The GOP’s Tax Deal Isn’t a Very Good Deal for Us or the Economy (Updated)

| December 6, 2010 | 9 Replies

The President announced today that he and GOP leaders have reached a compromise that will stop the tax increase that would have blown up in our faces on January 1, 2011. He was clearly not pleased that he had to make the deal, which is reason enough to celebrate, as James Lileks notes with a certain savage glee. This deal puts the President in very hot water with his base, who really wanted to see some rich people (i.e. anyone with enough loose change in their pockets to jingle when they walk) squirm.

Most of my compatriots on the right are happy about the deal.

  • Bryan Preston at Pajamas Media says, “The GOP held strong and won here.”
  • Grover Norquist is elated and calls it “a much bigger victory than people see”.
  • Allahpundit sees the value in a deal that will cause progressives “to melt down over his betrayal of one of his core 2008 promises”.
  • Lance Burri says, “Still, eyeballing it all, I see a win. Especially if the tax policies help end the recession and bring unemployment back down.”

You get the idea. The overall thought is that there was no chance that Republicans could make the current tax rates permanent, and they managed to extract a couple smaller temporary cuts such as a one year payroll tax holiday of 2 percent out of a clearly unwilling President. They get a tailor-made issue to use in 2012 and we get a little tax cut.

I regret to say that I don’t agree with my conservative friends. I don’t think this was all that good a deal and, contra my friend Lance, don’t see there this the compromise will help get us out of a recession. It certainly won’t bring employment back down for any significant length of time. It was a bad deal made by a group of politicians desperate to get out of a fight that might have marred their reputations as bipartisan good guys.

Let’s look at the three key elements of the deal. First, the tax rates will stay put for two years. In the short term that’s a good thing. But for a small business owner, or any business owner for that matter, the uncertainty over how much much money they’ll have to hire employees hasn’t really changed. Sure, they can hire someone now and know what their tax rates will be until 2012, but what then? I don’t know about you, but every business for which I’ve worked hires people for longer than two-year stints. We’ll be fighting this very same battle in the 2012 election season and while it will give both sides a favorite weapon to wield against the other side it won’t help the small business owner who will be stuck in tax limbo again. Wise businessmen will simply hunker down and wait until the stability returns, however long that takes.

Second, unemployment benefits will extend from 99 weeks to 112. That means that a person out of work can collect benefits for 2 years and 2 months. If you don’t think that matters, take a gander at the work done by Pro Publica. According to their research, 26 states are currently borrowing money to make unemployment insurance benefit payments because their trust funds are out of cash. Right now, states are borrowing more to pay people out of work than they have ever borrowed in the history of the country. As a result, states have had to slammed businesses with increased unemployment insurance premium rate hikes to either keep their trust funds solvent or to keep from borrowing even more money. Over the past two years, rates have gone up in Massachusetts, Colorado, Utah, Maine, Montana, Washington, Indiana, Tennessee, and Hawaii. That’s money that won’t go toward hiring new employees. How much worse will the situation get with an extra 13 weeks of benefits? Plenty worse. And if the crisis hasn’t hit your state, you had better bet that it will. There’s no way it won’t. Not now.

Third, the paltry one-year, two-percent cut to individual payroll taxes (businesses will still have to pay the full 6.2 percent) is essentially another stimulus check. The only difference is that this money is coming out of the Social Security system, which is already running wildly out of control. Here’s what that cut will mean. If you make 40K a year, you’ll get about 800 dollars. Woo. I can’t imagine that will have much of a stimulus effect on the economy at all, not weighed against the non-stimulative effects of this deal.

There is a fourth problem I have with the deal, which involves the estate tax. Under this agreement, estates over $5 million will have to pay a rate of 35 percent. Now, this seems like a big win considering the Democrats wanted that rate to be 55 percent, but it’s not such a big win when you consider that the rate for 2010 was zero percent. The estate tax is a direct attack on your ability to pass along the fruits of your labor to whomever you choose when you die. It is a second tax, where the greedy trough-feeders in Washington get another chance to stick their snouts into what you have produced with your own sweat and blood long after you are dead. I do realize that $5 million is a fairly high thresh hold, but the wealthy do not lose their right to their property when they reach a certain level of wealth, no matter what the progressives say. Unfortunately, the GOP leadership believes otherwise.

I’d love to call this a victory, but I don’t see where any part of the agreement gets our economy out of the recession in which we’re mired, nor do I see where it will get out of business owners way so they can hire people again. Remember, folks, turning this economy around is Job One for the Republican Party. It is the reason America gave them a historic victory this past Election Day.I’m asking you to remember that because, clearly, the Republican leadership does not.

I think Mitch McConnell and the rest got suckered into making a deal because they didn’t want to get painted by the MSM as a bunch of thoughtless Scrooges. Instead, they locked our economy into more uncertainty and higher taxes on businesses. Well done, guys.

UPDATE: Thank goodness I’m not the only one who hated this deal. Michelle Malkin thought it stunk on toast as well. I can’t wait to read her column on it!

UPDATE II: Let me expand on the unemployment benefit point. According to this article, the average unemployment check in 2009 was $293. Now, if we take the President’s assertion that the extension will help 2 million Americans, that means that states will spend an extra $586 million each week. Over 13 weeks, that comes to a total bill of $7.618 billion. So far as I know, that’s not a temporary extension, so that extra load on the states (and, more importantly, the businesses whose premiums will go up to pay for the extra benefits) will not go away by itself. If you divide that load evenly among the states, then each state will be on the hook for about $152.4 million more dollars a year than before. Can your state handle an extra $152 million more in spending? I know mine can’t.

UPDATE III: I got part of the unemployment insurance deal wrong. The deal won’t increase the totel length of time one can receive benefits by 99 weeks; it extends the program that allows people to get benefits for that long by 13 months. Gabriel Malor explains most of how it will work. The states, and by extension businesses, will still get hammered. Employers pay a tax under the Federal Unemployment Tax Act to the IRS. There is a fund that covers some state costs and half of the money paid out to those getting extensions to their benefits beyond the 26 weeks paid for entirely by the state. So far as I can see, the state pays the other half. The fund is also the pool of money from which states are now borrowing because their own unemployment benefit funds are insolvent, or nearly so. That money will have to be paid back and states will have to find a away to come up with their part of the newly-extended benefits. So, the 99-week limit is still in place, only it’ll remain in place for another 13 months.

UPDATE IV: Thanks, Monique, for getting my back!

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Category: The Economy and Your Money

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