Klein: Unraveling the Tax-Cut Deal

President Obama at the White House conference discussing the deal on tax cuts. Mandel Ngan / AFP-Getty Images

In Washington last week the temperature dipped into the 20s, which is evidently the point when hell freezes over. President Obama reached an agreement with the Republican Senate leader, who said, “The single most important thing we want to achieve is for President Obama to be a one-term president.” Sen. Bernie Sanders, a socialist from Vermont, and Sen. Jim DeMint, an archconservative from South Carolina, both threatened to filibuster the agreement. Liberal Democrats said they’d prefer a permanent extension of most of the Bush tax cuts, while the architect of those tax cuts said the country couldn’t afford anything more than a temporary extension.

It was a confusing week.

But it was also a clarifying one. The deal, which sees Republicans giving the White House about $300 billion in stimulus in return for the White House giving Republicans about $130 billion in tax cuts for the wealthiest Americans, laid bare some realities of how Washington works—and doesn’t work—right now. It’s worth going through them one by one.

No one really cares about the deficit—at least not yet. No sooner had Alan Simpson and Erskine Bowles completed their work on a deficit-reduction package than Democrats and Republicans reached a bipartisan accord to add $900 billion to the debt. Republicans wanted their unpaid-for tax cuts for the rich; Democrats wanted their unpaid-for stimulus measures. And both sides wanted the unpaid-for tax cuts for incomes under $250,000. I think it’s appropriate to spend while the economy is weak and then repay when it’s strong, but then, I didn’t just get elected to Congress by promising to rein in spending.

Obama is better at the inside game than the outside game. Sarah Palin likes to ask the president how “that hopey-changey stuff” is going. The answer, it seems, is that the changey stuff is going well, but the hopey stuff is proving more troublesome. Obama campaigned in 2008 as the inspirational newcomer who had no patience for the broken ways of Washington, but he’s governed like a Beltway veteran with little patience for inspired outsiders. In health-care reform, the stimulus, financial regulation, and the tax-cut deal, he’s proved a tough negotiator able to move his agenda through a gridlocked Congress—but he hasn’t been able to keep Democrats enthused or the popularity of his initiatives high. And he’s been prickly when questioned about it.

Republicans really, really, really care about tax cuts for rich people. Many Democrats had been operating under the theory that the GOP would obstruct everything they attempted, as that was the best way to make Obama a one-termer. But at least when it comes to tax cuts for very wealthy Americans, that’s not true. Republicans agreed to far more in unemployment insurance and stimulus proposals than anyone expected, and sources involved in the negotiations concur that the mistake Democrats made going in was underestimating how badly Republicans wanted the tax cuts for the rich extended.

It’s still Ronald Reagan’s world, at least when it comes to taxes. The Sturm und Drang over tax cuts for the rich obscured the Democrats’ massive capitulation on tax cuts for everyone else. Even the party’s liberals had accepted Obama’s argument that the cuts for incomes under $250,000—which include the bulk of the Bush tax cuts—should be permanently extended. Another way of saying that is, Democrats had agreed the Clinton-era tax rates were too high. If you put it to most Democrats that way, they’d protest vigorously. The economy boomed under Clinton, and the Democrats are proud of the efforts they made to balance the budget. But they’re so terrified of being accused of hiking taxes that they’ve conceded to the Bush tax rates for 98 percent of Americans.

We need tax reform, now more than ever. The result of this deal is going to be an even weirder tax code than we have now—and the one we have now is pretty weird. We’re extending old tax cuts and tax credits and adding new ones. Some may yet be extended further. Businesses won’t want to see the deductibility of investments expire, workers won’t want to see the payroll-tax cut expire, and the super-rich won’t want to see the tax exemption for estates up to $5 million expire. There are so many constituencies fighting for so many breaks that the only hope we’re going to have when we actually need to reduce the deficit—which isn’t yet, but will be soon—is to start from square one on the tax code.

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