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Good Deal

Dec 20, 2010, Vol. 16, No. 14 • By MATTHEW CONTINETTI
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Imagine the following scenario. It’s January 2011. President Obama is on Capitol Hill, delivering his State of the Union address. Behind him is Speaker John Boehner of Ohio. Before him are 87 new Republican congressmen and 6 new Republican senators. In his speech, the president paints a grim picture of America’s longterm budget outlook. What is needed, the president says, is an overhaul of both sides of the fiscal equation. The tax code must be made more efficient by closing subsidies and loopholes while lowering marginal rates. Future expenditures must be reined in by raising the retirement age and means-testing benefits. Obama ends his speech by challenging the Republican House and divided Senate to adopt tax and spending reforms by 2012.

Good Deal

State of the Union, Jan. 27, 2010

AP IMAGES / Tim Sloan

Don’t laugh. This vignette isn’t as farfetched as it may seem. The rapidity with which the president has been moving to the center-right on fiscal issues is nothing short of amazing. In the aftermath of the midterm election, not only has President Obama frozen nonmilitary federal pay. He’s inked a trade deal with South Korea. He’s welcomed the budget-cutting recommendations of his fiscal commission. He’s negotiated a deal on taxes that would extend current rates for another two years. He’s told reporters that he wants to work on a pro-growth tax reform. At this rate, it won’t be long before Obama endorses Paul Ryan’s Roadmap for America’s Future and starts calling for a return to the gold standard.

Okay, we may be dreaming on that last part. But the larger question is this: Are conservatives and Republicans willing to take yes for an answer? Consider the deal on current tax rates. The left is howling that Obama has abandoned his principles and capitulated to the right. Outraged House Democrats are demanding changes to the agreement before they hold a vote. The left is angry because President Obama has reversed a long-held position and agreed to a truce in the class war. What’s more, he’s spent the last week fighting with many of his fellow liberals, calling them unrealistic, unserious, and sanctimonious.

Music to our ears. And yet some conservatives seem unable to enjoy the melody. Some have fallen into the austerity trap, arguing that the deal costs too much and that tax hikes are necessary to shrink the deficit. They’re misguided. You can’t find an economist of any school who says raising taxes would hasten the recovery. And economic growth and spending restraint will do more to balance the books than any tax increase. When the unemployment rate is at 9.8 percent, as it is today, the most important priority is to align incentives to encourage work and investment​—which the tax deal does.

Other conservatives dislike the deal because it would raise the estate tax from zero in 2010 to 35 percent in 2011 and 2012. But this is just another instance of letting the perfect be the enemy of the good. If no deal is reached, the estate tax will reset to 55 percent next year. Furthermore, there’s nothing to stop Republicans from cutting the estate tax in the future. So why let it get in the way of preserving current tax rates on income, capital gains, and dividends now?

Oppose the deal because it’s a “back-door stimulus”? Let’s not forget that the problem with the 2008 and 2009 “stimulus” bills wasn’t that they tried to promote recovery. It was that they failed to promote recovery. They were poorly timed, contained tax cuts that were badly designed, and borrowed huge gobs of money to spend on frivolous social projects. They didn’t stimulate anything except the appetites of Nancy Pelosi, Harry Reid, and profligate state and local governments.

The most important stimulus in the current deal is that no one will see their taxes rise in 2011. This means America won’t repeat the mistakes of 1932 and 1937, when taxes were raised and the economy suffered. Plus, the deal contains what may be the first payroll tax cut in American history. Conservatives have backed such an idea for a long time. Are they really going to abandon it now because it might help Obama’s reelection chances?

The bottom line is that tax cuts will be off the table for the next two years, while spending cuts will be on the table. That sounds pretty good to us. The deal also lays the groundwork for a GOP budget that returns nondefense discretionary spending to pre-recession levels. It prepares us for a larger conversation in 2012 over the future of entitlements and the appropriate size and scope of the federal government. If President Obama wants to jump in the pool with conservatives and Republicans, so be it. C’mon in. The water’s fine.

—Matthew Continetti


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