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The Tax Deal: Who Won?

Supposedly Zhou Enlai was asked about whether the French revolution succeeded, and he replied, "It's too soon to tell." That's my view of the tax deal between President Obama and Congressional Republicans.

(Read here for an explanation of how exactly Obama got the deal.)

The most important policy question at stake is the future of the upper-income Bush tax cuts. If Obama had made absolutely clear that August that he would not extend them under any circumstances, then Democrats could have forced Republicans to stand against the popular tax cuts for families earning less than $250,000 a year. But the exhausted, demoralized, fractured Congressional Democrats simply couldn't move, an astonishing political failure.

The Republican Party's chief objective is to maximize the chance of eventually making the upper-income portion of the Bush tax cuts permanent. Republicans would have preferred a permanent extension, but a temporary extension gives them a chance to fight another day. The Republican Party has been organized around the goal of reducing upper-income tax rates, and was willing to surrender a great deal merely to preserve the chance of winning this fight in 2012 or 2013.

Ironically, liberals have been complaining that the Obama administration is too interested in fiscal restraint and insufficiently interested in fiscal stimulus. (Katrina vanden Heuvel today: "On the economy, the president has abandoned what Americans are focused on - jobs - to embrace what the Beltway elites care about - deficits.") This deal does the opposite. It's essentially a second stimulus, with loads of tax cuts (some of them actually stimulative) and an extension of unemployment benefits.

The basic trade then, is that Obama got a fair amount of short-term fiscal stimulus, and Republicans kept alive their dream of preserving Bush-era tax cuts for the highest-earning 1%. Whether this deal is a win for them depends entirely on what happens in 2012. Obama will be in a better position to draw a line in the sand on refusing to extend tax cuts that only benefit the very rich. Spending the election year of 2012 hanging tough on his refusal to sign an upper-income tax cut, while championing middle-class tax cuts, is a good campaign issue. The prospect of middle-class tax cuts expiring in 2013 -- when the economy is stronger, and Obama's reelection is behind him -- will not be nearly as terrifying as the prospect of having them expire in 2011. Indeed, it would be an outright perk, as the full expiration of the Bush tax cuts would nearly solve the medium-term deficit without any painful spending cuts at all.

On the other hand, if Obama caves again, or if Republicans win the White House and push through another tax cut extension, this deal will go down as a huge blunder for Obama. The good news for Obama is that the deal probably increases the chance that he'll get that second term. If so, he'll need to handle this issue better than he did the first time around.