Colin Barr

Following the money in banking, economics, and Washington

Rich make out in tax deal

December 7, 2010: 11:57 AM ET

This week's tax-cut compromise will trim everyone's taxes. But surprise, surprise, it's an especially rich deal for the rich.

The Obama administration says the deal will help working families by cutting workers' payroll tax contributions by almost a third.

Win some, lose some, some rained out

That's a victory for the White House because it postpones an effective tax hike that would have kicked in next year with the expiration of Obama's Making Work Pay credit, and delivers fiscal stimulus – not exactly the Republicans' favorite cause -- to an economy suffering with weak demand.

"The payroll tax holiday is the most important new stimulus in there," said Chuck Marr, the director of federal tax policy at the left-leaning Center on Budget and Policy Priorities. "Every nurse would have had a pay cut next year, and this is going to make that up and more."

The package also extends unemployment insurance and some other low-income tax credits, such as the child tax credit. All those policies will help ease the impact of a weak economy and a poor job market on lower-income people, Marr said, and boost consumer spending by keeping more money in the pockets of those most likely to spend it.

But naturally, Obama had to give something to get what he wanted, and the package laid out by the White House Monday is chock full of goodies for high earners.

The framework announced Monday evening by the White House would extend the Bush tax cuts for two years, preserving lower rates for those in the highest tax brackets.

It's no surprise that the Obama administration had to back off its desire to raise taxes for those reporting the highest incomes, given the need to bring congressional Republicans on board.

But the extension of the Bush tax cuts isn't the only sop to the high-income class. The framework announced Monday also:

  • Leaves in place the 15% capital gains rate on investment income. Obama had wanted to let that rate rise to 20% for those making more than $250,000 a year.
  • Puts the estate tax at 35%, its lowest rate since 1931 (not counting this year, when it was repealed). The top estate tax rate earlier in this decade ranged between 45% and 55%. The deal also exempts the first $5 million of assets from taxation -- much more than before.
  • Gives high earners big breaks on the payroll tax.
  • Allows the private equity type to carry on with their lucrative carried interest loophole. (Some would note that this wasn't a prominent item on the table in the latest go-round anyway, but it is worth mentioning as a shining example of the sorts of broken policies that Washington never has the good sense to deal with.)

All these cuts add up, needless to say, for a federal budget already straining to the tune of trillion-dollar-plus annual deficits. Policy analysts at MF Global put the cost of the tax package at around $1 trillion.

But that is the current price, with Republicans in the ascendancy in Congress, of getting a fiscal stimulus passed. The Democrats could have pushed through a payroll tax cut long ago, but "they missed their chance and you can't go back in time," said Marr.

He says the tradeoffs Obama made to extend tax cuts to lower-income families are predictable but no less frustrating for party loyalists.

Peter Cohan, a management consultant and author of investment books, summed up the frustration of those who see the tax package as the latest in a long line of failures to come to grips with America's true economic problems.

"The latest Obama compromise reinforces the feeling that we are living through George W. Bush's third term," he writes at his blog.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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