Monday, December 31, 2012

Emerging Fiscal Cliff Deal: Good Deal, or Bad?

Congress over the past couple of years has orchestrated a round of automatic spending cuts (sequestration) and taxes increases which are set to take effect tomorrow.  If we go over this fiscal cliff, we will all feel it. 

There is general consensus across the political spectrum that implementing sequestration and returning to pre-Bush tax levels at the same time will provide another blow to our teetering economy.  We also have agreement that we must address long term structural problems with the cost of social programs and the amount that we are currently taxing.  In short we are not taxing enough to sustain our social programs, and we don't have enough young workers coming in and too many workers retiring to sustain our social programs at the current levels without raising taxes.  Finally, we have agreement that the deficit presents a long term problem.  The deficit is large and growing due to 1) the Bush tax cuts, 2) the Iraq and Afghanistan wars, and 3) our structural problem with social programs and tax rates. 

There is disagreement between the parties regarding the solution to these problems.  Republicans advocate drastically less spending on social programs, and no increase in tax rates (although they are open to base broadening elimination of tax exemptions).   Republicans believe their approach would invigorate the economy like a New Years Day polar bear swim.  They believe the underlying dynamism in the market would grow the economy and lift all boats.  Democrats are advocating a balanced approach of some tax increases, and some spending cuts, but no (substantial) cuts to social programs.  Democrats believe that if social spending is reduced, the market will not fill the gap to provide for all members of society.  They believe we must spend on medicare, medicaid, social security, education, mental health, etc. in order to take care of a large percentage of the population that would not otherwise be provided for by the market. 

Democrats don't want to go over the fiscal cliff because it will result in across the board spending cuts in social programs that they don't want to see happen at all, because it will result in too-sudden spending cuts that will shock the economy, and because it will result in too-sudden tax increases for our anemic economy.  Republicans don't want to go over the fiscal cliff because it will result in tax increases they don't want to see happen at all, because it will result in too-sudden spending cuts for our anemic economy, and because it will result in cuts to military spending they don't want to see happen at all. 

There is a lot of sideline commenting going on as to who has leverage in this negotiation and how it should be played.  Should we go over the fiscal cliff now because this might give one side more leverage later?  Some say Democrats would have more leverage later because they will have pocketed the automatic tax increases and they might find political support for social spending priorities once those cuts actually bite.  Of course, in the meantime, social programs will be cut.  Some say Republicans would have more leverage later because they will have pocketed spending cuts, and they may be able to extract more concessions on taxes in the context of the next debt ceiling increase, which is coming right up, thank you very much.

As of 7:00 p.m. (EST) on the 31st, it looks like the House will vote on Tuesday on a plan cobbled together by Senate minority leader Mitch McConnell and Vice President Joe Biden--technically over the cliff, but before the Congressional session ends on Tuesday. 

Here are the deal parameters as reported by the NYT


  •  Income taxes to 39.6 percent from 35 percent on income over $400,000 for single people and $450,000 for couples.
  • Dividends and capital gains tax rates to 20 percent from 15 percent on income over $400,000 for single people and $450,000 for couples.
  • Phase out of personal exemptions and deductions at $250,000 for single people and $300,000 for couples.
  • Rise in estate tax on estates over $5 million to 40 percent, up from the current 35 percent.
  • A five-year extension of  child tax credit that goes out as a check to workers who do not earn enough money to pay income taxes, an expanded earned income credit, and a refundable credit for tuition.
Under the deal, the new rates on income, investment and inheritances would be permanent.  All combined, the new package would raise about $600 billion of revenue over 10 years. That  is approximately 85 percent of the revenue Democrats had wanted to raise under Obama’s initial proposal, which would have raised around $700 billion.
  • Democrats secured a full year’s extension of unemployment insurance without strings attached, a $30 billion cost.
  • Democrats were able to stave off sharp cuts for one year to health care providers who treat Medicare patients. That cost, about $30 billion, would be paid for with cuts to other health care programs.
A final deal is reportedly still being held up by one last question: What to do about $110 billion in automatic spending cuts set to begin Jan. 2.

So did Obama sell out?  Thus far it does not apear so.  On the taxing side, this deal would secure $600 billion of revenue over ten years.  It's not what we'll need, but we don't want it all at once;  we'll want to add revenue slowly as the economy grows stronger, and Obama has made clear that he'll be asking for additional revenue in connection with discussion on spending reductions.   On the spending side, there are no cuts here to Social Security, Medicaid, or other social programs so far.  Let's see what happens with that $110 billion in automatic spending cuts.  If those are deferred, that's the right thing to do for now... 

Going over the cliff is bad for the economy, bad for seniors and kids, bad for the military, bad for the country.  In light of this fact, it's irresponsible to advocate going over the cliff just to (perhaps) increase leverage in the upcoming debt ceiling negotiation.  If we can prevent sequestration now and get agreement on $600 billion of tax revenue over 10 years, and defer discussion on cuts.... let's do it!

1 comment:

  1. Ultimately it is up to the president to make a deal. He has to "sell out"some interests to do it. In business and in life, we make deals all the time. It's just annoying that a small wing of the GOP is doing most of the stalling.
    It is akin to fringe parties in parliamentary governments (like Israel) getting concessions for their votes.
    But democratic governments have to govern legally or it gets extremely violent.