Now that President Obama reached a deal with Republicans to extend all of the Bush tax cuts for two years and significantly lower the estate tax, I’m finding myself in a strange position for a progressive economist. I’m pleasantly surprised at how much he (and therefore the people of this country) has gained in exchange for what many were calling an abject surrender. After all, he got Republicans to agree to an extension of unemployment insurance, a payroll tax holiday and (amazingly) an expansion of the earned income tax credit (EITC). Remember what that program does: if you are a low-income worker and you don’t make enough to pay income tax, you actually get a check from the government. The right wing has consistently attacked the EITC as a welfare entitlement and yet there they were, agreeing to its expansion.
It is certainly true that on the grounds of fairness in our tax policy and good economics, the part of the deal that extends the Bush income tax cuts for the top 2 percent of the population, and cuts the estate tax permanently, is just plain bad. Every dollar spent refraining from raising income taxes to 39.6 percent from 35 percent for those making over $250,000 a year as well as the unconscionable gift to millionaires and billionaires with the cut in the estate tax, could be much better spent helping states avoid deep spending and service cuts.
However, Republicans had made clear that they were willing to let all tax cuts expire and refuse to do anything meaningful to help the unemployed unless millionaires got an extension of the Bush tax cuts. So the choice for the president was to let all the tax cuts expire and fail to get unemployment benefits extended or to do something that would preserve some of what most economists believe the economy needs: that is, extending unemployment benefits for the next thirteen months, the cut in payroll taxes and expansion of the earned income tax credit.
Of the total $900 billion cost of the plan, only $120 billion will be spent on extending the Bush tax cuts for the wealthiest 2 percent of taxpayers and on reducing the estate tax. The rest of the plan will be significantly stimulative. According to the first round of back-of-the-envelope calculations, within the next year it should cut unemployment anywhere from one-half to a full percentage point. The difference between 8.5 percent and 7.5 percent unemployment is not enough, but it’s not insignificant.
Consider the alternative: letting the Bush tax cuts expire and turning the next session of Congress into a battle for all future stimulus spending against a much larger Republican group in the Senate and a strong Republican majority in the House. They would have held all possible assistance to the unemployed and the working people in general hostage to budget cuts elsewhere. Making that kind of deal would have of course reduced the fiscal impact of the increased spending and done something else that would have been worse. It would have lent support for the current austerity nonsense emanating from, for example, the deficit reduction commission. The fact that Obama did not have to offer budget cuts in order to fund this $900 billion package is an extremely positive thing. As every decent economist since John Maynard Keynes knows and as public opinion also makes clear, running deficits to create jobs in the middle of a recession (or a sluggish recovery, which in terms of human pain and suffering is the same thing) is a better policy than deficit reduction all the time. With this agreement, the President, Democrats and Republicans have tacitly agreed with that argument—revealing that deficit hawks use the deficit as a stalking horse for attacking spending they don’t like. This is no small thing, because in terms of economic policy, the most serious obstacle to the pursuit of progressive actions now and into the future is the argument that deficit spending today means disaster tomorrow.
I also think, however distasteful it is on moral grounds, extending the Bush tax cuts does not do much harm. Even after Clinton persuaded Congress to raise taxes on the highest income earners and well before the estate tax cuts passed in 2001, the super-rich were continuing to increase their share of the nation’s income and wealth. Long term trends in inequality have more to do with the decline of union membership, financial deregulation and increased trade in labor intensive goods, while increasing protectionism for high salaried professionals (doctors, accountants, professors) and the fraying of the social safety net. Tax policy plays some role, but it is nowhere near the whole story.
If we on the left want Obama and the Democrats to strongly back a progressive agenda, we have to make them do it. If there had been a strong progressive movement such as existed in the 1930s demanding universal healthcare, pro-union policies, increases in the minimum wage, a crash program to create a green infrastructure for energy and transportation and, yes, a progressive tax policy, we wouldn’t need to be having this discussion today. Instead of complaining about Obama we ought to be working our tails off to build a real movement that will ultimately force him and a recalcitrant Congress to do the right thing.