The tax deal: short-term victory for Obama

The big news in American politics recently has been the surprising tax deal President Obama made with the Republicans in Congress.

Tax cuts introduced in 2001 and 2003 during the George W. Bush presidency were positioned at that time as “temporary”, and were due to expire at the end of this year. They were a main contributor to turning the U.S. federal government account into deficit. While a candidate for President in 2008, Obama promised to let the Bush tax cuts expire for wealthier Americans only: that is, to increase tax rates for this group, which was defined as families with income above $250,000 or individuals with income above $200,000, but maintain the lower rates for those earning less. His call to end the tax cuts for the rich was embraced by congressional Democrats, and promoted for the past two years.

In  deal reached last week, Obama abandoned this aim. The deal extends the Bush-era tax cuts at all income levels for two years. In exchange, benefits for the long-term unemployed would continue for 13 months, payroll taxes would be cut for a year, among other measures to support the economy.

Obama felt like he was backed into a corner; he later described the Republicans as “hostage-takers”. They maintained solid opposition to raising taxes on any group. Obama was ultimately faced with a choice: do nothing and let the tax cuts expire, and thus raise taxes in the midst of an uncertain economy (and risk being blamed for it); or, do a deal of some kind.

Liberal Democrats, especially those in the House, have responded with outrage, speaking of betrayal. But they have been unwilling to face reality. The Democrats’ call to increase taxes for higher-earners never really became a popular tactic. They had to explain why this group had to be singled out for a tax increase, and they couldn’t persuasively. The Republicans’ gains in the mid-term elections also indicated that the country was not behind the Democrats. As in many areas of policy, the Democrats had only themselves to blame for failure. Since 2008, they have controlled both houses of congress and the White House, and thus the reason they have not achieved their objectives is because they were not in agreement among themselves.

The deal was surprising because Obama attained much more than any had thought. The payroll tax cut and other steps represent effectively a second stimulus package. Given the sluggish economy, this is something Obama desperately wanted, but the consensus was the Republicans would never accede to. As it turns out, as long as the stimulus was packaged as tax cuts, the Republicans would agree. This is a political victory for Obama, as not only did he pull a second stimulus rabbit out of a hat, but he has made the Republicans look bad: this is the party that had, during the midterms, said that it was going back to its fiscally-conservative roots. Agreeing to a massive increase in the deficit will damage its credibility.

Indeed, the best thing Obama has going for him is the inept Republican leadership. Obama's supporters are crowing, and now see a path to re-election in 2012, as the stimulus will come just in time. This is intellectually vacant support for electoral gain without overriding purpose. Moreover, Obama's victory will be short-lived, because his real opponent – the economy – is far less accommodating. This second stimulus will not bolster productive industry. The deficit in itself is not a problem, but if significant economic growth does not emerge, than the deficit will be a big problem.

The tax deal shows a political class that prefers short-term expediency at the expense of  taking hard decisions for the longer-term. Do not expect it to restore the public’s faith in politicians.