Silver Linings in the Fiscal Cliff Deal

I will not try to convince any conservative that the final fiscal cliff deal that passed the Senate with only a few dissenting votes and needed Democratic votes to pass the House with a divided GOP caucus is a good deal, nor that it is the best deal available under the circumstances. It is, however, important to remember that this was a deal negotiated under just about the worst possible conditions: the president freshly re-elected, the largest tax hike in American history set to trigger automatically in the absence of a deal, the GOP leadership divided among itself and estranged from its grassroots/activist base, which itself was divided on how best to proceed. Republicans have illustrated dramatically why poker is not a team sport.
For all of that, there is some good news here for Republicans and conservatives if we know how to use it.
What’s In The Deal?
If you spent the holidays like a normal person and are just catching up, you can find useful explainers on the contents of the deal here, here, here, and here. The short summary:
The tax deals mostly bring a permanent settlement (subject, of course, to new legislative action) to a variety of previously temporary tax policies:
-The 2001 and 2003 Bush tax cuts to income, capital gains and dividend taxes will be made permanent for income up to $400,000 ($450,000 for married joint filers), but will be allowed to expire for income above those levels. Taxes will go up on many small business owners as a result.
-A similar half-a-loaf extension is being done for the estate tax, with the rate rising on estates above $5 million.
-The Alternative Minimum Tax will be indexed permanently to inflation, reducing the number of taxpayers hit with it and ending the annual debate over fixing it.
-The temporary payroll tax cut will be allowed to expire.
-5-year extensions are given to the Child Tax Credit and EITC as well as the college tax credit known as the American Opportunity Tax Credit, all of which can involve tax “credits” that are actually payments to people who pay no income taxes.
-Some exemptions and deductions will be phased out for incomes above $250,000 ($300,000 for joint filers).
-A variety of mischief was included or extended in the corporate tax code.
The good news is that the Bush Tax Cuts are now permanent for some 98% of all taxpayers; the bad news is the 1-2 punch of the expiration of the payroll tax cut and of the top-rate cuts. Even the left-wing Tax Policy Center admits that the net result of all this is higher taxes in 2013 for 77.1% of taxpayers, due in large part to the expiration of the payroll tax cut:

More than 80 percent of households with incomes between $50,000 and $200,000 would pay higher taxes. Among the households facing higher taxes, the average increase would be $1,635, the policy center said….The top 1 percent of taxpayers, or those with incomes over $506,210, would pay an average of $73,633 more in taxes….The top 0.1 percent of taxpayers, those with incomes over about $2.7 million, would pay an average of $443,910 more, reducing their after-tax incomes by 8.4 percent. They would pay 26 percent of the additional taxes imposed by the legislation.
Among households with incomes between $500,000 and $1 million, taxes would go up by an average of $14,812.

That’s increased new federal taxes; it doesn’t take into account the numerous new Obamacare-related federal tax hikes already hitting in 2013 (including big hikes on the same people getting socked in this deal) let alone Democratic efforts to ‘soak the rich’ with state tax hikes in some states. And the tax changes are most of the deal. Matthew Boyle:

According to the Congressional Budget Office, the last-minute fiscal cliff deal reached by congressional leaders and President Barack Obama cuts only $15 billion in spending while increasing tax revenues by $620 billion – a 41:1 ratio of tax increases to spending cuts.

That’s $62 billion a year, when you decode the CBO/JCT math, as unreliable as that is. RB has a chart illustrating exactly how little a dent that makes in the deficit.
On the spending side, little was definitively resolved, although conservatives are rightly concerned that yet another crisis came and went with no real action on spending and entitlements. New spending was authorized for unemployment insurance to be extended yet again, raising the question of whether Democrats think there is any limit to such insurance or any reason to believe the economy under Obama will ever produce a significant number of new jobs. Most of the rest of the automatic cuts in the sequester were put off for two months; the Medicare “doc fix” put off cuts for one year. Nothing was done to Social Security. No agreement was reached to extend the debt ceiling, which looms as the next crisis as early as February and Obama still pledging to refuse to negotiate.
Around The Web
Let’s round up some reactions from around the web and then I’ll offer my own thoughts.
From the Right
Ben Domenech (subscription):

Well, this looks like an insult to fig leaves everywhere….For all the talk of solving deficit problems, grand entitlement bargains, and steps toward dealing with out of control spending, Republicans and Democrats came together in the past 48 hours to endorse a solution which was about as small as it could possibly be. On the spending side, it trades the endorsement of higher taxes for every working American by Republicans for essentially nothing, with the promise of more nothing in the future.

Ben Howe: “I’m hoping that these last few years of constantly debating temporary tax rates will forever close the door on the use of such a negotiating tactic.”
Ramesh Ponnuru:

Democrats have made one major miscalculation. The pro-deal Democrats think that they have set a precedent for getting Republicans to agree to future tax increases — that Grover Norquist’s pledge is dead. This is a fantasy. This tax increase happened only because a bigger one was scheduled to take place. Republicans are not going to vote affirmatively to raise taxes, especially after taxes just rose. The deal makes future tax increases less likely, not more.

Ross Douthat:

[L]iberals have a real reason to be discouraged by the White House’s willingness – and, more importantly, many Senate Democrats’ apparent eagerness – to compromise on tax increases for the near-rich…if I were them I’d be more worried about the longer term, and what it signals about their party’s willingness and ability to raise tax rates for anyone who isn’t super-rich….Is a Democratic Party that shies away from raising taxes on the $250,000-a-year earner (or the $399,999-a-year earner, for that matter) in 2013 – when those increases are happeningly automatically! – really going to find it easier to raise taxes on families making $110,000 in 2017 or 2021? Color me skeptical: The lesson of these negotiations seems to be that Democrats are still skittish about anything that ever-so-remotely resembles a middle class tax increase, let alone the much larger tax increases (which would eventually have to hit people making well below $100,000 as well) that their philosophy of government ultimately demands.

Jim Geraghty:

Maybe the expiration of the payroll tax cut really will amount to a significant economic hit in 2013 [quoting uniquitous liberal economist Mark Zandi]…Perhaps this – along with the rest of the fiscal cliff-hanger – will be a useful lesson about “temporary” tax changes. Congress usually enacts them to provide a spark to the economy, and intends to end them once the economy is in better shape. But the economy is rarely in such great health that taxes can be raised without some sort of deleterious impact; as we may experience, taxes jump back up before there’s a robust recovery and the hikes cause the economy to sputter again. (In this light, the permanency of the Bush tax cuts for those making less than $450,000 per year may be one of the most significant economic reforms in the recent era.)
Either way, as no less an Obama-friendly entity than The New Yorker has declared, President Obama has now raised taxes on all working Americans.

Yuval Levin:

For liberals, this was not a moment of danger to be minimized but by far their best opportunity in a generation for increasing tax rates (which is the only fiscal reform they seem to want) and for robbing Republicans of future leverage for spending and entitlement reforms. And it is likely the best one they will encounter for another generation…some liberals believed [extending most of the rate cuts] could be overcome through much expanded caps on deductions…which would both raise more revenue and make Republican-style tax reform (a broader base with lower rates) much more difficult later. And they believed that the Republicans’ opposition to tax increases would also give Democrats an opportunity to score some other points, like forcing Republicans to sign on to Obamacare-style counterproductive provider cuts in Medicare, so that Republicans couldn’t criticize those anymore.
The White House at first tried to do all of that. They wanted about $1.6 trillion in revenue…They wanted [Medicare] provider cuts …to blunt Republican criticism of Obamacare and to make real (if incremental) structural reform far more difficult. And they wanted control of the debt ceiling, so Republicans would never have that leverage again…
But that hasn’t happened here. This deal is projected to yield $620 billion in revenue over a decade – increasing projected federal revenue by about 1.7 percent over that time. And that’s about it…They did not get to pick and throw away the low-hanging fruit that could be used in future rate-reducing tax reform (in fact, they retained some “extenders” of tax credits and deductions that could better enable such reform, and the new and more honest CBO baseline that results from this deal eases the way for it), they did not get to claim that they have reformed Medicare without touching its structure, and they now have to move immediately into a debt ceiling fight. Right after a tax-only deal, and just as people start to notice higher payroll taxes, they’re not in a great position to demand more rate increases in that fight, or others to come.

From the Left
Greg Sargent:

By any measure, the fiscal deal that finally passed the House yesterday should have been something House Republicans could have enthusiastically supported. After all, as Jonathan Weisman put it, the bill ‘locks in virtually all of the Bush-era tax cuts, exempts almost all estates from taxation, and enshrines the former president’s credo that dividends and capital gains should be taxed equally and gently.”
…The story is being widely reported today as proof the GOP finally broke from decades of anti-tax orthodoxy. And that’s true, at least in the sense that Senate Republicans overwhelmingly supported the final deal. But the more important point is that a majority of House Republicans didn’t break from it – despite the action of their Senate counterparts – signaling that literally any kind of compromise with them may simply be impossible.

Henry Blodget:

To listen to all the moaning out of the House of Representatives yesterday, you could be forgiven for thinking that the Republicans are losing the fiscal battle in Washington.
Actually, they’re winning.
…Ever since the Bush Tax Cuts were first enacted in 2001–temporarily, as a stimulus measure–one goal of the Republican party has been to “make the Bush Tax Cuts permanent.”
For most of the last decade, this goal has seemed like an extremist view: Making the Bush Tax Cuts permanent would drastically reduce the federal government’s revenue. It would also increase inequality and balloon the national debt and deficit–so how could we possibly justify doing that?
And yet now, suddenly, almost all of the Bush Tax Cuts are permanent….when it comes to the broader fiscal battle, the Republicans are winning: The federal government’s tax revenues are at the lowest level as a percent of GDP in the past several decades.
The Republicans, in other words, are well on their way to starving the beast.

Kevin Drum: ” my real preference was for a deal that would have allowed the Bush tax cuts to expire completely…there’s not much question we’re going to need more revenue” to pay for health care entitlements.
The Path Forward
Conservatives these days tend to be gloomy about the road ahead, partly due to lack of faith in the GOP’s leadership and establishment and partly due to lack of faith in the electorate. But this is no time to throw in the towel. There is good news here, too, as a number of those quoted above on both sides have noted, and we should not hesitate to celebrate it.
First, the nonsense idea of “temporary” tax policy has hopefully had a fatal stake driven through it: both parties had lauded their ability to deliver temporary tax relief in the past, and must now swallow voter anger that those tax cuts were allowed to expire. One of the golden rules of Washington is that bad policies rarely end until both parties have suffered a downside from them. The only reason for tax policy to be “temporary” in the first place is to game the broken system of budget scoring.
Second, the Democrats have truly conceded far more ground on taxes than the Republicans. The ATR no-tax-hikes pledge was bent and mutilated badly, but not completely broken, given that Republicans accepted the expiry of temporary cuts and did so only after exhausting numerous efforts to save them. But Democrats who spent a decade blaming deficits, the housing crisis, and weeds in your lawn on the Bush Tax Cuts have now delivered the votes to make nearly all of them permanent – something that was unthinkable any time during Bush’s presidency and even as recently as 2010.
Third, the table is set for Republicans in 2014 and especially 2016 to seize anew the initiative on taxes: on broad-based reforms that simplify the code, make it more pro-family, and cut taxes for everyone (possibly even slashing or abolishing the payroll tax) – variations on a platform that worked in 1980 and 2000 and can work again. After four years of bobbing and weaving, Obama now has signed off on raising taxes on nearly everyone, and that is sure to play into the GOP’s natural strengths.
Fourth, the table is also stacked against the Democrats demanding new tax hikes in the next spending battle. Maybe Boehner and McConnell won’t bring much back home in spending cuts – I never really believed that Obama would ever sign off on significant spending cuts or entitlement reform, and I still don’t – but there really is no case at all to be made for returning so soon to the well of tax hikes.
Fifth, the tone is set for Obama’s second term, and while it is hardly a great tone for Republicans, it also signals that Obama will need to either keep his ambitions small, stop demanding Republicans vote for deal-beakers, or start offering them something real in exchange if he wants to get anything accomplished. It’s unlikely that he will be negotiating from as strong a position again.
Sixth, it will now be much harder for Obama to avoid ownership of the economy, having embraced most of the centerpiece of Bush’s economic agenda while adding his own personal stamp. He’s socked new taxes on investors, on small business owners, and on ordinary working people. Nobody forced him to do any of these things. Politically, that’s a double-edged sword (Republicans have a lot of governors up for re-election in 2013 and 2014 who could be innocent bystanders if their states get blindsided by bad federal tax policy), but it is rarely good news for the party in power in the sixth year of a president’s term.
The temporary-tax-cut trap had stuck Beltway Republicans in an uncomfortable morass that was, to a large extent, one of their own devising. They did not emerge unscathed, but at least they have put it behind them, and that creates a lot more flexibility going forward – an important consideration in a party that is largely united on policy but deeply divided on strategy. That’s an opportunity, and no amount of gloom should cause us to lose sight of that.