The Obama-Republican Tax Compromise

Apparently a deal has been reached to maintain the Bush-era tax rates.  The compromise calls for a temporary extension of the income tax rates from the 2001 and 2003 tax cuts, a temporary extension of the tax rates on capital gains and dividends that came from those tax cuts, a one-year reduction in payroll taxes, and an extension in unemployment benefits (among other things).

The majority of Democrats are not happy.  Sen. Tom Harkin considers the extension of the tax rates for higher-income earners a “moral outrage.”  Republicans, on the other hands, are patting themselves on the back.  Sen. Charles Grassley stated “everybody was a winner” from this deal.

President Obama declared this tax package will create “millions of jobs.”  The truth isn’t quite so obvious.

It should be clear raising taxes in a recession is a dumb idea.  Businesses are less likely to invest in expansion and hire new employees if the government is taking a larger chunk of their income.  And despite the class-warfare rhetoric coming from Democrats and left-wing commentators, the small businesses they allegedly stand behind would feel the impact of ending the Bush-era tax rates, as this Wall Street Journal article makes clear.  Depending on the profit margin of a particular business (for example, a National Shoe Retailers Association survey showed the average profit margin for independent shoe stores was 3.5 percent), such an impact could be devastating.  Just how is that supposed to put people back to work?

While the level of taxation is a factor in how well an economy prospers (or suffers), it’s not the only one.  Unfortunately, neither President Obama or the incoming Republicans seems serious about tackling the other factors.

The extension of unemployment benefits may seem like a compassionate move.  However, the evidence shows such an extension is not nearly as favorable as it sounds.  Labor economist Lawrence Katz found that increasing the duration of benefits increases the duration of unemployment, and a report by Michael Feroli of JP Morgan Chase showed that increasing the length of unemployment benefits raises the unemployment rate.  This is what FDR called the “spiritual and moral disintegration fundamentally destructive to the national fiber.”

The problem is out-of-control government spending.  By taking money out of the productive sector of the economy and spending it on non-productive uses, the government is reducing economic efficiency, thus lengthening our current predicament (hence the failure of the stimulus).  President Obama has shown no inclination to get spending under control.  Unfortunately, the Republican record on spending when they have power is atrocious.  Already, you have Tea Party favorites Michelle Bachmann and Steve King trying to redefine the definition of an earmark so they can keep sending taxpayer dollars into their respective districts.  If Tea Party Republicans are willing to sell out their principles on earmarks, just how can they be taken seriously to tackle much-needed reforms on bigger budget items like Medicare, Medicaid, Social Security, and Defense spending?

How about their plans to rein in the excessive regulations and loose-money policies that triggered the recession?  I’ve heard nothing about President Obama or the Republicans confronting these issues.  Earlier this year, the House rejected efforts to audit the Federal Reserve’s activity.  On top of that, the incoming Chair of the House Financial Services Committee, Spencer Bachus, has a voting record that enabled Fannie & Freddie to pursue activities that ultimately crashed & burned the economy.  Can we really trust a man like this to use his influence to steer public policy in the proper direction?

Whatever positive economic benefit the Bush tax cuts had was overwhelmed by President Bush’s reckless spending and regulatory activity.  We need more than just tax cuts to get the economy back in order.

This compromise shows President Obama and the Republicans failed to learn the lessons of the recent past.

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