Will Taxes Doom Obama In 2012?

It wasn’t Appomattox.  It was more Bull Run.

The first clash between President Obama and the incoming Republican leadership in the House and Senate centered on whether to continue or end the Bush tax cuts originally enacted in 2001 and 2003.

The deal is interesting and important.  More interesting, and certainly more important, is what we learn about how aggressive each team will be in engaging over the next two years, how strong they think they are, how they read the mandate of the 2010 elections, whether Obama becomes Clinton and “triangulates” away from his somewhat reduced left wing base in Congress.

The first thing to note is that the “deal” is a truce, not a peace treaty.  Every part of the “deal” lasts exactly two years.  All the moving parts of the “deal” will be front and center in the 2012 election.  Nothing has been solved.  Every conflict of vision, of policy, of ideology, has been deferred.  Two years.

The agreement itself reads as follows: the Bush tax cuts will continue for two years for all Americans.  That means that for the next two years the capital gains tax will stay at 15 percent rather than jump to 20 percent as otherwise scheduled.  The tax on corporate dividends will—for two years–stay at 15 percent rather than increase to almost 40 percent.  All marginal tax rates on personal income will say put for two years. The lowest 10 percent rate was scheduled to increase to 15 percent and the top rate of 35 percent would have increased to almost 40 percent.

The death tax, which was phased down from 55 percent in 2000 to zero for the entire year of 2010 was scheduled to jump back up to 55 percent in 2011 on all estates larger than one million dollars.  This agreement will—for the next two years—put the death tax rate at 35 percent on estates larger than $5 million or ten million for couples.

The agreement also—for two years—reduces the social security tax paid directly by individuals from 6.2 percent to 4.2 percent. This is the first cut in marginal tax rates on social security since the system first imposed taxation in 1937.

Obama demanded, and received a 13 month extension of the law that allows those receiving unemployment benefits to be on unemployment for two full years (One disappointment is that the agreement does not have offsetting spending cuts to “pay for” the additional federal spending on unemployment benefits. We are reminded here that Obama’s concerns about the deficit are politically driven and unserious).

So who won? Who lost?  Who’s the toughest kid on the block? And what does this tell us about the future?

Republicans wanted all the lower tax rates made permanent. They only got two years. The death tax at 35 percent is a big step forward from the threatened 55 percent and is the ”new normal” from which all new negotiations begin. The social security rate cut is a cut in marginal tax rates that will reduce the tax wedge on new hires.  The additional spending on unemployment is a hike in spending, but one the Republicans might well have conceded later without “getting anything for it.”

Obama and the Democrats gave up more than most understand and unnecessarily and inexplicably put themselves in a substantially weaker strategic position in 2012.

The Democrat talking point is that they have “always” wanted to make permanent all the lower taxes in the 2001 and 2003 Bush era legislation for Americans earning below $200,000 or $250,000.  They have claimed they only opposed continuing the lower rates for higher income Americans.  Left wing Democrat Senators and Congressmen have whined loudly and publically about Obama extending the “tax cuts for the rich” as an abandonment of the politics of hate and envy they view as central to modern liberalism.

But the real size of the Obama cave in is not continuing the tax cuts “for the rich” but extending the tax cuts for anyone.  For the last four years Democrats have controlled the House and Senate.  For the last two years Democrats have controlled the House and Senate and the White House.  Every day they woke up and all day they did nothing to extend the Bush tax cuts for lower or middle income Americans.  Then they would go to bed and repeat the inaction the next day.  For four years.

The real Democrat plan was to extend the tax cuts for no one.  They view all that lovely money paid in taxes and belonging, not to the Americans who earned it working, but as the government’s money.  They were loath to part with any of it.

How much did the Democrats want to raise taxes on all Americans by allowing the Bush era tax cuts to lapse?  They wanted those higher taxes so much they passed on every politically advantageous opportunity to actually pass legislation to protect the lower taxes for “the middle class.” They could have passed such extensions early in the Obama administration gutting the argument that they were big tax hikers. They would have passed such legislation just before the 2010 election to show how reasonable they were.

They could not bring themselves to part with “their” money.

And on the death tax, they were so anxious to return to a top rate for death tax of 55 percent that they allowed the rate to stay at zero all of 2010 rather than open the public debate that might have led to a compromise going forward at a lower rate such as 35 percent.

The deal bringing the 35 percent rate, long discussed in back rooms as the natural compromise, came to the fore.  It will be heard for Democrats to ever support a death tax rate higher than 35 percent in the future.

And the politics of this.  This deal puts the debate on tax hikes front and center in 2012.
Re-elect Obama and all the tax hikes spring to life three two months after the election.  Defeat Obama and your lower tax rates are safe.  (Who was advising Obama on this?) And by demanding that the lower rates are only good for two years, Obama has ensured that they have little positive impact on investment and job creation…what business will invest in creating jobs knowing that the lower tax rates are only good for two years?

Obama has betrayed a central liberal value: envy.  He put the Democrats weakest issue—taxes—front and center in 2012.  And he has made all the tax cuts temporary so as to minimize their help in bringing down unemployment. 

Evidently he is now getting strategic advice from the folks who thought up Harriet Miers.