1. From an economics point of view and tax policy point of view and where-we-need-to-get-to-if-we-are-ever-going-to-pay-our-bills point of view, the fiscal cliff deal was horrible. Greg Mankiw summed it up nicely:
“The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would look like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.”
That said, and it really cannot be said often enough, because it is so true, let’s keep going.
2. President Obama got Republicans to move off their “no-tax-increase-for-anybody” stand, which was a win for him politically. But by agreeing to raise the level at which the Bush tax cuts are repealed from $250,000 to $450,000 (for couples), President Obama insured that the government won’t get very much extra tax revenue. If the President’s idea was just to get some group called “rich” to pay “more” (at least until their tax advisers figure out a way around it), and to get the Republicans to give in, then he succeeded. But if he really wanted more tax revenue for the federal government (as some Democrats did), then he has a problem.
Because if you think the federal government needs more tax revenue, then you need another tax increase. And this time it will have to be on people making below $450,000 (as well as maybe increasing taxes again on those making over $450,000). I am not sure what the politics on that will be, but it certainly won’t be as good as it was last time.* “Tax the rich” is one thing. “Tax the rich again and tax the not-so-rich, too” is another.
3. If you disregard the fact that the fiscal cliff deal did nothing to get our deficit under control, and if you disregard the fact that the tax rates and policies that were extended are not sustainable, Republicans could look at the deal as a bit of a win: While the Republicans gave in on tax hikes for couples making over $450,000 (and deduction claw-backs for couples making over $250,000), they still were able to get the Bush tax rates extended for everybody else – and without a time limit or a sunset clause. And it wasn’t just the rates on regular income that were extended; it was the rates on capital gains, too. The permanency of these provisions is huge. Now any change will have to be affirmatively voted on; it won’t just come into effect automatically. And getting the Democrats to increase the level at which the increases kick in from $250,000 to $450,000 for couples was important. The Republicans definitely could have sold this better.
4. What does it say about the Obama administration’s priorities that they were the ones who demanded that the deal include the extension of $64 billion** in special tax credits for big business and big special interests? President Obama’s press secretary, Jay Carney, tried to blame the Republicans, too: “It would strain the credulity of everyone in this room to suggest that Republicans did not support or want tax credit for business.” Certainly, Republicans support these kinds of thing too often, but this time it was the Democrats who demanded them. It was President Obama would insisted that these tax breaks for business be included in the bill. This is important not only because we gave the well-connected another $64 billion in tax breaks. It’s important because it shows that when President Obama talks about wanting “tax reform,” he is talking about a very different type of tax reform than his Bowles-Simpson commission was talking about or that most Americans support. Apparently, President Obama likes giving tax breaks and subsidies to people he thinks deserve them, “people” in this case being defined as big corporations and special interest groups.
5. A reprise of point # 1: The tax cliff deal was terrible, but by the time Congress got around to it and with the views President Obama apparently has, I don’t think a good one, or even a mediocre one, was possible. We may have to wait another four and trillions more in deficits before we can have real tax reform and real deficit reduction – unless the markets tell us otherwise before that.
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* Megan McArdle made this point early on.
** Some reports put the amount at $76 billion.
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