Tax deal a good, not great, bargain for Republicans

It’s victory!  It’s defeat!  It’s the end of Obama!  It’s the end of the world!  The deal to keep the current tax rates in place has received soaring praise and bitter criticism on the Right, but the truth is that the deal winds up being good for Republicans while making their job in the 112th Session a little harder, especially on budgeting.  However, it works for them in other ways, especially on credibility, and sets up the next electoral cycle as a fight on tax increases — just as 2010 played out.

Jennifer Rubin diagnoses the impact of Barack Obama’s surrender on the tax question:

They won the philosophical point (tax hikes impede economic growth) and, candidly, are more than delighted to have a repeat of this debate for the presidential campaign in 2012. Ryan Ellis of Americans for Tax Reform, which strenuously pushed for extension of the Bush tax cuts, tells me,”If 2012 is a referendum on Obamacare and tax hikes, we win.”

The Left has demonized the Bush tax cuts as the Source of All Deficits for years, even though tax revenues increased after the cuts as the economy began booming again [see update III].  Obama, the most Left-leaning President ever elected, just endorsed the Bush tax rates for another two years — and, as John Hinderaker notes, added in a payroll tax holiday that will do more to encourage growth than anything Obama has done in the past two years.  John Podhoretz calls this a “what the hell” deal for Obama, who coughed up more for less than imagined, and exposed his grasp of economics as superficial at best:

Here’s a theory: Obama said, “What the hell.” Once he knew he had to give in, and would get criticized for giving in, he figured he might as well go whole hog. The whole deal seems designed to test conservative arguments about how best to help the economy right now, with the understanding that if the economy improves markedly as a result, he will get more credit for his role from the independents he lost so decisively in the 2010 election. And if it doesn’t, then the GOP will be in the position he was in this year in relation to the stimulus—their desired policy won’t have worked either, and he won’t get blamed for acceding to political reality in going along with it.

Paul Krugman and the Nation and moveon.org were going to be enraged no matter what compromise he struck. So…what the hell. Go long. Try the Hail Mary. Nothing Barack Obama could have done indicates just how empty his own economic policy quiver is.

My friend and mentor Hugh Hewitt was outraged at the deal, telling me last night in a hastily-arranged but tremendously fun on-air argument that the GOP had all of the political momentum and should have held out for total victory.  He was most angry about the concession on unemployment benefits, arguing that an extension of 13 months was a ridiculous idea.  After all, these started at 26 weeks, and now we’re putting employers and taxpayers on the hook for 161 weeks [see update IV: still 99 weeks].  That will slow growth all on its own, and Hugh is right to be opposed to such an extension. The deal will end up costing around $270 billion over the next two years if one counts tax cuts as part of the cost (which is illegitimate, as those dollars belong to the taxpayer in the first place), which will mean the GOP will have to cut deeper in its first year than perhaps thought.

However, the nature of politics in a time of split power is compromise.  Republicans made the tax rates their priority after the election, and to some extent before it as well.  They needed to get a victory on this point before the tax hikes took effect, all while knowing that the situation in January would be more or less the same as it is now: Democrats still control the Senate and the White House.  Demanding an all-or-nothing position would mean sticking all taxpayers with a higher bill, which (not surprisingly) was the same strategy demanded by the Left to get the GOP to surrender on the higher tax bracket rate.  That position helped turn the midterm into a big loser for the Left, and it wouldn’t have helped anyone after January, either — not Republicans or Democrats. The parameters of the deal wouldn’t have changed much at all by waiting.

What do Republicans gain?  They get to set up the 2012 elections in large part as a debate on pending across-the-board tax hikes for one.  The extension of unemployment benefits will expire in the 2012 primaries, which will create another debate on the wisdom of continued government interventions — but also will keep unemployment higher for longer, which won’t help Obama in 2012.  The estate tax only goes up to 35% after the first $5 million, rather than 55% after the first $3.5 million, as Democrats demanded (and would have gotten had they bothered to deal with it in 2009 rather than wait until now).  The payroll tax holiday and the tax rate extensions may help a little in economic growth, but tax rate consistency only gets us a little further down the road and won’t be a game changer. (Increases, though, would have been disastrous.)

Mostly, though, the deal and the Democratic furor over it shows that the Republicans came to lead and get things accomplished, not just act as obstructionists for the next two years.  That will add considerable credibility to the GOP from the independents who flocked to Republicans in this past midterm cycle.  That’s a good, not great, deal for the Republicans in an environment where they have limited bargaining power.  If Democrats end up sabotaging this deal in Congress, well, so much the better.  They will become the obstructionists instead, and will have made the argument for their own oblivion in the next election.

Update: Just to clarify, the Death Tax was going to 55% on January 1, with an exemption to the first $3 million.  Had we done nothing, that was the new status quo.  Keep that in mind.

Update II: A few e-mailers inform me that the 2011 Death Tax would have started at $1 million, with 41%, escalating to 55% above $3 million, which makes it even worse.

Update III: Yes, tax revenues increased after 2003, and according to the CBO, in excess of overall economic growth.  In fact, from 2003 to 2006, tax revenues jumped 35%:

Total federal revenues grew by about $625 billion, or 35 percent, between fiscal year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since 2003 is necessarily preliminary because relevant data are not yet fully available.  CBO examined the available data using the commonly employed method of analyzing the sources of revenue growth as a percentage of GDP. Had revenues grown at the same rate as the overall economy between 2003 and 2006, federal receipts would have increased by only $373 billion.

The reason?  Corporate tax revenues soared, thanks to the economic boom:

This analysis shows that the overall increase in revenues as a share of gross domestic product (GDP) since 2003 is disproportionately accounted for by increases in corporate income tax revenues.

Update IV: Actually, the unemployment extension is less than meets the eye, too:

The filing deadline for federal unemployment insurance that provides benefits for people who run out of their 26 weeks of state-provided benefits without finding a job would be extended until January 2012. Essentially, this will make it possible for people who became unemployed in the past 99 weeks and still haven’t found a job to collect benefits for the same length of time as people who lost their job more than 99 weeks ago. This would not add additional weeks of benefits — 99 weeks would still be the maximum amount of time that anybody could receive benefits.

So in exchange for tax rates staying the same across the board, the GOP agreed to open the window for eligibility for an additional 13 months but not to pay more than 99 weeks to any individual.  That adds cost, but not nearly what the White House’s description suggested.  Big thanks to Gabriel Malor for clarifying this point for me.

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