Who Won from the Tax Deal?

Update: The White House recently stated that the tax cut deal would create or save 2.2 million jobs, which would bring the budgetary cost to $390,000 per job, right in the middle of the cost per job range we estimated below.

Over the last few days, politicians and pundits have been arguing over who got the better deal in the recently-forged tax cut agreement. A graph which the White House has been circulating around the hill (version below is via Ezra Klein) claims that the deal is a big Democratic victory. According to this argument, the Democratic "gets" --  the payroll tax holiday, unemployment benefits, refundable tax credits, etc -- have about twice the cost of the Republican "gets":

Others on the left have pointed out that, even though the pieces the Democrats wanted are larger, the Republican gets-- higher income rate cuts and estate tax cuts -- are far more likely to be permanent and therefore far more expensive. Moreover, many of the Democratic gets -- including corporate investment incentive and payroll tax cuts -- aren't all that offensive to Republicans in the first place.

Our view: this political analysis misses the point. Horse trading is the easiest form of political compromise. The agreement has something for everyone. Anyone who benefited from the Bush tax cuts before (which is almost everyone) will continue to benefit from them for the next couple years. All workers will receive a 2 percent cut in their payroll tax. The unemployed will receive another 13 months of unemployment benefits. Businesses will receive a new set of tax breaks. And the very wealthy get an estate tax cut, at least if they die in the next two years.

But if the objective is to end the uncertainty surrounding tax policy and keep rates low, it didn’t really do that since 24 months from now we go through this exercise again. And if it is to provide the economy with another round of stimulus, it didn’t do that particularly well. Surely the legislation will provide the economy with some measure of economic stimulus -- but the "bang for buck" is quite low relative to the alternatives. Using some of CBO’s multipliers, we estimate very roughly that the package could create between 1.5 and 4.3 million jobs. Given the astounding $858 billion price tag, that means we’d be paying between $200,000 and $550,000 per job created. (Note that excluding the 2001/2003 tax cuts, this would drop to between $100,000 and $250,000 per job).

^{Note: job creation calculated using CBO multipliers from table 1 and CBO estimates from table 4 of the following: https://www.cbo.gov/ftpdocs/118xx/doc11874/09-28-EconomicOutlook_Testimony.pdf. Table 1 multipliers were generated, originally, at the beginning of 2010 and will surely differ due to the time lapse. Moreover, estimates above do not account for any types of interactions and treat the "expensing" provision slightly differently than CBO would. All numbers are rounded.} 

In arguing against renewing the upper income tax cuts, only a month ago, President Obama proclaimed that making the upper income tax cuts permanent would "be digging ourselves into an even deeper fiscal hole and passing the burden on to our children." We agree with this concern, which is why we are so dismayed to see a plan which digs the hole much, much deeper, and is not combined with a gradual debt reduction plan.

Asking what the Democrats got and what the Republicans got is the wrong question. We should be asking what the American people and future generations got. The answer: more debt.