Tax Compromise is a Small Victory; We Need Many More

President Obama’s announcement yesterday that he struck a tax compromise with Senate Republicans that will temporarily halt the automatic income tax hikes that were due to hit all Americans. Although the President announced the compromise with little excitement, saying he was “sympathetic” to the idea of fighting to raise taxes on high earners instead of striking a deal, the proposed plan is a small win for a sluggish economy that is saddled with 9.8% unemployment. But we need many more wins, and much larger ones, before the economy can recover and thrive.

In addition to preventing income taxes from rising on January 1, 2011, the plan includes a temporary two percentage point cut in employee payroll taxes, from 6.2% to 4.2%. That cut is also effective for employer contributions, reducing the overall Social Security tax from 12.4% to 10.4% for 2011. The White House says this tax cut will save families an average of $1,500 next year.

The compromise also locks the death tax rate in at 35% for two years, a provision strongly opposed by President Obama, who has called for raising the death tax significantly in previous budget plans.

The deal is an acknowledgment by the White House that in troubled economic times it is good for working people to keep more of their money to spur job creation. Mr. Obama recognized this connection when he announced the deal. “Make no mistake,” the President said yesterday, “allowing taxes to go up on all Americans would have raised taxes by $3,000 for a typical American family and that could cost our economy well over a million jobs.”

Let’s hope the President heeds this lesson about the link between lower taxes and job creation if and when the economy starts to improve and job creation recovers. If not increasing taxes is good in a bad economy, not raising taxes is also good in an improving economy. And if the President is really in the lesson learning frame of mind, he’ll soon come to understand that lowering taxes is even better for job creation.

Yesterday’s announcement also provides some limited measure of investment certainty for business. The economy is not likely to ignite based on a two year horizon of tax certainty, but at least individuals and businesses don’t start next year with tax hikes and at least know their rates are locked in for two years.

Yesterday’s compromise was not only necessary, but also unusually practical.

The deal was brokered by a President who has pushed repeatedly for higher taxes on American businesses (income tax changes as well as cap and trade and Obamacare) and a lame-duck Congress still controlled by liberal Democrats. The fact that a deal was struck to provide across-the-board tax relief suggests that the President and his allies in Congress may finally be getting the message that voters voted explicitly against big government in November, of which higher taxes are a necessary prerequisite.

With the principle that low taxes are good for workers and job creators now firmly established on a bipartisan basis, the burden now falls on President Obama and the new Congress to begin work next year to make lower taxes and smaller government a permanent reality.

This work includes reducing the size and scope of the federal government through a comprehensive replacement strategy where decades of liberal government is replaced by policies and processes that allow business to create jobs and allows taxpayers to keep more of their hard-earned money.

This includes reforming regulatory authority at agencies such as the EPA where unelected bureaucrats are trying to impose by executive branch regulations what our elected officials refused to pass legislatively (i.e., global warming taxes).

It means converting unemployment compensation to a work and training program so people who need jobs actually increase their skills instead of just receiving unemployment checks.

It means stopping wasteful spending in Washington, starting with a ban on earmarks, a return to 2008 spending levels, and passing a long overdue balanced budget amendment.

And it means creating incentives for businesses to come to America and thrive. Yesterday’s tax compromise was a good first step, but only permanent tax relief on income, dividends, and capital gains coupled with permanent regulatory reform will signal to the world that the United States is the best place to invest. Passing the Economic Freedom Act is one example of what’s necessary to create this pro-business, pro-jobs environment.

Doing all of this would both create jobs and effectively address our deficit and public debt problem. The quickest way to tackle the deficits is to cut unemployment in half through job creation and by a reduction in federal spending. It is not by raising taxes.

The reason Washington is in the red financially is not because taxes are too low, but rather because spending is too high and government is too big. Cutting spending and allowing businesses to thrive means more jobs and less debt.

Next year the new Congress, which has been energized by Tea Party support and by newly elected officials committed to lower taxes and smaller government, should build off yesterday’s small victory for American workers wake up every morning and ask themselves how they will work to spur job creation in America.