Reject the Deal
by Jeffrey Sachs
The White House and Senate have agreed to make the Bush tax cuts
permanent for 99 percent of households, starving the federal government
of funds. Even Mitt Romney could never have accomplished for the
Republicans what Obama has just done for them. The Democrats in the
Senate would have soundly rejected the plan if the Republicans had put
There has been a special absurdity to the entire negotiating process.
Obama has insisted that his top aim is to protect Bush's tax cuts for 98
percent of Americans. In the process he has lost sight of the even more
basic need to protect the long-term finances of the federal government.
We have been subjected to a White House negotiating process that
violates every standard of rationality and transparency. The public
never once saw an integrated budget proposal that showed the
quantitative and qualitative implications of various policy options. The
public has not been told that yesterday's agreement threatens the
financing of crucial programs for education, job training,
infrastructure, environment, energy, science and technology, health
care, nutrition, and the poor for years to come.
Here are the simple facts. Government spending today is around 23
percent of Gross Domestic Product, including 13 percent for mandatory
transfer programs (Social Security, Medicare, food stamps, veterans
benefits, military retirement, and others), 2 percent for interest, 4.5
percent for the military, and 3.5 for civilian programs. Taxes are
around 16 percent of GDP, but would probably produce around 17-18
percent of GDP in a more robust economy.
Allowing the Bush tax cuts to expire today would have raised tax
collections by around 2.5 percent of GDP, to around 21 percent of GDP by
the end of the decade, thereby allowing the government to pay its bills
assuming that the useless wars are ended and the bloated Pentagon budget
is brought under control. The Obama-Senate plan will instead keep taxes
at around 18 percent of GDP. The CBO will soon "score" the new tax plan;
Democrats will be shocked at what the White House and Senate have given
Whatever the precise numbers, the White House unilaterally and
permanently gave away more than 2 percent of GDP in net revenues, all in
the name of symbolically "taxing the rich" and "protecting the middle
class." The pending agreement would raise taxes very slightly on the top
1 percent of households, perhaps by 0.3 percent of GDP, while making
permanent well over 2 percent of GDP in Bush tax cuts.
Many people will say, "Yes, but why tax the middle class to collect more
revenues? Why not tax the rich even more to get to 21 percent of GDP?"
There are two answers. First, the pre-Bush tax schedule was in fact
adequate. It was the schedule of the Clinton years that supported
balanced budgets and a reasonably healthy macro-economy.
Second, yesterday's deal if approved by the House will make it
impossible to get to 21 percent of GDP under any alternative scenario,
and perhaps even to 19 percent. The Republicans will now block any
attempt to raise revenues as a share of GDP and the White House will
have no leverage. Obama is now a lame duck even before being sworn in
for his second term, and he will have brought the Democrats down with him.
The White House should have put forward its own tax plan with adequate
overall revenues. It could have told Congress to adopt the alternative
plan or simply accept the expiration of the Bush tax cuts. That was the
time for negotiating leverage. Instead, the White House gave up the
revenues permanently and without a fight.
With a revenue baseline of around 18 percent of GDP, there will be years
of harsh spending cuts ahead. What will they be? Medicaid? Food Stamps?
Roads? Water? Renewable energy? Education? Pre-School? Environment? It
will probably be "All of the above."
Obama said yesterday that future deficit cuts must be "balanced" between
tax increases and spending cuts. But what will be his leverage to pass
tax increases that he didn't secure even when he had them in his pocket?
Why did he do it and why has the Senate gone along? The core reason is
that Washington has become all politics and no policy. Obama's game plan
was to get reelected (in part by promising an extension of the Bush tax
cuts for nearly everybody) without thinking of what to do after that.
It's policy by improvisation.
There is still time to resist this lousy deal. The House Democrats
should try to vote it down today. If such a last-minute action is
successful, the Bush tax cuts would end, and a new possibility for sound
public finances would suddenly open.
If the deal passes, it will be a sad day for the Democratic Congressmen
and Senators who really care. They've been sold out, and with no Plan B.
It will be sadder still for the American people. The Federal Government
is being dangerously weakened in its capacity to help America address
the economic, environmental, and social challenges of the 21st century.