Taxes, Triangulation and the Deficit

Obama has apparently angered his left leaning base over the agreement on a "framework" to keep the Bush tax cuts in place. The WSJ is reporting that

In reaching the deal, whose details still need to be worked out, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax.

Looking at the outlines, I am not particularly pleased either, but for other reasons. I think Obama knows what he's doing and may have outsmarted the Republicans, at least in the short term. The key to understanding his position is that all of these measures are temporary, while blowing a hole in the deficit that a Republican House will have to deal with. Don't get me wrong, I favor extending the Bush era tax cuts permanently, but this deal has real issues.

First, temporarily reducing the payroll tax is not going to increase hiring, except in some high turnover occupations. In general, businesses think longer term about their work force structure, so they my belief is that this will only serve to push Social Security towards acknowledge insolvency more quickly. This will resurrect attempts to later bring about tax increases "for the rich" including extending the maximum wages on which social security taxes are levied.

Second, extending unemployment benefits is going to slow the necessary restructuring needed in the labor force. Clearly, many people need to move, change occupations, or go into business for themselves, because the recession permanently altered the demand for the labor by skill set and geography. Propping up housing markets and extending unemployment benefits only delays the inevitable restructuring.

Third, given the level of unhappiness of liberal Democrats, I don't know if this can pass in a lame duck session that still sports overwhelming Democrat majorities in both houses. That may have been part of Obama's plan. Obama can appear to have reached bipartisan consensus, see triangulation, but can count on lefties in his own party from blocking a deal. Right now, the headlines all project sweetness, light and tax cuts, but this is not yet a done deal. I would not be shocked if this unravels.

Not everything in the deal is bad:

The deal would extend a raft of business tax breaks, including credit for spending on research. It would extend current tax rates on capital gains and dividends for two years, including for higher earners. It would also maintain protection for middle-class families from the alternative minimum tax.

Stay tuned, it could be a wild ride.