The Five Things You Should Know About The Fiscal Cliff Deal.
There’s a lot of spin out there about the deficit deal that was cut over the holiday. We wanted to share our thinking on the deal.
Unfortunately, the White House, which was in a strong position when it went into negotiations with Republicans, chose to cut a bad deal in order to make the overhyped “Fiscal Cliff” deadline. Instead, we should have waited for a new Congress to be sworn in on January 3 — with a Senate which will include progressive champions like Elizabeth Warren and Tammy Baldwin, and a House with more Democrats and fewer Tea Party Republicans.
Last night the House ratified the White House’s deal with Senate Republican leader Mitch McConnell. And the White House made the Bush tax cuts permanent for a huge chunk of the wealthiest 2%, giving away much needed leverage for staving off future cuts to Social Security, Medicare and Medicaid benefits.
As Grover Norquist, the anti-tax conservative zealot who famously said his goal was to shrink government “down to the size where we can drown it in the bathtub,” tweeted before the vote: “Congress about to make permanent most of the temporary tax cuts that Democrats voted against in 2001 and 2003. Permanent beats temporary.”
And Rep. Tom Cole, a Republican House member from Oklahoma crowed, “I would prefer not to raise taxes on anybody. But we protected almost every American. We did it at a higher income level than the President campaigned on. And again, frankly, we’ve denied him I think his most important piece of leverage in any negotiation going forward.”1
The deal didn’t address the debt limit or even the triggered cuts (called the “sequester”) set in place by the failed 2010 debt ceiling deal. So in just two months, we’ll reach a crisis again, and because a key leverage point for raising revenue (rolling back the Bush tax cuts on the wealthiest Americans) has been surrendered, we’ll be in the fight of our life to protect our Social Security, Medicaid and Medicare from benefit cuts.
From our perspective, here are five things you need to know about last night’s deal.
1) The Bush tax cuts that were finally set to expire are now permanent.
The Bush tax cuts were set to expire on Jan. 1, 2013. President Obama and many Democrats won election in 2012 based on a promise to roll back the Bush tax cuts for the wealthiest 2% of Americans making $250,000 and above. Had Congress done nothing, the Bush tax cuts for all Americans would simply have expired at midnight on December 31. But the deal that just passed made the Bush tax cuts permanent for households making up to $450,000. This represents a $9,200 tax cut for people making more than $35,000 a month.2 And it will take an affirmative act of Congress to actually raise taxes to undo this hand out to some of the richest Americans (a virtual impossibility with the current Congress).
2) The estate tax exemption just passed is a pure giveaway to the nation’s wealthiest families.
As Los Angeles Times business columnist Michael Hiltzik explains:3
There’s no purer giveaway to the wealthy than this. The final deal raises the tax to 40% from 35% on estates over $10 million. (That figure is for couples, whose estates are each entitled to a $5-million exemption upon their deaths.) The alternative was to return to 2009 law, which set the tax at 45% on couples’ estates more than $7 million.
Who pays the estate tax? In 2011, about 1,800 taxpayers died leaving estates of more than $10 million. Their average estate was somewhere from $30 million to $40 million. Their heirs cashed in on some of the most nimble tax planning on Earth: Although the statutory top rate was 35%, the average rate on estates of even $20 million-plus (the average gross value of which was $65 million) came to only 16.2%.
3) The payroll tax expiration raises taxes on the middle and working classes.
For the last two years, the payroll tax that wage earners pay on their first $113,000 of income to fund Social Security was temporarily reduced by two percentage points.
While the mechanism of this tax cut was problematic from the perspective of those worried about fully funding Social Security, it was a form of economic stimulus that helped put more money in the pockets of working Americans. So most progressives who opposed the funding mechanism still thought that it should be phased out over time or replaced with some other kind of equivalent tax cut (at least until the economy improved).
Instead, the payroll tax holiday was allowed to end abruptly and without anything to replace it, which will result in a jarring two percent reduction in the take-home pay of most workers.
Since the payroll tax only applies to the first $113,000 in income, people who make more than that will see a relatively smaller tax increase. And combined with the now-permanent tax cuts for the wealthy, some of the richest Americans will see a net reduction in the taxes they owe whereas working and middle class workers will see a tax increase.
4) The deficit isn’t really the problem.
The deficit hysteria that has become part of the conventional wisdom in DC is really just a way for wealthy elites and corporate interests (and their allies on Capitol Hill) to push for austerity and end programs that benefit most Americans.
America is the richest country in the history of the world and yet we’re told by the deficit scolds that we’re too poor to fund education or the FDA or pay for food stamps to keep Americans from going hungry. Meanwhile, the very same politicians who plead poverty want to give away billions in unneeded corporate welfare, spend more money than ever to fund the biggest military in the world and cut taxes on the extremely rich. Not to mention the fact that the cost of borrowing is at historic lows. For more on this topic read Dean Baker’s piece “Look Beyond the Fiscal Cliff.”4
5) The debt ceiling wasn’t addressed. In two months Republicans will take hostages again, and we’ll be in the fight of our lives to protect Social Security, Medicare and Medicaid benefits.
The existence of the so-called “Fiscal Cliff” was itself the result of a terrible deal President Obama cut the last time Congress had to raise the debt ceiling. This set up a constellation of automatic tax increases and spending cuts that Congress was feverishly trying to avoid, and which paved the way to yesterday’s vote.
But with the Bush tax cuts (one of the Republicans’ top priorities) now off the table, we’ll spend the next few months dealing with the automatic across-the-board spending cuts (known as the “sequester”), the end of the continuing resolution on the budget that funds the government, and the need once again to raise the debt ceiling.
All of these provide the Republicans with opportunities for hostage-taking, and we know they have their sights set on cutting Social Security, Medicare and Medicaid benefits.
As Republican Congressman John Fleming told the Huffington Post: “We still have more opportunities. We’ve got the debt ceiling coming, sequestration. So we’re going to get taxes off the table. The president can’t say, ‘We’ve got to raise taxes first before we get to spending cuts.’ We will have already done that. Now the topic will be spending cuts, from this point out.”5
There were some positive things in the bill that was passed. There was no negative change in the way cost of living increases to Social Security benefits are calculated. Unemployment benefits were extended for over two million Americans who are still looking for work. The Child Tax Credit and the Earned Income Tax Credit were extended for the next five years. And the Wind Production Tax Credit was extended for another year, to name a few.
But overall, as Rep. Jim Moran said, “We’re going to look back on this night and regret it.”6 And even Majority Leader Harry Reid tossed concessions suggested by the White House into his Senate fireplace.7 Reid was soon replaced in negotiations with Republican Minority Leader Mitch McConnell by Vice President Joe Biden who struck the final deal.
Jim Moran was joined by seven other members of the Congressional Progressive Caucus in voting no on making the Bush tax cuts permanent for Americans making over $250,000 a year. They were: Rep. Rosa DeLauro, Rep. Pete DeFazio, Rep. Earl Blumenauer, Rep. Xavier Becerra, Rep. Jim McDermott, Rep. Brad Miller and Rep. Suzanne Bonamici. In the Senate, Tom Harkin also stood up and alone on the floor of the Senate explained that permanent extension of the Bush tax cuts was an absolute deal breaker. These progressive legislators deserve our thanks.