How the Obama-GOP Debt Deal (aka “Tax Cuts”) Actually Will Work in the Real World

Let me preface this with a couple of things.   One) I have become extremely annoyed that somehow the notion that “tax cuts” balance out “spending” has taken root in our political psyche.   There’s this weird idea out there, and it’s a popular one, that cutting revenue (and thus reducing the balance sheet) is somehow totally different than increasing spending (and thus reducing the balance sheet).  Two) That was really the only thing I wanted to preface this with.

It is absurd to think tax cuts and spending aren’t the same thing, and have the same effect, but it is the prevailing view of a large segment of the U.S. voting populace.   The paper-thin philosophical rationalization for this concept is that “it’s the people’s money” and therefore cutting taxes is seen as a good thing, giving the people their money, regardless if it is accompanied by spending cuts.  Long-term debt rarely enteres the conversation.  Recently we saw what happend when long-term debt was made a focus…it was very quickly forgotten once the money was on the table.

Cutting taxes is politically easy.  Cutting spending much harder.    Increasing taxes is politically hard.  Increasing spending has a slight political cost, but the bribe usually shuts people up (for example: how many Tea Partiers are complaining about the Bush’s unfunded Med D expansion?  I’ve yet to see a prominent one).

So the end result of thirty years of thinking that “tax cuts” are the same as “spending cuts” is a roughly $13,000,000,000,000 debt that costs about $400,000,000,000/yr to maintain (note, that’s our “minimum interest payments”).

It’s funny, but when we talk about tax cuts, we talk about how individuals earn their money and should keep it.   We don’t want to punish the successful, after all.

However, when we talk about debt, we talk about it how much of it is apportioned to each and every American citizen (currently it’s at about $45,000/person).

It should come as no surprise to anyone reading this that the U.S. is currently in recession* and is spending waaay beyond her means. 

Hence, any additional tax cuts are all deficit spending.   When you don’t have enough money to pay the bills, bringing in less money doesn’t usually help you catch up**.

I found one Congressman who made this point, while standing against the deal…

“I strongly support extending tax cuts for middle-class families and ensuring no increased tax rates for 98 percent of Americans,” said U.S. Rep. Lloyd Doggett, D-Austin. “I do not favor incurring another trillion dollars in debt needed to provide another tax cut to the 2 percent of taxpayers who earn over $250,000 a year.

See, he hits the nail on the head.  In order to finance the tax cuts for everyone, everyone has to take on more debt.  That debt is shared equally.  Those tax cuts aren’t.

So how does the Obama/GOP Debt Expansion Deal look now?   How does it affect Americans of differing incomes?

Glad you asked, because that’s my big finish….

[based on this graph, and expanded with my own data analysis skillz…]

Graph on How Debt Deal Screw Half of Income Earners

As you can see, you have to make at least the median income to break even on this deal. By definition, half of workers don't meet that criteria.

It becomes fairly obvious, after you factor in the shared burden of our national debt incurred by this deal, that this was a pretty crappy compromise for most working people.   The “payroll tax holiday” is a only for a year, the tax cut on capital gains , upper incomes, and estates is for (at least) two.   

It gets really bad when your realize that in order for each top earners to keep their huge cuts, an average of 70 low income people are going to have to take a hit when it comes time to pay it back.

That hit is going to come in the next couple years, when it becomes obvious that the additional debt this deal adds to the last 10 years of this foolishness are going to require “belt tightening” by *everyone*.  And by *everyone* we mean people who work for a living and will have to continue working for a living until they reach, at least, the mandated retiredment age (which is now going to be at least two years later, ’cause you know, Rush has to get his cuts or we’ll be back the kind of economy we had under Clinton).

Ultimately I think this is a pretty shoddy deal.  There isn’t much in it that the Republicans didn’t want (Seriously, di you think they’d be the first Congress in the modern era to deny extension of unemployment when it’s at record highs?  Seriously, Obama?), and the idea of horse-trading Democratic spending for Republican tax cuts is a horrid deal for the workers themselves.

It has become largely apparent that Obama is a pragmatic centrist with leftist…shall we say…aspirations.    

This bodes well for his chances in 2012.

*It feels like one because of the unemployment rate, however, we aren’t technically in a recession anymore.  We’ve had like 8 consecutive quarters of growth.  2010 saw record corporate profits.   It’s just that they money is at the top, and staying there.  Ultimately this type of unbalanced society *will* topple, which is why I advocate against letting it get worse than it already is.  Human history illustrates this point again, and again, and telling ourselves we are inherently different and immune to such trivialities is a blind spot a mile wide.

**I’m  aware of Keynsian economic thinking (simple version: spend during a recession, tax during a boom), and generally agree with it….but we never get to that second part, as only one side thinks you *ever* have to recoup the losses, and they can’t seem to hold on to power for very long, nor make this exact same point in a coherent way.

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