With good reason, President Barack Obama is facing massive resistance within his own party to the tax cut compromise he struck with Republican leaders in Congress. On Thursday, the House Democratic caucus signaled its position loud and clear by voting against bringing the tax package to the floor for a vote unless it is revised. Obama gave away too many tax breaks to the country's richest households that do too little to stimulate the economy and add too much to the federal deficit. His deal will add about $900 billion to the national debt over two years. Once again everyone would get everything through reckless borrowing with no price to pay until years down the road. That is not acceptable. Here are ways to make the deal somewhat less offensive:
Set income limit on tax cuts: Obama capitulated to Republican demands that the Bush-era tax cuts be extended for all income earners for another two years, violating his campaign pledge that he would allow taxes to revert to Clinton-era rates on the wealthy. Obama had wanted to extend the tax cuts to couples earning less than $250,000 a year, but Republicans flatly rejected that and have stalled Senate business in a high-powered game of chicken. They even blocked a Senate vote that would have extended the tax cuts to couples with incomes of under $1 million. But Democrats should push again for a million-dollar limit. If Republicans continue to reject it, they will have to explain to their constituents why taxes went up for everyone because they refused to compromise on a modest rise in taxes for the nation's millionaires and billionaires.
Recalculate estate tax: Republicans despise estate taxes, or "death taxes" as they call them, which bring in revenue while reducing the social impact of inherited wealth. In 2009, the estate tax rate had been lowered to a maximum of 45 percent on estates valued at more than $3.5 million. That extremely generous filing threshold meant that fewer than 34,000 estates paid any federal estate taxes in 2009, down from 108,000 in 2001. After this year's suspension of the estate tax, though, levies are slated to return in 2011 to a maximum of 55 percent on estates of more than $1 million — something Republicans are desperate to avoid. The deal Obama struck with Republicans would lower estate taxes to a maximum of 35 percent with a $5 million exemption. But this is too generous. The rates in place in 2009 should be as far as Democrats go.
Impose income cap on payroll tax cut: The president and congressional Republicans have agreed to cut employee-side payroll taxes by 2 percent in 2011. This would essentially replace the expiring "Making Work Pay" tax credit — a $400 per taxpayer payment that phased out for individuals with incomes over $75,000. Without a payroll tax cut, middle-class Americans would experience a rise in taxes that could negatively impact the nascent economic recovery. But the payroll tax cut does not include an income cap as the tax credit did, resulting in another tax break for the wealthy that would damage the Social Security system's long-term solvency.
Rework energy tax breaks: In a completely backward move, part of the deal would extend tax breaks for corn ethanol while allowing tax incentives for clean energy to expire. Other than as another giveaway to lawmakers from farm states, it makes no sense to continue supporting corn ethanol. The fuel has dubious environmental benefits, with some studies finding that its production results in more greenhouse gas emissions than some fossil fuels. Meanwhile, wind energy, solar energy and energy-efficient batteries, the kinds of green energy that are truly environmentally advantageous, are the tax policy losers. Two federal programs providing incentives for such clean energy production are set to lapse. Those should be renewed while the corn ethanol tax breaks should end.
Certainly there are political realities that Obama must face when dealing with Republican intransigence. But congressional Democrats are rightly incensed by this give-away-the-store agreement. To make it somewhat more palatable, some additions and changes are essential. There is still time for honest brokers in Washington to overcome partisan obstructionists and work out a fairer agreement for all Americans.