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The Tax Deal



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It’s quite a turn of events.  The Democratic party has more or less defined itself over the last decade by opposing the supposed irresponsibility of the Bush-era income-tax rates.  Now, President Obama has turned his back on the liberal wing of his party and endorsed those very same rates for the duration of his current term in office. 

And not only that, he has endorsed a liberalization of the estate tax compared with the levels that were in effect during the Bush years, and agreed to abandon the signature tax break from the stimulus law in favor of a more sensible payroll-tax holiday.  This latter change has the potential to become a very favorable development, as the payroll tax directly hinders job creation and Democrats have recently been more concerned with pushing those rates higher to sustain the expansive welfare state they have created.

More broadly, the president’s agreement to this deal is an implicit admission that voters aren’t buying what the Democrats have been selling on the budget for the past year.  The primary argument Democrats pushed throughout 2010 was that the country simply could not afford to “spend” anything more on tax cuts for the wealthy.  The president went so far as to say he could find much better uses for the hundreds of billions of dollars that would be “spent” by extending the top Bush tax rate at 35 percent.

But this kind of language only betrayed an attitude toward the private sector that most voters find entirely distasteful.  Democrats talk as if private earnings are somehow the property of the federal government and $100 billion not collected in taxes is the same as $100 billion spent on a new government program.  Most voters don’t see it that way at all.  To them, allowing today’s tax rates to rise next year is a tax hike, not a spending cut.  And fiscal conservatism does not consist in piling more taxes on the productive sector of the economy in order to finance an ever growing federal government.  What voters want is for the elected officials to concentrate on fitting spending within what’s available from today’s tax rates, not on back-door ways to hike taxes to cover increases in spending.

The emerging deal is not all good news, of course.  It is not wise to provide extended unemployment insurance for the duration of 2011.  That’s likely to contribute to persistently high unemployment and discourage the adjustments necessary to get more people back to work.  And temporary tax cuts are much less effective than permanent ones at spurring productive investments and job creation.

Still, it’s an important victory to keep the Bush-era tax regime in place for another two years.  The Democrats had dominant control of the 111th Congress, including a supermajority in the Senate, as well as a president committed to pushing federal tax collection higher to finance a supersized government. And still they couldn’t get it done.  Remarkable.



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