Tax Deal

The President has apparently reached a deal with Congressional Republicans on taxes. It is not clear the House Democrats have signed off, but I am not sure what realistic choice they have. Several parts of the deal were expected, and several were more of a surprise:

• plan extends the current tax rates for two years, both for the first $250,000 of income as well as above. This was expected, but is a huge loss for the President, who campaigned on not extending the tax rate for income above $250,000.
  
• extended unemployment insurance for claims lasting up to 99 weeks; that lapsed on Nov. 30, and I think most thought there would perhaps be 13 or 26 weeks of extension. This was not expected by many, and is a big win for the President.
• A payroll tax holiday for 2011 that will cut the employers Social Security payroll tax from 6.2% of wages up to $108,600, to 4.2%. This is a good idea that provides some needed stimulus in the most straightforward and quick way possible. This is more stimulus than many thought possible to get out of the Republicans.
  
• The creation of a tax on estates above $5 Million, at a rate of 35%. The estate tax had lapsed to 0 this year and would then kick back in at the old rate as part of President Bush's budget gimmickry to hide the cost of his tax policy. The rate of 0 was ridiculous, at least there is an estate tax again.
  
• Extension of some temporary tax cuts that were a part of the stimulus in 2009 for students and some working families.
  
• Expanded deductions for equipment and the like for businesses.

In the short run, we need more stimulus, and this is likely the best that could be gotten. In the long run, we need a radical transformation of our tax code and benefit side of government or our country will go bankrupt. The next two years won't do it, but the tax code we have just extended is a disaster for anyone who is interested in a balanced budget if it remains for the long term. Hopefully it will be replaced by a far simpler tax code along the lines suggested by the Deficit Commission, and our nation will have an adult conversation about how much spending we want and we will then develop a way to pay for it. It will be up to the President to focus the nation's attention on our long term fiscal situation and the deficit with his budget next year, and his powers of persuasion for the remainder of his time as President.