expensing rule for certain equipment purchases. I don't know the details, but the former two may add a bit of progressivity and the latter can be stimulative so long as it's very short-term.

I'm hoping that DADT and the Russia treaty will also go through as a result of this, although not explicitly in the deal. Among other things, this would leave me a bit less concerned than I have been about the Republicans' degree of good faith behavior regarding governance in general. We will see. (Concerning McCain and DADT, I will follow the advice of mothers everywhere that, if you can't say anything remotely civil about someone, you should probably say nothing at all.)

But back to the fiscal package. One of the main criticisms of the deal pertains to the $180 billion cost of the payroll tax cut plus extending UI, as compared to the $700 billion cost for a 10-year extension of the tax cuts. But if Obama can get through the 2012 election saying that this time he actually will let the top bracket expire (distinguishing 2010 on the basis of the need for stimulus), then a better outcome might be possible that time around (assuming, obviously, that he wins the election). At that point, why not let the whole thing expire as he wouldn't need to run for reelection and even the Democrats in Congress would have 2 full years. In other words, same chicken game as at the end of 2010 (and with the same reasons for pessimism about shearing off the top bracket tax cut), but with a different outcome if the Democrats' true fallback position has shifted to permitting expiration of the whole lot.

A key reason for dismay on the left about the deal is simply that Obama has forfeited a lot of his erstwhile backers' trust (including mine). If one came into it trusting him, I don't think it would be considered that terrible, at least taking it as given that he was against letting all the tax cuts expire. One's degree of trust should indeed be an input to what one thinks of the deal, as one of the key questions is what to expect from him down the road. But at least I don't see the deal as evidence further supporting the negative inferences. So color me a spot more hopeful than I have been lately.

Obviously, one thing we don't have here is the slightest bit of evidence for the needed pivot from short-term stimulus to long-term sustainability. But that was so far beyond anything one could reasonable hope for in December 2010, that its absence isn't freshly dismaying. Expiration of all the tax cuts at the end of 2012, if I may be permitted to dream, would supply an element of that as well.