The Compromise Tax Bill: Why Something Was Better Than Nothing

If a compromise by definition is a deal that pleases no one, then the $858 billion tax deal that cleared Congress Thursday night was a rousing success: Not many people feel like celebrating it.

Conservatives and liberals both argue that it doesn't go far enough -- in opposing direction, of course -- but those who voted for it on both sides of the aisle agreed that the alternative -- raising taxes for everyone -- was unpalatable while the U.S. struggles to extricate itself from the worst economic downturn since the Great Depression. In addition, millions of out-of-work Americans would have lost their unemployment benefits without the 13-month extension President Obama negotiated into the bill.

It's a far from perfect plan, and the issues in question should have been dealt with long before the deadline loomed -- but political maneuvering prevented that until now.

"They have known about this for seven or eight years," says Mark Robyn, staff economist at the conservative Tax Foundation, in an interview, who calls the bill a temporary solution and says that real tax reform is needed. "There was a lot more at stake if they couldn't pass something right now."

The law amended the estate tax, which conservatives would have preferred to abolish: It now exempts inheritances up to $5 million. Another issue conservatives have long championed is lowering the corporate tax rate: Republicans failed to get that tax rate lowered from its current level of 35%. As the Heritage Foundation recently noted, the U.S. is the only industrialized nation that has not lowered its corporate income tax rates over the past 20 years. Many businesses, however, file at the individual level, and will benefit from the lower tax rates that will apply there. On the plus side, the R&D tax credit was extended for two years. Tax breaks for ethanol producers, which some wanted to abolish, were also preserved.

How Much Bang for Our Billions of Bucks?

Business groups, though, are hailing the tax deal which President Obama is expected to sign today.

"These much-needed incentives will spur investment, economic growth and job creation," says Jay Timmons, executive vice president of the National Association of Manufacturers, in a press release. "We urge the President to sign the bill immediately so manufacturers and the broader business community can have some certainty moving forward."

Sponsored Links

As Paul Krugman of The New York Times and others have pointed out, the Congressional Budget Office estimates that extending the Bush tax cuts will trim unemployment by an extra 0.1 to 0.3 percentage points in 2011, and twice that in 2012. Without the deal, economists were predicting that U.S. GDP growth would be 2.8% next year, but many are now revising their estimates upward based on the premise that provisions such as middle-class tax cuts will help bolster the economy.

"We are talking about adding 1 point of GDP growth in 2011 and a reduction of unemployment from a half to a percentage point, and around a million more jobs," says Chad Stone, chief economist of the liberal Center on Budget and Policy Priorities, which supported the deal despite misgivings about some aspects of it. "This does make a big difference."

Stone added that even if those forecasts are accurate, the economic recovery would still be weak compared to what's needed to get the nation back on track, based on comparisons to previous recessions and their aftermaths.

Critics on the left, who argued that the tax deal benefits the rich at the expense of everyone else, still say the deal is bad news. Howard Gleckman of the Tax Policy Center writes on the organization's blog that the proposal will help grow the economy, albeit not by much. Groups such as MoveOn.Org have raised similar concerns.

"If you care about the bang for the buck -- and given our long-term fiscal mess, you should -- this new law is a colossal waste of money," Gleckman writes. "By my rough calculations, more than half -- at least $450 billion -- will do little or nothing to boost the economy in the short run. It won't increase demand for goods and services. It won't increase investment. And it certainly won't create many new jobs. It will, however, provide a fabulously generous tax windfall to those who need it least."