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Tax Compromise: Good, Bad And Ugly

When the president says this compromise satisfies no one, he really isn't kidding. But my question is whether it makes for good policy in the long run. My gut and my head say it doesn't, though it does have some extremely beneficial

When the president says this compromise satisfies no one, he really isn't kidding. But my question is whether it makes for good policy in the long run. My gut and my head say it doesn't, though it does have some extremely beneficial provisions.

The Good

Child tax credit - In general, refundable tax credits are far more valuable than deductions or even rate reductions. The Child Tax Credit gives eligible taxpayers (low income families) a refundable tax credit of $1,000 per child. That's a significant break for families who most need it. It's estimated to benefit 10.5 million families with 18 million children.

College Tuition Tax Credits - The Recovery Act included refundable tax credits of up to $2,500 to assist with college tuition, books and costs. This deal extends those, and makes college affordable for families and students who couldn't otherwise afford it.

Unemployment Insurance Extension - Although it doesn't help the 99ers at all under the current framework, it does give some breathing room to the unemployed and puts the burden on business to let go of the trillions they're sitting on for job creation. Since a key GOP talking point is "tax cuts create jobs", 13 months should be more than enough time for that to play out, even though it hasn't for the past 10 years.

Business Investment Tax Breaks - Allowing businesses to expense 100% of their capital investments in one year is a huge jump start to job creation. This is a win-win.

The Bad

2% Payroll Tax Holiday - On its face, it looks great. But if you scratch under the surface, it's really not. The Republicans have long wanted to reduce the payroll tax in order to strip Social Security of its security. Shifting $120 billion from paychecks to a government budget item leaves that piece ripe for cutting when the deficit hawks come to town. At the same time, no one will want to let that provision expire since it's of such immediate benefit.

More importantly, it's bad policy. It's the equivalent of telling employees they shouldn't contribute to 401k plans or save for retirement in hard times, and is basically a way of eroding Social Security's rock-solid financial standing. We're at a point where the taxable wage base should be expanding. If they're unwilling to do that to cover the shortfall from this payroll tax holiday, then it's going to put the whole program on shaky ground.

The Ugly

Extending lower tax rates for high income taxpayers This sort of goes without saying. It's the big bonus for them stooping down and agreeing to extend unemployment. It's bad policy. It reinforces the idea that "expiration" is a myth" and gives political ammunition where none should be allowed. Extending them for two years on the premise that Democrats can run on their expiry is foolish, given the fact that Democrats aren't letting them expire now.

Temporal rate cuts create a situation for business and industry where sitting on large amounts of cash, maintaining austere hiring practices and continuing to make the specious claim that 'uncertainty' leaves businesses with no option will continue to erode all efforts at legislation and governance, which is, of course, exactly what conservatives want. Extensions of temporary rates are far better political ammunition for conservatives. Permanence would kill it as a political talking point.

Estate Tax Concessions The 35% estate tax rate with a threshold of $5 million is really generous, but that's not really the worst of it. That could be acceptable, except that it is once again a temporary and fleeting thing. That means it will come up again in the middle of the 2012 election at a time where the money boys will be looking for the friendliest party to their cause.

Alternatives

There aren't many that don't involve some real sacrifice. Look at the list of the good. There are some very real, significant, tangible benefits to lower and middle income families there. It would be a blow to the economy and to those families to see their tax bill rise and lose those refundable credits. Unemployed people need the unemployment benefits to survive.

Still, overall this is bad policy, in my opinion. If the clock were to run out on the current tax provisions, 2011 could be a year for real tax reform which is really where we should be going. It's badly needed.

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