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The Realpolitik Behind the Tax Deal

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Behind any big historic political bargain there are usually big, bottom-line self interests. The case of the tax deal negotiated by the Democratic White House and Republican Leadership is no exception.

The president woke up the day after the fall election facing a serious political and economic dilemma. Back in 2008 Democrats won voters who reported that their personal economic situation was worse by a margin of 40 percent. In 2010 Democrats lost that same cohort of voters by 29 percent. From the standpoint of swing voters, the election was all about one thing: the voter's feelings that their own personal economic outlook was bleak.

To win reelection in 2012, the president had to do something to substantially improve economic growth in general and job creation in particular. That translated into the need for more economic stimulus to jump start sustained economic growth.

But the outcome of the election had also made the prospects that the new Congress would pass new economic stimulus remote. The Republicans who would control the House had no interest whatsoever in providing more economic stimulus. That's not mainly because they have a different economic philosophy. It's primarily because they have no political interest in near term economic recovery. It's just fine with them if the economy continues a slow slog, and the jobless rate is 8 percent or 9 percent in November 2012. After all, no president has been reelected in the last century when the unemployment rate was above 7.2 percent. Reagan was reelected in 1984 with a 7.2 percent unemployment rate, but at the time of the election, unemployment appeared to be -- and was -- in sharp decline.

And the smartest among the Republicans realize that left to itself, the economy will not reignite without additional stimulus. In fact, around the world over the last century -- after the five major recessions or depressions caused by the collapse of financial markets -- the jobless rates of the economies involved have never returned to pre-crash levels for at least five years.

Without a major infusion of more stimulus, the Obama administration saw very little to convince it that the U.S. economy would defy that history. The president's major bottom-line self interest: more stimulus to spur economic growth and job creation.

The Republican bottom-line self interest is very different. While the president's self interests align directly with those of the vast majority of the American people, the Republicans' self interests do not. Not only do they have a short term political interest in low levels of job creation. Their core constituency -- the tiny sliver of super-wealthy Americans -- has been completely insulated from the effects of the long term effects of the Great Recession. Corporate profits and Wall Street bonuses have now exceeded pre-recession levels. The stock market is back. And the fact that there are five job seekers for every available job drives down wages. In fact, it's all a "robber barron's dream."

Over the long run, a low wage economy with high unemployment is not sustainable and will do enormous damage even to the biggest corporations. But short term, greed tends to block out long term concerns, so the wealthy -- and their Republican Party -- aren't so much concerned about long term economic growth.

But they are very concerned about an immediate threat to their fortunes -- the prospect that the Bush tax cuts will expire at the end of this year, and they will be subject to the tax rates of the Clinton era. Let's recall that for the entire economy, the Clinton era -- when the rich paid those Clinton era tax rates -- was the most prosperous period in human history. But that doesn't matter to the Republicans and their wealthy backers. They want more -- now.

Not only are they worried that the Bush tax cuts will expire. The wealthiest families are also gravely concerned that if nothing is done, the inheritance tax is scheduled to return to its 2001 level. The consensus position among Democrats is that the inheritance tax -- which by definition impacts only the sons and daughters of multimillionaires -- should exclude estates worth up to $3.5 million for individuals and $7 million for couples. But that the remainder should be taxed at 45 percent. Republican Senator Kyl wants the threshold raised to $5 million for individuals and $10 million for couples. More importantly from the standpoint of the very rich, he wants the rate lowered to 35 percent.

To gauge the importance of this proposal for the very rich consider the situation of a one of the rare families with an estate of a billion dollars. To them this change would be worth $100 million dollars that either does or does not flow into the pockets of the silver spoon crowd. That will give you a sense of why what happens to the inheritance tax really matters for the super-wealthy core constituency of the Republican Party.

So the core interest of the Republicans is: tax breaks for the very rich.

The tax deal addresses each of these two core interests. It gives the Republicans tax breaks for the rich. And It gives the president and Democrats a major shot of economic stimulus that they -- and average Americans really need. All told the package costs $900 billion over two years. About 60 percent to 75 percent of that could be considered real stimulus, since the balance goes to the rich and has very little stimulative effect. But the money for $70 billion or so of unemployment compensation, the $120 billion for a payroll tax holiday, and the extension of middle class tax cuts -- including the refundable tax cuts from in the original Obama stimulus program -- actually do have increase aggregate economic demand.

Now with the exception of unemployment compensation -- which most economists think generates two dollars of GDP growth for every dollar of spending -- many of the other provisions are not as stimulative as infrastructure construction, a direct federal jobs program, etc. But they definitely increase growth. According to an analysis by the Center for American Progress (CAP), the package may generate or save up to 2.2 million jobs. And most importantly, these measures are far better than no stimulus at all.

The Republicans have basically held the rest of the country -- and economic growth -- hostage to their demand for two years worth of tax breaks for the super-rich, it's that simple. That has infuriated progressives -- and it should.

But that is the basis for the tax deal. It meets to the core, overriding self interests of each of the two protagonists.

Hopefully, the House, and progressives in the Senate, may be successful at demanding improvements in the package -- reducing for instance the outrageous giveaways to the super rich in the two year estate tax provision. The House Democratic Caucus has voted not to consider the tax deal in its current form, but to continue to negotiate to "improve the proposal that comes to the House floor for a vote". House leaders are taking a firm stand for progressive values.

At the same time, many progressives realize that in the end it is certainly in the interests of Progressives, who want to succeed over the next two years, to pass some package that allows a significant economic stimulus before Republicans take control of the House and make it ever so much more difficult.

Without new stimulus to the economy, the odds are very high that we will face defeat in November 2012, it's that simple.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.