The Tax Deal and the Apocalypse

December 13, 2010

Dean Baker
Truthout, December 13, 2010

See article on original website

The proponents of the tax deal that President Obama and the Republicans negotiated last week have gotten out their TARP and Iraq War hysterics. All the important people are now telling us that if Congress doesn’t approve the package it will be the end of the world!!!!!

To be an important person in Washington these days requires a solid record of failure. That is why we have 25 million people unemployed, underemployed or out of the labor force altogether. And those who got us into this disaster are still overwhelmingly the ones calling the shots. So people who want a realistic assessment of what the defeat of this tax package means for the economy may not want to rely on the usual suspects.

As I have noted before, the major risk of this deal is that it would undermine Social Security. The deal temporarily lowers the Social Security tax by 2 percentage points. In principle the tax rate will go back to its current rate after the end of next year.

However, several prominent Republicans have already made it clear that they will call the expiration of this tax cut a tax increase. And they will point out that it is an extremely regressive tax increase that disproportionately hits low and moderate-income workers.

At the end of the 2011 the unemployment rate is virtually certain to be well above 8.0 percent and quite likely above 9.0 percent. In this context does anyone seriously believe that President Obama will refuse to go along with efforts by the Republicans in Congress to continue the tax cut beyond the scheduled deadline?

If the payroll tax is indefinitely lowered by 2.0 percentage points, then Social Security’s finances will appear much more shaky. As it stands, Social Security is fully funded through the year 2037, but that doesn’t keep the Washington Post and National Public Radio from running endless scare stories about the program’s funding crisis.

If the payroll tax is permanently reduced by 2.0 percentage points it would double the program’s projected 75-year shortfall. This would give far more ammunition to the Social Security fear mongers.

While Obama’s deal ostensibly provides for general revenue to be placed into the trust fund to make up the lost payroll tax revenue, there is little reason to believe that this funding would persist beyond the first year. Again, does anyone believe that President Obama will stand up for Social Security on this point?

In short, this deal is a very large first step toward cutting and/or privatizing Social Security. If the President wants to remove this risk he can simply arrange to have the exact same tax cut given to workers from general revenue. There is no legitimate reason for the Republicans to reject this change in structure, unless their intent is to destroy Social Security.

It’s really that simple. The structure of the deal would be changed unless the point is to undermine Social Security.

What about the threatened apocalypse if we don’t do the deal? Well, the deal would provide a net stimulus to the economy and also give money to unemployed workers who really need it. Not getting this boost would be bad news.

But it is hard to stomach the whining from people who were too damned lazy or incompetent to think about the consequences of the collapse of an $8 trillion housing bubble. These workers are unemployed because the folks calling the shots messed up.

In other words, the reason that we have 25 million people unemployed or underemployed is that people like Ben Bernanke, Timothy Geithner and Larry Summers messed up royally on their jobs. Fortunately for the folks on top, employment is not dependent on performance.

More to the point, this will not be our last chance to extend unemployment benefits or get additional stimulus. Unemployment benefits are hugely popular across the political spectrum. Even conservatives understand that the reason people are unemployed is because the economists messed up, not that the workers themselves lack the necessary skills or desire to work.

Congress will feel considerable pressure to extend benefits. In the same vein, the Republicans in Congress know that they will be evaluated in large part on the state of the economy in 2012. This means that they will have incentive to support additional stimulus, under whatever name they choose to give it.

In short, the train is not leaving the station. If this deal goes down, there will be other deals in the months ahead.

Remember, it was the Gingrich Congress that gave workers the first increase in the minimum wage in more than 15 years. They needed something to show for the 1996 elections. This Republican Congress is likely to feel the same pressure.

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