The ugly reality of US tax cuts

To the rich the spoils. A Republican refusal to continue unemployment benefits for millions of unemployed Americans unless millionaires and billionaires got to keep  tax cuts has seen Obama compromise, and arguably outsmarted

A cartoon in one of the American newspapers over the weekend had a large Republican elephant dressed in a Santa suit and laden with a huge bag of goodies about to go down the wide fat chimney of a house marked “the rich”. Before his dissent he looked next door and announced to the house marked “the unemployed” that their chimney was much too tiny for him to fit down.

That brief drawing embodied the Republican view of politics America.

Having won the mid-term elections they are determined to bring down Obama and make sure millionaires and billionaires get tax breaks and to heck with the dirty filthy poor.

No sooner had the election results come in than the Republican hierarchy drew its line in the sand – no legislation…nada…nothing…will get done in this current session until the rich get an extension of their Bush era tax cuts. Obama caved.

Here he is with the bully pulpit his weapon and yet he failed to use it effectively to combat Republican naked self interest and disdain for the unemployed. Such a capitulation saw another two key campaign promises down the gurgler for Obama – ending the tax cuts for those earning more than $250,000 a year, and continuing the tax cuts for those below that figure.

Obama was unable to make his case that it was disgusting greedy politics on the part of the Republicans to hold hostage every piece of legislation – including the discriminatory ‘Don’t Ask Don’t Tell’ – until they got all the things they wanted including more and more and more money for those who don’t need any more.

Sure by giving the Republicans a two-year-extension on tax cuts for the rich Obama secured the tax cut extension for the middle class. Those on more than a million annually will get an extra $US104,000 a year which evidence shows they will save and not plough back into the economy to encourage job growth. Those on $US50-70,000 will get between $US1,000 and $1500 a year which they will spend on necessities and not save because they can’t afford to. Their spending will be contributing to job growth as the US staggers out of recession.

The unemployed will have a 13 month extension on their benefits – not two years like those with jobs – and critically for them, unemployment seems settled at about the 10% mark. Why Obama & Co. could not make it clear to Americans that had he left things as the Republicans had handed them over, that jobless rate would have been well over 16% by now…and climbing.

The tax showdown is a portent of things to come in the next two years of so-called bi-partisan politics Washington-style. It is theoretically a politics of compromise, but it is poles apart in tactics and a liberal President trying to lead a centrist country and keep his base support happy enough to tolerate compromise is potentially in for a most unhappy time.

Add to this one of the reasons Obama was elected in 2008. He is not a gut-reacting, shoot from the hip/lip, my-way-or-the-highway, blustering idiot. He is measured and intelligent with a history of conciliation and bridge building. Were he to change his spots he would not win in this environment either, especially given the strength some of the gutter dwellers have already displayed. It would take way more than the rest of his first term to match them swipe for swipe. Remember the ‘no drama Obama’?

There’s an interesting by-product of the great tax compromise. The two-year extension will expire as the 2012 Presidential election campaign is underway and by punting this issue forward into that arena he has given himself a clear-cut issue to present to Americans.

But will he be able to capitalize on it even then?

Before that is a prospect however, he is likely to face an immediate and open revolt from his party ideologues and grass roots base as Bill Clinton did when he compromised with Republicans over tax. Clinton did survive to fight another term. Obama has to muster almost super-human street smarts to avoid the damage promise-breaking on such a defining issue will do to his credibility, although the Democrats are hardly likely to consider an alternative to him running in 2012.

That said Obama couldn’t play chicken with Republicans on this core issue, and taking chicken off the menu in this White House will make some within the administration increasingly nervous while emboldening the Republicans.

But before writing off the guy completely, it pays to look at the alternatives.

What would have happened to the millions of unemployed had he refused to sign and their only financial aid – a meagre $US300 a week on average – was cut off just in time for Christmas? Standing his ground would have eventuated in tax hikes for all – including the middle class.

In his post-deal announcement Obama was candid about not liking the compromises, and framed the deal as one with a number of wins for the unemployed and the middle class. It is just that they are not permanent wins and the compromise will cost $US95 billion more thanks to paying off the well-off. The ‘wins’, including a one-year cut in payroll taxes which will trickle into workers’ pockets, are worth $US215…but the crippling deficit continues to rise.

The bottom line is the Bush tax cuts were never affordable in the US economy of the last ten years, and they are even less so now. Everyone knows it, but doesn’t want to say it least they lose their slice of the heavily borrowed pie, or perhaps more correctly, Peking Duck. The extension of these tax cuts can not be masked as the much needed tax reform no matter how they are politically manipulated.

And so tax continues to define the two parties within US politics. The Republicans have finessed that into single point, bumper-sticker slogans – “Democrats raise taxes”, and/or “Republicans fight for lower taxes”.

The Democrats haven’t quite got there yet. Their slogan is still too complicated.

Instead of it being “Republicans only care about the rich”, it tends to be “Democrats are for lower taxes for the middle class Americans who work hard and try to educate their families and make sure they have health insurance, while the Republicans don’t seem to care about this silent majority which is often too busy getting on with life to play politics and while the exit polls from the last election showed they don’t agree with tax cuts for those earning over $US250,000 there’s probably not much we can do about it quite just yet, so we had better concentrate on making sure those who have lost their jobs through no fault of their own but because of the disastrous state of the economy President Obama inherited, are not left completely destitute or without hope, and can see the change Obama promised, its just that right now change would be more useful in the form of actual coins in their pockets”.

That would not even fit the bumper of a 36-wheeler.

Avoiding playing politics at this stage of the game will cost Obama.

Yes he needs tangible results but his ‘enemy’ doesn’t.

Few would accuse him of not having spine, but he is beginning to run out of time for showing how much steel is in that spine. The ticking clock of re-election lurched forward on him some very expensive minutes thanks to the tax compromise, and it paid no heed of how unpalatable the alternatives would have been.

The fat Republican elephant in the Santa suit is no more bothered with the skinny chimneys of the unemployed.