Is the "Fiscal Cliff" Deal a Good One?

In the past few days the US Congress passed legislation to avert the so-called “fiscal cliff”. This came after weeks of tense negotiations between President Barack Obama and congressional Democrats on the one hand and the Republican congressional leadership on the other. The final bill passed by a comfortable margin, with most of the opposition coming from Republicans in the House, almost two-thirds of whom voted against it, including some in leadership positions. On the surface, the deal looks like a victory for bipartisanship (despite Speaker Boehner's petulance toward Majority Leader Reid), but particularly for Obama and the Democrats. After all, taxes were raised on the wealthiest Americans (or more correctly speaking, they went back to the level they were at before they were cut under Bush the Younger), and Social Security and Medicare remained untouched. But a closer look makes me wonder if this deal wasn’t worse than none at all.

First of all, the Bush tax cuts were made permanent for the vast majority of Americans. Of course throughout this process, the Democrats characterized the Republicans as holding the middle class hostage in order to preserve low taxes for the wealthy. This was accurate, but the problem with the Democratic position was the idea that while the rich should pay more, the middle class shouldn’t have to. To be perfectly clear, I should emphasize that I do think the wealthy should have to pay a proportionately higher tax burden than they do now. Not only should the Bush tax cuts have been allowed to expire, but loopholes should have been closed, dividends taxed as income and the capital gains tax raised substantially (then there’s the estate tax, but I’ll get back to that). However, the Bush tax cuts should also have been allowed to expire for everyone else, if not now then at some point not too far in the future. Despite what right-wingers often claim, Americans in general do not pay all that much in taxes, and all but the relatively poor (who unfortunately constitute a larger and larger proportion of the population) can afford to pay a little more. As an aside, let’s keep in mind that while the poorest Americans don’t pay income tax, they do pay all sorts of other taxes, including in most places state sales taxes and of course Social Security payroll taxes (in fact they pay a larger share of their income in payroll taxes than those with high salaries, another point we’ll come back to). But instead of a temporary extension of the Bush tax cuts for those making under $250,000 a year (Obama’s original minimum threshold), the cuts have been made permanent for everyone making under $400,000. Admittedly, the Democrats had always advocated making the tax cuts permanent for those earning less than $250,000, but that was a mistake, even if it was politically expedient. What’s more, not only has the capital gains tax rate been set at a too low level of 20%, but dividends are now taxed as capital gains, rather than income as in the 1990s, meaning the wealthiest Americans (who earn most of their money from investments) will still be paying proportionately less in taxes than many of the moderately wealthy.

In addition, while the estate tax was raised slightly, it is still only 40%, with a $5 million exemption, and that indexed to inflation. This one is particularly absurd. Many on the right claim to oppose higher taxes on the principle that people should be able to keep their “hard-earned” money. But while it is possible to argue that a billionaire industrialist or a multimillionaire small businessperson “earned” their money (with plenty of help from their employees and the public infrastructure), their children certainly didn’t earn it. None of these Ayn Rand-type justifications about the superiority of “prime movers” and how they should be allowed to keep the money they make apply in the case of inherited wealth. For that matter, several of the "Founding Fathers" that many on the right claim to be the heirs of (not to mention Adam Smith, the father of capitalism) were critical of the idea of inheriting wealth. While I don’t object to allowing people to leave some of their assets to their children, the heirs can certainly afford to pay considerably more in taxes (50% at the least, with an exemption of no more than $2 million, or better yet several different rates depending on the size of the estate).

What’s more, the sequester that would cut drastically cut spending was merely put off for two months. Of course there is some spending that definitely could and should be cut, particularly defense spending. But despite all the rhetoric about the US government’s unmanageable debt, the problem is not nearly as serious as it’s made out to be. The more immediate issue is transforming America’s economy for the future by promoting new industries such as alternative energy. In any case, there is no justification for drastic cuts to solvent programs like Social Security. I’ve said it before and I’ll say it again: The best step that can be taken to improve the financing of Social Security for the long-term is eliminating the payroll tax cap, which ensures that people who earn salaries above the current cap of around $110,000 actually pay a smaller percentage of their income in payroll tax than minimum-wage workers do. Granted, getting rid of the cap will not eliminate all of the future shortfall, but it will eliminate most of it (if it had been done several years ago, it could have eliminated it entirely), and combined with a slight increase in the rate, it would solve the problem. But of course Republicans are not interested in any solution that makes the rich pay more (what many of them really want is to destroy Social Security entirely), and even many of the Democrats seem far more willing to cut benefits than adjust payroll taxes.

Finally, this deal didn’t even raise the debt ceiling. This wouldn’t have been an issue in the past, as previous Congresses didn’t consider it necessary to debate whether the US government would commit to fulfilling its obligations. But the current crop of Republicans have already shown their willingness to use the debt ceiling as a club to get what they want (the gutting of social programs, continued tax breaks for harmful industries like oil and coal, lower taxes for the rich), and with the Bush tax cuts permanently extended, the Democrats will have less bargaining power next time around. No wonder a fair number of the slightly less short-sighted Republicans were pleased with the deal. With the debt ceiling and the sequester, the can has just been kicked down the road, and it's not clear that the Democrats will be in a stronger position when the next deadline looms.

There are many other provisions in the deal, some absurd (a $9 billion tax break that benefits big banks and multinationals, tax breaks for NASCAR race tracks) and some good (subsidies for taking public transit). Even if I had the time and inclination, it would take hours of study and analysis to find all the pluses and minuses. It's clear that the deal could have been worse. Social Security and Medicare were left alone (but wait till the sequester and debt ceiling rear their ugly heads again). The Republicans’ absolute intransigence on raising taxes for the wealthy finally gave way (though not among all of them – and it was so stupid to begin with that it is hard to celebrate some Republicans finally showing a bare minimum of sense, if only grudgingly). But I am not convinced that this deal is any better than no deal at all would have been.