Why Democrats Will Probably Swallow The Tax Cut Compromise

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Moody’s Mark Zandi has done a macroeconomic analysis (subscription required) comparing a baseline scenario for 2011 with the Obama-McConnell tax compromise scenario to figure out the impact of the compromise on unemployment and the GDP.

For the baseline, Zandi tried to describe a consensus approach: Bush-era tax cuts extended under $250,000, AMT patched, Estate Tax restored, as well as popular business and R&D tax cuts. He also assumed a one-year extension of tax cuts for the wealthy. Under this scenario, he projects average 2011 unemployment of 9.9 percent and a GDP that grows 2.8 percent.

For the compromise proposal, he adds in all of the stimulative tax cuts and benefits that Obama advocated: An extension of unemployment insurance, the payroll tax cut, the accelerated depreciation, and an extension of the refundable tax credits. Under this scenario, Zandi estimates that 2011 average unemployment will drop to 8.7 percent and GDP will grow 3.9 percent.

Now these are just projections. Lots could change, including an economic collapse in China, more credit trouble in Europe, a terrorist attack, or any other of a number of things.

But my question is this: Which Democrats would rather enter the 2012 election season with unemployment still at 9.9 percent, but the comfort of knowing that they held the line on tax cuts for the rich? Which Democrats would rather enter the 2012 election season with unemployment falling to 8.7 percent, knowing that they gave up the fight over tax cuts for the rich? I thought so.

There is another point to be made here. Since Republicans would be in a much better position of defeating Obama in 2012 with a higher unemployment rate, it follows that Mitch McConnell is not quite as cynical as many Democrats claim. McConnell got a lot of attention for claiming that “The single most important thing we want to achieve is for President Obama to be a one-term president.”

Apparently, extending tax cuts for the wealthy, combined with tax stimulus for the middle class, is also a top priority, even if it makes the “single most important thing” more difficult to achieve.