President Obama Uses Tax Deal to Set Up 2012

by Douglas Holtz-Eakin

Good policy is good politics: In the end, that is the lesson of yesterday’s “deal” between President and Obama and Republican congressional leaders. Getting a deal to avoid raising taxes was an economic imperative. With the clock ticking before IRS officials would have had to impose instructions for higher withholding and thus the imposition of a de facto tax increase on January 1, time was of the essence. Since nothing would ensure a one-term presidency faster than a continuing economic malaise — or even a double-dip recession — the politics aligned with doing the right thing for the economy. Keeping taxes low increases the odds of a quicker, self-sustaining recovery; the president and his advisers realized this, and the urgency to reach a deal became paramount.

Moreover, the deal contained a surprising tax-policy victory: throwing overboard the deadweight of the Make Work Pay tax credit in favor of a marginal rate reduction for workers in the form of a one-year payroll-tax reduction. While the time for Keynesian stimulus has long passed — and thus the merits of the macroeconomic impacts of UI extensions and temporary business expensing are dubious — there are benefits to improved labor incentives. So, from a policy perspective, some aspects of the plan look better than one could have anticipated. Indeed, the major defect in the plan is the absence of spending cuts to offset the increases in outlays. True to history, the president thus far pays only lip service to the problems of mortgaging our future.

Will the deal pass Congress? Democrats were noticeably quiet on Capitol Hill after the president’s remarks, which were remarkably partisan in nature, devoid of the usual pleasantries and congratulations to Republicans for coming to an agreement. The tone appeared to be a token contribution to the wishes of the liberal base, and may aid the president in collecting votes. But more than anything, the president’s remarks marked the beginning of the 2012 presidential race. By agreeing to a two-year extension, the president teed up tax policy as a centerpiece of that race, evidently believing that a candidacy based on class warfare will be successful. Unfortunately, that is not good policy and will not turn out to be good politics.

Douglas Holtz-Eakin is president of the American Action Forum.

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