Obama Got Least-Worst Deal in Tax-Cut Showdown: Albert R. Hunt

The late Congressman Phillip Burton, House Speaker Nancy Pelosi’s mentor, once said a popular colleague’s idea of negotiation was to find out what the other guy wants and give it to him.

That’s what President Barack Obama and congressional Republicans just did on the tax cut-economic stimulus package. Both sides got more than they anticipated and gave more; this is the short-term strength of the deal and its longer-term problem.

The measure -- which includes the Republican goals of extending for two years the tax cuts for the wealthy and providing a massive benefit for rich heirs, and the Democrats’ objectives of more liberal unemployment benefits, a temporary payroll tax deduction, refundable tax credits for the working poor and larger write-offs for businesses -- has drawn flak. The criticisms, from Republican Senator Jim DeMint of South Carolina to Democratic Representative Barney Frank of Massachusetts, echo one another: My side gave too much.

House Democrats, who were cut out of the final negotiations by the White House, are incensed about the estate-tax provisions. The deal may go through more contortions, even a rejection or two, and some tweaking, before approval on the eve of Christmas as the historic 111th Congress adjourns sine die.

Both sides won crucial concessions. For Republicans, an extension of the upper-tier tax cuts, under a Democratic president, would be a big victory. These cuts were enacted in 2001 and 2003 with a fiscal sleight of hand, which is why they expire this year. If extended, they were supposed to be paid for either through offsetting tax increases or spending cuts.

Tax Cuts for Wealthiest

Instead, Republicans got a two-year, $100 billion extension of lower taxes for the wealthiest Americans without political peril. They didn’t have to advocate for them while simultaneously trying to cut college loans for middle-class students or medical research on Alzheimer’s disease or cancer.

As a special bonus, Republicans won an estate-tax exemption that is even more generous than one proposed by Obama and that almost no one argues adds any economic benefit.

At a cost of $14 billion over two years, this provision would only tax estates of more than $5 million per individual or $10 million per couple, which would be subject to a 35 percent rate. This would exempt almost 3,000 wealthier estates from any taxation and lower the tax for the 3,600 even richer estates that still pay any levy. It benefits a small fraction of 1 percent of the wealthiest Americans. Some Republicans argue this protects family farms and small businesses.

Family Farms

Yet under Obama’s generous estate-tax plan -- exempting estates up to $3.5 million per individual or $7 million per couple, and subjecting those above that threshold to a 45 percent rate -- only 110 family farms or small businesses in the U.S. would pay any estate tax.

Obama got major concessions for the working poor and the unemployed, the college tax breaks for low- and middle-income students and other anti-poverty measures. A single mother with two kids working full time for minimum wage -- about $14,000 a year -- will get a credit of $1,735 with the Obama extension; without, she only would get $263.

The really big bonanza the president got was a second stimulus to help the sluggish recovery. The extended jobless benefits, temporary payroll tax cut and more generous business write-offs -- the largest one-year business tax incentives in history, the White House says -- are expected to generate more than 1 million jobs and add at least a percentage point to economic growth.

Fighting Unemployment

If that materializes and results in an unemployment rate closer to 7.5 percent than 8.5 percent in October of 2012, the president’s re-election prospects will be considerably brighter.

That’s bad news for Republicans. If the issue of the upper- tier tax cuts becomes part of the 2012 national debate, that might be a problem, too.

Moreover, while passionately championing these tax cuts -- at one stage Republicans insisted there would be no deal without the estate-tax provisions -- the lawmakers, especially those in the House majority, in only a few months have to turn to major cuts in programs that affect middle- and working-class Americans.

There is peril for Obama, too. First, he has alienated much of his liberal base with this agreement, even though some complaints are based on misunderstanding.

And it gives comfort to those who argue he can be rolled. He has insisted for years he would never accept extending the tax cuts for more affluent Americans.

Temporary Extension

Three months ago, when Obama’s former budget director, Peter Orszag, proposed extending all the tax cuts for two years -- with the rationale it would be easier to kill them all in 2012 -- it was greeted with derision at the highest levels of the administration. Officials said it was either naïve or duplicitous to pretend that politicians would opt for tax increases in the middle of a presidential election year. It still is, especially with a more Republican Congress.

And the president has transition difficulties of his own. It will be tricky for him to convince Americans, starting with his next budget in January, that he’s serious about deficit reduction after negotiating a deal that would add about $850 billion to the budgetary shortfall over the next couple of years.

Many Democratic lawmakers who complain about this measure have themselves to blame. Last summer, when the Democrats held a solid majority in both houses, they could have come up with a compromise measure extending the tax cuts for middle-class Americans for a longer period than those for wealthier individuals. They either would have prevailed or at least created a campaign issue.

Timetable Miscalculation

Over the summer, top administration economic officials wanted to push a similar measure. By September, however, Senate Majority Leader Harry Reid of Nevada was focused solely on his re-election; White House Chief of Staff Rahm Emanuel was checking out to run for mayor of Chicago, and the White House strategists miscalculated and never pressured Congress to vote on the tax bill before the election. The Nov. 2 Republican landslide weakened Obama’s position.

There are many reasons to dislike this deal. The alternative, a recovery-threatening, massive tax increase in January, is worse.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net.

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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