Is the Agreement to Extend the Bush Tax Cuts in Trouble?

There are new reasons to wonder today, which means that there are new questions about the outlook for any economic stimulus effect that the markets are expecting since the tax deal news hit the wires earlier this week.

On Tuesday, the White House and Republicans agreed in principle to maintain the tax breaks enacted a decade ago. Without a new vote, that legislation is due to expire at the end of the year, effectively delivering a tax hike at a time when economic growth is sluggish. But what was blessed by the President and the Republicans in theory must now navigate the realities of congressional politics, a realm where Democrats are reportedly fuming that Obama signed off on the deal that extends cuts to all Americans, including the wealthy.

“I’m not sure this bill can pass in this form in the House of Representatives,” Rep. Chris Van Hollen (D-Md.), told MSNBC yesterday via The Hill. Van Hollen is a liaison between House Democrats, the White House and the Senate. According to The Hill: “Van Hollen said Democrats were stunned that Obama agreed to set the estate tax at 35 percent and apply it only to inheritances over $5 million.” Van Hollen confessed that “This provision makes it very, very difficult for me to support it in its current form.”

Van Hollen is hardly the only Democrat to voice frustration with the idea of extending the Bush tax across the board. “There is a substantial amount of dissatisfaction with the deal that was cut,” Rep. Jim McDermott (D-Wa.) said yesterday, the New York Times reports. “The Democratic caucus put itself on notice that it would not vote for tax cuts for the wealthy because we can’t afford them and because they are not needed, and that’s the point one Democrat after another is making.”

Another headwind for the tax deal is the news that the co-chairmen of the President’s deficit commission will reportedly warn the White House that an extension of the Bush tax cuts doesn’t raise the national debt. “I am deeply disappointed that we have this short-term deal and it’s not linked,” co-chairman Bowles said yesterday. “It must be absolutely linked to long-term fiscal restraint.”

Worrying about the tax cuts’ impact on the nation’s finances goes far beyond Simpson and Bowles. As the AP reports:

The worry in the markets, echoed by the credit-ratings agency Moody’s Investor Services, is that the tax-cut extension could add about $4 trillion to the U.S. deficit over the next 10 years. Bond investors see no credible plan to get a grip on that deficit – especially since the government will be split for the next two years, with Republicans in control of the House and Democrats in control of the Senate and the White House.

“The world in which investors took solace in lowly yields on account of sovereign debt crises in the eurozone and fears over the health of global recovery has suddenly changed after agreement to keep tax cuts in place,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

The White House is fighting back with its own pointed rhetoric. The President’s economic adviser Larry Summers warned that “if they don’t pass this bill in the next couple of weeks, it would materially increase the risk the economy would stall out and we would have a double dip.”

But one vocal Democrat—Rep. Barney Frank, chairman of the House Financial Services Committee—announced: “No, I won’t vote for it. I don’t think that I should be coerced.” Is Frank worried that the risk of a new recession is higher if the tax cuts aren’t extended. Nope. “I do not believe that raising the marginal rate from 36 to 39 percent on hundreds-of-thousands of dollars is going to affect their spending patterns,” he said. Frank did predict, however, that the bill would pass, despite his opposition.

The irony in the Democratic opposition, as LA Times’s columnist Andrew Malcom opines, is that “if keeping more of their own money [by way of extending the tax cuts] does prompt American consumers to feel better and spend more, then the Republican tax plan will have saved not only the lagging economy but the Democrats’ bacon come 2012.”

But if there’s confusion about the politics of the proposed tax cuts, some of the blame must go to the President, who seems to be of two minds about the deal that he supports…sort of. “I’m as opposed to the high-end tax cuts today as I’ve been for years,” Obama said yesterday. “In the long run, we simply can’t afford them. And when they expire in two years, I will fight to end them.” The President, it seems, was against his own tax cut deal before he was for it.

Indeed, Obama has also been the strongest advocate for extending the tax cuts, even if he argues against it. Letting the tax cuts expire for the middle class would “cost our economy nearly a million jobs,” the President explained. “All of this would have been damaging to those individual families. It would have been profoundly damaging to the economy, as well, at a time when, frankly, the economy is growing but we still have very high unemployment.”

On that point, at least, there is no disagreement.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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