Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.
Compared to what I expected to happen, the deal announced last night is pretty good.
In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.
With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.
The Good
The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath – do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years – including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.
On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact. A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.
Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to “expense” new investment rather than have it taxed, which perversely happens to some degree under current law.
The Bad
The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.
But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.
The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.
The Ugly
As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politcally powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.
Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.
To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.
[…] with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news […]
[…] with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news […]
[…] with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news […]
[…] with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news […]
[…] with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news […]
[…] 21, 2010 by Dan Mitchell Appearing on Bloomberg TV, I pontificate about the good, the bad, and the ugly in the recent tax deal. I also make what I hope are good points about the Laffer Curve and the […]
[…] 21, 2010 by Dan Mitchell Appearing on Bloomberg TV, I pontificate about the good, the bad, and the ugly in the recent tax deal. I also make what I hope are good points about the Laffer Curve and the […]
[…] year. If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] year. If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half-empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half-empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] year. If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government […]
[…] are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] J. Mitchell of Cato likes the tax deal for the obvious reason: There are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] 11, 2010 by Dan Mitchell There are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and […]
[…] Posted by fxpro on Dec 10th, 2010 // No Comment My previous post pointed out that the tax deal was an amalgamation of the good, the bad, and the ugly. […]
[…] Dan Mitchell of the Cato Institute. Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible. […]
[…] because there are things to like and dislike from all perspectives. I’ve already commented on the good, the bad, and the ugly parts of the agreement, noting that reactions often depend on whether people compare the proposal to the tax laws in […]
Mr. B.G. Baggins:
You say:
“Dropping political bomb shells like “Death Tax” and “Class Warfare” turns a commentator like Mr. Mitchell into nothing more than a political hack in love with all the latest politically charged zingers.
Mr Dan Mitchell has writen an enormous quantity of excellent papers on taxation, I have read some of them, in my latinoamerican country we have used Mr. Mitchell’s papers to fight the left and its permanent quest for increasing their power & control over our lives and their insatiable lust for more tax $trillions. You cannot erase Mr Mitchell superb work on taxation and other matters with your empty statements. Mr Mitchell talks because he do knows. And he do not base his analysis on nonsense absurd keynesian pseudoscience, like most of the leftist high priests.
Which one of your favorite leftist commentators has done an impressive research on taxation? For instance leftist high priest and Nobel Prize Winner Paul Krugman has been demonizing Bush Tax Cuts. Well, now Obama, maybe the most leftist president ever, is extending Bush Tax Cuts. Who is going to believe that tax cuts were nonsense now that Obama extends them?
Mr. Mitchell has the courage to say out loud what he thinks is true.
Markets signal a big probabilty that republicans will control both legislative chambers in 2012: The contract that says there will be a GOP senate in 2012 is trading at 63 bid, 80 Ask, the contract for GOP house 2012 is trading at 70 bid 88 Ask. See http://www.trendmacro.com/default2.asp.
So in 2013, thanks to republicans controlling both chambers , the tax cuts may become permanent.
Although I seldom agree with Cato Institute positions, I have given credit to their commentators for offering thoughtful opinions about public policy. Dan Mitchell’s recent appearance on the Diane Rehm show, however, has given me ample reason to seriously doubt my reasonable attitude. Dropping political bomb shells like “Death Tax” and “Class Warfare” turns a commentator like Mr. Mitchell into nothing more than a political hack in love with all the latest politically charged zingers. Intelligent listeners immediately write off such grandstanding, whether it comes from the right or the left. His offering a “real world alert” to one of the telephone callers’ comments was arrogant and condescending. The Cato Institute must try to rise above the Sarah Palin School of political commentary if it is to be taken seriously at all.
Yes, the payroll (Social Security) tax discount will increase incentives to work – for a year. However since it is not accompanied by any decreases in Social Security expenditures whatsoever, it simply makes the situation a little better today, only to pay for the improvement tomorrow, plus some interest.
Not sure if the net effect will be positive. May increase the deficit even further, so if that leads to expediting spending cuts, it may still be a positive choice. If it leads to pitchfork economics then the gap between US prosperity and an ascending developing world will shrink even faster.
Overall, a country where government expenditures are 5% of GDP and has a 25% budget deficit is probably, overall, in better position than one with a balanced budget and a government that is 35% of GDP. In that way, we are still in a better position than Europe. But for how long?
The Obama sales pitches have been using phrases like “tax cuts for millionaires and billionaires” over and over again. Can you point us to (or prepare) an actual breakdown of who is in the $250,000/year-and-over bracket? How many really are billionaires, how many really are millionaires, and how many are small business owners? And does distinguishing those who are already rich and those who are still trying to get rich matter?
Has anyone generated a list of all of the “various special provisions for politically powerful constituencies”?
I think all such lists need bright sunshine beamed at them from the first mention to the final signing. These bribes for votes ought not be costless, to anyone involved.
the talk on the radio here in DC is that there is also a quid pro quo on the Start Treaty. Heard that?
The Fact that we get to do this again in2012 is a good thing. Democrats will have to vote to make the cuts permanent or go on record voting to raise taxes in an election that they already have a competitive disadvantage. I too wish that the tax cuts could be renewed w/o the unemployment extension but I’m happy no other concessions were made.
Temporary=another lost opportunity to repair the ecconomy. We need better politicians (maybe come Jan?).
I am a small government conservative but would not object to my tax rates rising a bit if one precondition was met: the federal government cut in real terms $2 in spending over the ACTUAL 2008 budget (pre-TARP & stimulus) for every $1 in revenue the tax hike generates for the treasury. Heck, they can even use mindless CBO static scoring. But the cuts must come first, no bait & switch. Only the political class could possibly object (see better politicians above)
Cutting federal spending would signal budget responsibility for a change, light at the end of a dark fiscal tunnel which could spur confidence toward growing the economy again.
I am glad that all the tax rates were extended, but very concerned that there is still little action on the real priority, cutting spending. Although it is understandable that any spending restraint would have to waiit until the Pelosi congress has left the field.
But once the new congress takes office, I expect to see some real cuts in gov spending, at least 3-4% of the budget each year. If we dont get it, I will be extremely dissappointed in the new majority.
[…] deal announced last night by President Obama are all over the place. As Cato’s Dan Mitchell points out, where you fall on the deal depends on where you stood and what you expected […]
[…] deal announced last night by President Obama are all over the place. As Cato’s Dan Mitchell points out, where you fall on the deal depends on where you stood and what you expected […]
Excellent summation – as usual – from Dan Mitchell.
[…] DAN MITCHELL: The Good, The Bad, and the Ugly Of The Tax Deal. […]