"This isn't the politics of the moment, This is what we can get done right now" -  President Barack Obama - Dec 7, 2010, speaking on the tax deal.

Well, that is the definition of the politics of the moment - what we can get done right now. The White House and Senate Republicans have reached an agreement on the "Bush tax cuts".

Mainstream media is portraying this as a huge victory for the GOP, and a stinging loss for President Obama. It is neither. The President is playing up the bad guy Republicans holding out for the rich, while he is just looking out for the little guy. He had to do it. He'll keep fighting. The Republicans are taking the win on the big issue, but gave on some of the side issues. Republicans did not get the whole pie, Obama got some good slices. Here is the breakdown of who gave what:

Extension of the Bush tax cuts for everyone for 2 years - This had both sides giving. The GOP wanted a permanent extension for all taxpayers. That wasn't going to happen on President Obama's watch, with a Democrat controlled House and Senate. A two year extension makes this a major issue in the 2012 Presidential campaign. The GOP gets most of what it wanted, and stands on the side of the taxpayer in 2 years.

President Obama didn't want to extend the cuts at all, and then gave on extending them for any family making less than $250K per year. Looking to January, the GOP takes control of the House and expands its membership in the Senate. Obama decided to take his chances now, when he could get something. Leaving this debate to January, when the impact of the tax increase is seen in paychecks throughout the country, is opting for a losing position. Better to deal now than to be over-ridden on the first act of a new Congress.

13 month extension of unemployment benefits - This is seen as a concession by the Republicans, and in theory, it is. The extension has been held up this far by GOP leadership seeking offset funds in the form of cuts elsewhere or getting the funding from the leftover stimulus money. In practice the Republicans were not going to cut off unemployment in the middle of this economic quagmire, and lose all of their current goodwill from the mid-term victory. They gave what they were going to give anyway.

35% tax for two years on estates worth more than $5 million - This would have been a bitter pill for the GOP to swallow. This is the so-called "Death Tax" on inheritances. The GOP argues that it is inherently an unfair tax because taxes have already been paid on these monies as earned. Before the Bush tax cuts were enacted, the estate tax stood at 55%. Currently it is at 0%. Still, there is not much sympathy for piles of cash in excess of $5 million, no matter the correctness of your argument. This is a Republican acceptance of a significant tax increase in this area.

Imagine that you work hard, build a business and be fortunate enough to have it be worth $5,000,001 to pass on to your children. That 5 million is the sum total of the business which you built over many years - facilities, equipment, stock, assets. It is not a pile of cash. When you pass away, your family would owe the federal government $1,750,000.35 - in cash. That kind of levy will force many of these families to sell off the business to pay the government, rather than retain it within the family. More than one third of what you plan to leave your family on your death will go to the government instead. From President Obama's stand point it is a concession because he wanted half.

Dropping the Social Security tax rate from 6.2% to 4.2% - Being billed as a "payroll tax holiday". This replaces Obama's "Make Work Pay" program that helped middle class families with an $800.00 tax credit. It was largely unnoticed by taxpayers. This will be a visible increase in take home pay, however Social Security remains in financial trouble, as all Ponzi schemes eventually are. The drop in funding for Social Security will be made up out of the general fund, so it's a bit of bait and switch. It will look like there is more money in the paycheck, but the loss will be made up by other tax dollars paid in - or by borrowing more from the Chinese.

Allowing businesses to write off 100% of capital investments for tax purposes in 2011 - This is a temporary tax reduction for businesses of all sizes to encourage growth. It provides incentive to the tune of $150 billion in tax breaks. We are talking buying equipment, expanding facilities and also costs involved in research and development. All of this puts private money into the economy, and stimulates job creation. The write off encourages businesses who need to expand but are holding back because of economic uncertainty. This was a Republican proposal during the original stimulus debate, which they claim will foster growth, and ease unemployment. Since what is being done does not appear to be working to jump start the economy, this seems like a worthwhile idea to try.

Extension of the Earned Income Tax Credit, the child tax credit, and tuition credits - Normally, less taxes is a Republican idea. These are tax credits that primarily benefit lower income families, and are priorities for the Obama Administration. President Obama is famous for promoting the idea that he only wanted to raise taxes on the top 2% of American earners. This tax credit goes in large part to the nearly 50% of wage earners who pay no federal income tax. These workers receive 100% of their withholding back as a tax refund every year. It allows them to receive more than 100% back, normally in the range of 110 - 120%. This is funded by the people who actually do pay taxes. It is hard to make an argument against this practice without sounding cruel or uncaring of the plight of the poor.  Still, it is forcibly taking money from one person to give it to another. This was not the time or forum to make their case on this issue.

These are the main points of the agreement. This hasn't taken into account that this is by no means a done deal. The agreement needs approval by the Senate and the House. Harry Reid has been a good lapdog for the President and will probably deliver enough Senators for passage. Nancy Pelosi, on the other hand, is livid, as are the extreme left members of the House. This may be her last stand as Speaker, and she could scuttle the whole deal. It would serve the President well to take her on directly, and publicly. If nothing else, taking her on and getting passage in the House would show him to be in charge of his party.

Common Sense Dictates

This is the first piece of bi-partisanship to come out of DC since President Obama took office. The Republicans pushed for the retention of current tax rates, and managed to insert it as a major campaign issue in 2012. They got a key part of the Republican economic plan approved in the business write off on capital expenditures. Obama got unemployment extended, which he needs as job creation is stalled. He kept his tax credits for lower income families. Then there is the bit of economic smoke and mirrors with Social Security. Everyone got something, no one got everything. It is a deal, and only time will tell how it work out.

The immediate benefit is no income tax hike in January. Another dubious benefit is that those who are now chronically unemployed due to the stagnant job creation will keep receiving aid. It would have been far better to push job creation earlier with proven methods rather than the $700 million boondoggle of special interest gifts that was the stimulus. We see the start of that in this agreement. It would be good to not have the need for even further unemployment extensions in the future.

The takeaway here is the future of tax rates is kicked down the road. This happens every few years, and every few years after that. The federal income tax has become a mishmash of arcane penalties and loopholes that no one can completely understand, including paid professionals in the tax preparation industry.

America should not have to go through a tax hike debate in such an ongoing basis. There would be no reason for tax credits for some paid for by taxes taken from others, if the tax rate was fair and affordable for all. God only asks for 10% in the Bible. The Federal government on average helps itself to 33%. Both flat tax supporters and the Debt Commission have suggestions to lower tax rates, have a generous personal (self and dependent) deduction, and elimination of all other deductions, loopholes, credits and penalties. The tax rate number suggested varies, but floats around 15 - 17% of taxable income as covering our current federal budget. We think that makes for a good starting point for discussion and debate.

The time has come for true tax reform to replace endless wrangling over tax policy. We do not know if any politicians are up for taking on the issue, but those who want to gain or hold office would do well to start studying the issue. Whether deliberately or by chance, this has become a defining issue in 2012. The best candidates will not be arguing about supporting or denying a tax hike in 2012. They will come prepared with a plan to reform the federal income tax in a way that the taxpaying public will support. Maybe the Tea Party has developed a new cause. This is a natural for the Blue Dogs as well. It is the Common Sense approach.

RLB