Why I’ve Changed My Mind About The Obama/Republican Tax Compromise

Five days ago, I tentatively supported the The Obama/Republican Tax Compromise,

In other words, the choice is to take this deal or let the Bush tax cuts expire in the middle of a recession, when we desperately need to stimulate the economy. On the merits, it’s far from a perfect deal, but it moves the ball more our way than the Left’s way and I think Republicans in the Senate should take it.

This was never a great deal, but my thinking was that the benefits of stimulating the economy outweighed the significant negatives,

How smart is it for us to borrow money from the Chinese in order to pay people NOT TO WORK for 3 years? It’s not. It’s actually pretty dumb.

Then there’s the death tax. Currently, it’s zero. Under this deal it goes up to 35%. So, yes, we will be raising taxes in a recession — and we won’t be getting a permanent deal on the Bush tax cuts either.

So, the criticisms being leveled at the bill by Jim DeMint and the Club for Growth are very valid. If you’re a conservative who doesn’t like this bill, in all honesty, you have good reasons not to like it.

Since then, this deal has only gotten less attractive. For one thing, Obama has signaled that he intends to try to make the Social Security tax cut in this deal permanent,

One of those fights will be over the very thing that some Democrats are angry about: The two-year extension of George W. Bush-era tax cuts for the nation’s wealthiest Americans.

“When they expire in two years, I will fight to end them,” Obama said. “Just as I suspect the Republican Party may fight to end the middle-class tax cuts that I’ve championed and that they’ve opposed.”

A one time 2 percent cut in the Social Security tax rate in the middle of a recession? That may not be the worst idea in the world. It does put money in people’s pockets and it could stimulate the economy. On the other hand, doing it long-term? That’s a terrible idea, although you’d never know it from hearing liberals lie about the program. Here’s the spin you get,

The payroll tax cut has absolutely no effect on the solvency of Social Security,” said White House economic adviser Jason Furman.

Social Security has accumulated a $2.5 trillion trust fund since the 1980s. But the government has borrowed that money to pay for other programs. The Treasury Department has issued special bonds to Social Security, guaranteeing the money will be repaid, with interest.

As aging baby boomers start to retire and strain the system, advocates worry about future benefit cuts. This year, for the first time since the 1980s, Social Security will pay out more in benefits than it collects in payroll taxes. Without changes, Social Security’s trust funds will run out of money by 2037, according to the trustees who oversee the program.

You know how much real money is in the Social Security “trust fund?” Not one thin dime. But, what about that 2.5 trillion dollars in “special bonds?” Well, those are VERY SPECIAL bonds that are more commonly referred to as “IOUs.” In other words, all of that money has been spent, but the government has issued bonds that will be paid off by…..you guessed it, the payroll tax that we’re about to cut just as the program is starting to go into the red.

So, why do this? Because the Democrats have a lot of constituents who soak up massive amounts of government services, but already pay no income taxes. That means the only way to help these people leech even more off of the productive people in this country is to either give them EVEN MORE benefits or to cut the very limited amount of taxes they already pay — which will then, as surely as night follows day, lead to calls to raise taxes on the rich to make up for the revenue lost. We have a tax system that’s already far too progressive as is, so this isn’t good for the economic health of the country.

Additionally, this is scarier news than many people may realize,

Moody’s warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody’s analyst Steven Hess said in a report sent late on Sunday.

It’s worth noting that in February of this year, Timothy Geither was saying the loss of our AAA rating could NEVER happen,

So on THIS WEEK, during our exclusive interview with Treasury Secretary Timothy Geithner, I asked if the U.S. is at risk of losing its triple-A bond rating.

He responded bluntly: “Absolutely not. And that will never happen to this country.”

“When people were most worried about the stability of the world, they still found safety in the Treasuries and the dollar,” he continued. “That is a very, very important sign of basic confidence in our capacity as a country to work together to fix these problems.”

How long until “never” gets here? It could be as little as 12-18 months if this deal goes through — and the consequences could be devastating. The cost of servicing our debt would increase dramatically and it would significantly reduce the amount of foreign investment coming into the United States.

Would losing the Bush tax cuts hurt? You bet. But, would losing those tax cuts hurt more than losing our AAA rating? Not even close.

This bill is popular with the public and probably headed towards passage, but the potential long term consequences of losing our AAA rating, lower Social Security taxes, a higher estate tax, and not paying for the unemployment extension tilt the scales against this deal, even if it’s the best one we can get. There are some significant benefits to this deal and so it’s understandable that many Republicans will continue to support it, but I don’t think I can continue to be one of them.

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