Tax Cut Compromise a Costly "Deal"

The Senate began debate late Thursday on the tax cut compromise hammered out by some lawmakers and President Obama. The debate began even as House Democrats vowed to prevent bringing the current version of the deal to the House floor. While the deal is still being negotiated, the main components would extend the 2001/2003 tax cuts for two years, offer a payroll tax holiday for one year, lower the estate tax, extend unemployment benefits, and offer a series of individual and business tax breaks. The plan now is estimated to cost $858 billion (including $56 billion for unemployment); none of it is offset by cuts elsewhere. By comparison, that figure is about the same as the 2009 stimulus law, which is projected to cost $814 billion over ten years as of August. The lack of offsets is particularly galling in light of last week's bipartisan Fiscal Commission report that laid out the bleak budget situation and offered a solid plan for improving the dire fiscal outlook. The tax compromise is a "deal" that doesn't deal with fiscal reality.

What is actually even worse than not offsetting this package would be continuing into the future this package unoffset. CRFB has estimated what the 10 year costs of extending unemployment for an additional year on top of this package, a ten year--as opposed to a two year--extension of the 2001/2003 tax cuts, AMT patch and Estate Tax and a ten year--as opposed to a one year--payroll tax holiday at about $6 trillion. This would be an unconscionable amount of money and so we urge lawmakers to keep this extension temporary.

CRFB highlighted the dichotomy between the tax proposal and the Fiscal Commission plan in a release. In the statement we also called for the deal to be paired with a serious long-term deficit reduction plan. We are very encouraged by reports that a bipartisan group of 20 senators will attempt to attach a non-binding resolution to the tax bill that will call for negotiations next year on a deficit-reduction plan. While symbolic, this is a move the right direction. 

We are also happy to hear reports that President Obama is planning a major tax reform push next year. The growing, bipartisan movement for tax reform that simplifies the tax code and broadens the base will be critical to confronting our debt (see our ideas for reforming tax expenditures here). A deficit plan and fundamental tax reform will be even more important if the tax cut deal is passed. A fiscal plan and comprehensive tax reform are real deals.