Why would Obama support extending the Bush tax cuts now even though Democrats opposed them in 2001?

[BzaDem]

A lot of people ask that question here over the past few weeks. Looking at it superficially, it would seem that it would be hypocritical to switch positions in 10 years. Therefore, people come to the conclusion that Obama is secretly a right-winger/Manchurian candidate, chosen by the "powers that be," etc.

But aside from the conspiracy theories, there is actually a real policy reason why the calculus changed. The difference is: There's a huge difference between LOWERING rates for the poor/middle class when there's 6% unemployment, and RAISING rates for the poor/middle class when there's 10% unemployment.

The components of Bush's tax package for the poor and middle class (child tax credit, lowering the bottom bracket to 10%, etc.) were mostly SUPPORTED by Democrats in 2001. The reason they voted against the package in 2001 was because the negative effect on inequality of the wealthy tax cuts for 10 years outweighed the positive effect for the poor and middle class.

But now, in 2010, the calculus is different. We are in a liquidity trap (with 0% rates), with consumer demand collapsing and around 10% unemployment. Democrats have the same position on the INDIVIDUAL components as they did in 2001 -- for lowering taxes for the poor and middle class, but against lowering (and for raising) the tax cuts on the rich. The difference is that in this climate, Democrats judge the economic benefits for the poor and middle class to outweigh the drawbacks (i.e. the rich tax cuts).

Why did the drawbacks outweigh the benefits in 2001, but the benefits outweigh the drawbacks in 2010?

The economy. When we are in a liquidity trap, the absolute worst thing you can do for the poor and middle class is to take money away from them that they would otherwise SPEND. This is not supply-side economics -- supply-side economics is all about giving tax cuts to the rich, and businesses, so they will "create supply" and therefore jobs. That's absolute crap and there is no basis for it in the evidence. But that doesn't mean Keynesian economics (the idea that we need to create DEMAND in a horrible economy) is out the window -- Keynesian economics is still as true as it was in the 30s. We need to create demand, not take away demand by letting the tax cuts on the poor and middle class expire.

Once the economy gets better and is recovering, and we no longer have such a demand problem, THEN the policy calculus will revert back to what it is in 2001. In an improving economy (specifically an economic recovery in progress that can sustain itself without further Fed action), there is no longer an economic basis for "the benefits for the poor outweigh the drawbacks." Once again, as in 2001, the drawbacks (top 1% tax cuts) will outweigh the benefits.

[pnwmom]

1. K & R. n/t

[liberalmuse]

2. You know...

you kinda make sense. I think many of us are between a rock and a hard place since few can afford to have $400+ taxes added to what they are already paying in this nasty economy. President Obama did good. I teeter on the edge so many times with him, but the truth is, the guy is doing the best he can with the pile of sh*t that's been dumped on him.

[BzaDem]

5. Exactly. And for families with children, the amount is even greater than 400. It's over $3500 for a

family of 4 at the poverty line, mainly due to the expiration of the refundability and larger amount of the child tax credit/expiration of the extension of the earned income tax credit.

Is it a hostage situation? Sure it is. But if one's own grandma was being held hostage, they would probably back down from their "principled" stance on not negotiating with hostage takers.

[TheKentuckian]

3. The tax cuts will not produce demand in line with the investment. The money goes to the top 20%

The cuts didn't work in 2002, 2005, 2006, 2008, today, and won't work tomorrow.

No value is created and your multiplier effect is low with an existing high debt load as opposed to running a surplus in the boom years.

I don't see it. Especially when the people who most need the help and who are most likely to spend it on a variety of things from all manner of goods and services, to staying in homes, to making good on loans, to reducing reliance on public assistance and mostly greasing the palms of the top 20% of earners and giving token relief to the tune of less than lunch money every week to the masses.

Tax relief for the middle class is misleading and depends heavily on rebranding the upper class as the middle so they can get their beaks wet and put it on the tab of the vast majority.

All these hysterics is not about a few bucks to a grand on the high side spread out over a year for most people. Nobody is feeding their family or working out daycare on these few dollars and for those getting more than a few, it ain't the grocery money either.

This is all piggy bullshit and spinning to sell a failed formula for prosperity they are going with in the name of "doing something".

Some middle class families face a tax increase of 3,081 in these tough economic times!

Meanwhile, our dear "Joe Sixpack" is pulling down a couple hundred grand a year. Boo fucking hoo!

"Joe" is doing way better than most, no matter where "Joe" lives in this country. "Joe" won't be eating ramen or putting off dental work, or taking a payday loan to pay daycare one more week in hopes that something will happen so he can keep his barely adequate job.

[BzaDem]

8. "Tax relief for the middle class is misleading and depends heavily on rebranding the upper class

as middle"

But if tax cuts were to expire, a family of 4 at the poverty line would lose 2k from the expiration of the refundability and expansion of the child tax credit, and over 1k from the expiration of the expansion of the earned income tax credit. So it's not this only benefits people slightly below 250k -- it benefits people tremendously who make very little.

Thats a HUGE amount of money that the family of 4 at poverty was planning on getting, but now no longer will be able to spend and create demand. It will affect demand tremendously, at a time when demand very low. It's not a few dollars at all.

[leftstreet]

4. How much $$ will this put in the pocket of the average peon?

:shrug:

[BzaDem]

6. For a family of 4 at the poverty line, the deal prevents their tax bill from going up around $3500.

$2000 of that comes by extending the refundability and doubling of the child tax credit, and $1000 of that comes from extending the expansion of the earned income tax credit.

[leftstreet]

7. So they don't get any actual dough. They just won't be taxed more?

Is that correct?

[BzaDem]

10. Yes. That is the point.

Very few people under this deal will actually get MORE dough. (The payroll tax holiday adds some dough to some people.)

The main point of this deal is to prevent taxes from going UP (thousands for a family of 4 at poverty for example), not to allow them to go DOWN.

[OHdem10]

9. He does not support them. In a sense he was over a barrel

and in order to meet the deadline and get the tax cuts for the
Middle Class he had to accept the GOP wish for Tax cuts for
the wealthy.

Obama had determined he would not let the tax cuts expire
because of the danger of falling back into recession.
This places him in a time constraint. The GOP know he
will not let the tax cuts expire. They take advantage
of this by not blinking.

[TeaBagsAreForCups]

11. enthusiastically k/r !

[tedbear]

12. Instead of tax cut deal

If the Republicans will noT go along with the u/e extension without a wealthy tax cut, WHY NOT JUST PLACE ALL THE UNEMPLOYED ON A "WELFARE TYPE CHECK" OR SOME SUCH COMPENSATION THAT WOULDN'T HAVE TO BE VOTED ON BY THE GREEDMONGERS?

[BzaDem]

13. Because Obama can't legislate by fiat. There is no new compenation that wouldn't have to be voted

upon by Congress.

[tedbear]

14. Welfare

If the people eligible for u/e are cut off they will qualify for welfare but w/o something legis. wise I suppose they couldn't live on welfare benefits, I mean not easily. That is going to happen w/o the extension though.