Why Obama's Tax Deal May Be an Even Bigger Disaster Than You Think

If our politics weren’t tainted by a unceasing barrage of innumerate right-wing demogoguery on taxes and public spending, then a temporary tax cut would be just that and the deal Obama cut with the GOP last week would be, as the president insisted, a pretty good one on balance.

But as it stands, the package that has outraged many progressives -- and not a few conservatives -- is a baited trap, a Trojan Horse for the "entitlement" cutting crowd that could lead to disaster for working families over the long haul.

It's true at face value that the Republicans supporting the deal are guilty of rank hypocrisy. After years screaming that we face a looming fiscal crisis that will doom the nation in short order, Republicans won the House on a pledge to repeal the Democrats’ health care reforms, a move that would add $455 billion more to the federal deficit over the next decade (PDF) and before even taking the Speaker’s gavel, they held benefits for the long-term unemployed hostage in exchange for a tax deal that would add another $854 billion in red ink over that same period.

Progressives have been appalled, largely by what they view as the administration’s easy “capitulation” to the GOP. But the truth is that, on its merits, the deal isn’t at all bad for the "Main Street" economy. 

Despite being the central point of contention, just 15 percent of the package’s total value (including the $57 billion cost of extending unemployment benefits) would go to cuts for the wealthiest taxpayers. Fifty-seven percent of the costs are for extending the “middle class” tax cuts -- a Democratic priority. The package also includes a payroll tax holiday next year, which is an effective 2 percent pay-raise for working people -- people who will spend that money when consumer demand is at a low. There are also tax credits for working families, and for businesses that invest in the American economy in 2011. 

According to the nonpartisan Center for Budget and Policy Priorities, the payroll tax holiday and working families credits alone will keep 2 million people out of poverty. And an analysis by the Center for American Progress estimates that despite its flaws, the deal will create or save 2.2 million jobs.   

With so much in the package for Obama, this leads to the question of why the deal has garnered so much support among a Republican caucus that's made no secret of its desire to sabotage his presidency. 

The answer is that they’re playing the long-game, and are confident that two years from now, during the heat of a presidential election, they will once again be able to extend “temporary” tax cuts without effective opposition from Democrats, and that those lower rates will cut deeply into the federal government’s revenues, forcing painful cuts and ultimately advancing their overriding wish to shrink government down so it can be drowned in a bathtub.

Consider the latest wrangling over the Bush tax-cuts for high-earners. Democrats had popular opinion on their side, but were unable to carry the fight to the GOP and let the “temporary” relief for millionaires expire. 

As Nancy Altman, co-director of Social Security Works, put it, “Given [law-makers'] unwillingness to raise taxes by less than a nickel on every dollar earned over $1 million, I find it unfathomable that a more conservative Congress, in two years, in an election year, will increase the payroll tax by 2 percent on the very first dollar, and every other dollar up to the cap, earned by virtually every single worker in the country.” 

Recent history suggests she’s right, and conservatives are quite open in acknowledging it. When Howard Kurtz of the Daily Beast asked Bush’s former communications director, Dan Bartlett, about the “temporary” tax cuts they passed in 2001 and 2003, the GOP strategist openly gloated about the successful “trap” the Bushies had set for the Democrats.