The trouble with Obama's tax deal

The controversy has been bubbling for several days over President Obama's tax cut deal with Congressional Republicans.

As the Los Angeles Times puts it, this deal would "extend the Bush-era tax cuts for all taxpayers, keep jobless benefits flowing for 13 months and continue a series of tax breaks for the middle class." It would also include "a GOP-backed proposal to revamp the estate tax and lower Social Security payroll taxes by 2 percentage points to put more money into workers' pockets."

Listening to Obama defend this deal, I was impressed by his sincerity. I think the man really thinks he would be putting the economy and ordinary working people in danger if he fights the Republicans instead of compromising. But I think he's wrong.

For one thing, as Chuck Collins points out over at AlterNet, this deal tends to further concentrate wealth in the hands of the very richest US citizens, while taking money away from ordinary citizens. For another thing, as The Other 98% point out, we as a nation have a lot better uses for $700 billion than extending a tax break to the very wealthiest citizens. On top of all that, this "compromise" is bad politics for the president. Paul Krugman argues persuasively that this deal makes Obama's re-election in 2012 less likely.

Worst of all, as Dean Baker points out, the temporary two percent cut in Social Security included in the package could actually open the way to a right-wing attack on Social Security:

Democratic officeholders have had difficulty standing behind tax increases for the very richest people in the country. It is difficult to imagine them sticking their necks out for tax increases that will hit low and middle-income workers. In other words, it is very plausible that in the 2012 election, Democrats will feel the need to take the Republican pledge that they will never raise taxes. This means that the reduction in Social Security taxes may not be for just two years, it may be for the indefinite future.

In principle there is nothing wrong with financing a portion of Social Security benefits with money from general revenue. This was in fact the original intention of President Roosevelt when he designed the program. However, the fact is that the program has always been financed exclusively by the Social Security tax that is taken from workers’ wages. This makes the tax regressive, but it has the advantage that workers can quite legitimately say that they have paid for their benefits. This will be to some extent less true if a portion of the funding comes from general revenue rather than payroll taxes. In short, getting funding from general revenue opens a new line of attack on the program.

For all of these reasons, I hope that House Democrats are successful in their attempt to keep this plan from passing without serious renegotiation.