Tuesday, December 07, 2010

The Tax Deal

From all of the caterwauling on the left you would have assumed that the President has been pronounced a heretic.   I am not entirely a fan of this compromise.  There are some very good things in the proposal - from my perspective the creation of an estate tax solution which avoids both the confiscatory notions of the left and the fantasies of complete exemption on the right is close to being perfect.  They move to a $5 million limit on estates ($10 million for couples) based on a 35% rate.   While I can certainly make a case for ending the estate tax entirely -this seems like a reasonable place to have policy land.  

I also believe that the acceptance of the rates in the 2001 Tax Act for all taxpayers is an interim solution. Not perfect but about right.   In the long term we need to simplify the entire income tax system and lower rates.  That means broadening the base.  We got some good ideas from the Bowles Simpson proposal but if this gets us off the bash the rich rhetoric and toward a saner discussion of tax reform, then it is a good idea.

I am troubled by the temporary tax holiday on FICA, dropping by 2% the rates for one year.  It is a pretty good stimulus for wage earners but the condition of the Social Security "trust fund" is perilous.  And this simply adds to that problem.

But I am very troubled by the thirteen month extension of unemployment benefits.   I am not sure what an appropriate length for unemployment benefits should be.  But it should not be close to two years.  The tradeoff here is simple.  Make the benefits too generous and you dampen the incentives for seeking employment.  Make them too small and people in real transitions will be faced with calamity.  I do not think they hit the right balance here.

What gives me hope on this is two things.  First, if we can assume that Paul Krugman is wrong (and that is not a hard thing to assume) that there are "no deficit hawks in Congress" and that the new majority will take their role seriously when they convene the next congress, this interim deal is fine.  Second, if the deal causes the far left that has had far too much say in our national policies to go into frenzy, so much the better.  Their class bating rhetoric has worked for too long and finally their bluff was called.  I say let them whimper.

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