Progressives in Congress Stand Up

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The spirited and principled rejection of the tax cut compromise by progressive Democrats in Congress is as welcome as it is unexpected. The deal between the White House and the Republicans , as Bob Borosage of Campaign for America’s Future observed, was “far more a deal to keep the economy from slowing than to get it going.” Facing negotiations with a nihilistic Republican leadership, avoiding a complete stalemate in which workers lost much needed unemployment insurance benefits, the Bush tax cuts for the middle class were rescinded, and low-income working families lost the expanded earned income tax and child tax credits seemed to be as much as could be hoped for.

The price exacted by the Republicans was steep: extension of the Bush tax cuts for the top 2% of households, exemption from inheritance taxes for estates up to $5 million dollars and a 35% maximum rate on estates in excess of that amount, and a 15% maximum tax rate on income from dividends and capital gains.  As progressive Democrats in Congress have made clear, tax breaks for the wealthiest Americans are not only unconscionable but they make no economic sense.  The Congressional Budget Office ranks these types of tax cuts as among the least effective ways to increase growth and jobs.

All the happy talk from the Administration and some economists about the boost to growth and jobs from the tax cut deal is just that – happy talk. Allowing tax cuts for the middle class and unemployment benefits for the long-term unemployed to expire would reduce incomes and are contractionary; letting them continue, however, does not raise incomes in January above where they were in December so these policies provide no additional stimulus to the economy. Very little in the tax package provides a stimulus. It is surprising, therefore, that Mark Zandi told reporters that he expects the tax compromise to add as much as a full percentage point to economic growth in 2011, bringing it to 4%. He also expects the unemployment rate to be under 9%, approaching 8.5% by the end of the year. This seems far too optimistic; based on this and other analyses, the Administration is once again overpromising what its policies can deliver.

But there is actually more to hate about the deal the White House struck with the Republican leadership than just the giveaway of tax cuts to the wealthy.  Replacing the Making Work Pay Credit with a payroll tax cut is bad policy on multiple grounds. The MWP is a credit of up to $400 for workers earning less than $75,000 a year, with workers making as little as $5,000 a year receiving the $400. With the payroll tax cut, a worker would have to earn $20,000 a year to get a $400 tax break. Workers earning less than $20,000 would see their taxes rise, while those making over $20,000 would get a further tax reduction, obviously a bad deal for low-income workers. The most insidious aspect of the payroll tax cut, however, is that it threatens the idea that Social Security is sacrosanct, a reality so important to the economic security of the nation that the taxes that support it should never be tampered with.

The tax cut deal makes up the lost tax revenues from the partial payroll tax holiday out of general tax revenues. It would be far better to simply mail every working person and social security recipient a check from the Treasury out of general tax revenues – something I have advocated for in the past and that was done by both Presidents Clinton and Bush to deal with recession.

Congressional Democrats have already changed the terms on which future negotiations between the White House and the Republican leadership will proceed. Progressives in Congress will do a great good for the country if they succeed in getting a better deal with Republicans. But in their criticisms, they should also note the cynical way in which hysteria over the deficit and the debt has been promoted, and the willingness of the White House and the Republicans to jettison these concerns to make sure the wealthy get to keep their tax cuts.  Talk of spending cuts to “pay for” extending middle class tax cuts and unemployment benefits must be met by progressive Democrats with the same vigorous opposition that greeted the tax breaks for the wealthy. As long as household spending and business investment remain weak and 25 million workers are unemployed or underemployed, spending by the federal government that raises the deficit and the debt poses no danger to the economy. On the contrary, short-term increases in the deficit and debt are essential to creating jobs and a growing economy.