With the current session of the United States Congress coming to an end, the tax cuts brought about during the Bush Administration are due to expire. After months of fierce discussion between Democrats and Republicans about the need of maintaining existing tax rates, a compromise was reached between opposition members of the Senate and the White House this week. But some Democrats in Congress have already vowed to vote against the deal.
Democrats and the president have routinely blamed Republicans for holding the extension of middle-class tax rates and unemployment benefits “hostage” to tax cuts for “millionaires and billionaires,” or the richest 2 percent of Americans. In recent months, Republicans have blocked other legislation in Congress before, they say, Washington assure the people that their tax rates will not go up next year.
Confronted with this stalemate, President Obama, in a statement last week, said that he was unwilling to let “working families across this country become collateral damage for political warfare” in Washington. “I’m not willing to see two million Americans who stand to lose their unemployment insurance at the end of this month be put in a situation where they might lose their home or their car or suffer some additional economic catastrophe,” he added. So he announced a compromise agreement: a two years extension of current tax rates coupled with a thirteen-month extension of unemployment benefits. “It’s not perfect,” the president admitted, “but this compromise is an essential step on the road to recovery.”
Some members of his own party beg to differ and Congressman Chris Van Hollen of Maryland explained why on Fox News Sunday. Even if there are some House Democrats who “haven’t adjusted to the post election reality,” most are willing to compromise but upset about the estate tax cut, he explained. “That doesn’t help the economy,” according to Van Hollen. “It hurts the deficit. And most importantly, the Republicans did not insist on the estate tax being part of the central portion of this deal.”
The estate tax break — which according to Van Hollen would cost the government $68 billion in revenue — would lower rates to 35 percent on estates over $5 million as opposed to the current 45 percent tax on estates worth more than $3.5 million. Paul Ryan, who will succeed Van Hollen as chairman of the House budget committee in the next Congress, characterized it as a double tax on death. “Economists will tell you that it’s really not a tax that soaks the rich,” he said, “but it’s a tax on capital that deprives business investment and therefore job creation.”
If liberal Democrats successfully manage to stall or vote down the compromise agreement, Paul promised that Republicans next year, once they have a majority in the House of Representatives, will prevent any tax increase. “And we’ll do it retroactively after the first of the year.” Unsurprisingly, Van Hollen was quick to add that he did not intend to block the compromise altogether
The White House seems confident that the deal will pass. Senior advisor to the president David Axelrod said on ABC’s This Week that he expected “strong support on both sides of the aisle.” He warned Democrats that unless they accept the compromise, hundreds of thousands of unemployed Americans would see their benefits cut next year. The alternative is to “put money in the pockets of middle-class people,” he said.
Axelrod, who was Obama’s chief strategists during the presidential campaign, was all the more explicit on CNN’s State of the Union. “You can focus on what you don’t like and cut your nose off to spite your face, and that would be the wrong thing to do,” he said, adding that Congress should approve the deal because “everyone understands what it means to the economy if we don’t get this done.”
The greater question for the US economy is the ballooning national debt however. The federal government currently borrows more than a third of what it budgets and there are no plans to seriously rein in spending.
Even if restoring balance to the budget is possible at existing tax rates if only Washington freezes spending levels, it seems unlikely that Democrats will accept cuts during the next two years unless they are offset by some tax increases.
Congressman Ryan, who has proposed radical spending cuts and entitlement reforms in the past, was asked about the deficit on Fox News Sunday but wouldn’t say how exactly he intends to balance the budget next year. Extending the tax cuts isn’t so much a fiscal measure though. “I’m not going to make any bones about this and say this is a great growth package,” he told CNBC Wednesday. “They have some demand side Keynesian stuff in here I’m not particularly a fan of,” he complained then, “but this is probably the best deal we can get.”
On his Fox Business show this Friday, David Asman also criticized Democrats who pretend that stimulating consumption will help the recovery. “Our economy’s health is judged by how much we produce, not by how much we buy,” he said. “The more Americans work and produce, the stronger our economy grows. And that’s what gives us the wealth to buy and consume, not the other way around.”
With unemployment rates stuck at 10 percent, Asman said Congress shouldn’t do anything that could undermine job creation. “We need economic policy that encourages work and production a lot more than we need policies meant to encourage consumption,” he explained. “That’s why any tax increase is insanity right now.”