A Short-Term Win For Democrats, A Long-Term Loss For Democrats?

We’re making permanent tax policies Republicans originally crafted.”

—Dave Camp, the Republican chairman of the tax-writing Ways and Means Committee in the U.S. House of Representatives

Republicans, at least those not completely ravaged by ideological stupidity, have finally been willing to embrace their substantial victory over Democrats, a victory represented by the last-minute deal to make the once-infamous Bush tax cuts permanent.

Early on New Year’s Day, Senate Republicans saw the light and accepted a Biden-engineered but Obama-blessed “compromise,” and later on New Year’s Day House Republicans—those 85 or so who for one reason or another realized they have won the tax debate—did the same.

All the while, most Senate and House Democrats couldn’t wait to get in line to vote to accept the deal (only 3 voted “no” in the Senate and only 16 voted “no” in the House), which, among other things, makes the Bush tax cuts, I’ll say it again, permanent.

Perhaps we should stop here and get Merriam-Webster‘s definition of the word permanent:

continuing or enduring without fundamental or marked change.

That’s a lot of what happened on New Year’s Day.

I watched Grover Norquist, yes, Grover Bleeping Norquist, right in front of CNN, GOP Jesus, and everyone, bless his fellow Republicans as they were about to vote to do what conservatives a decade ago only dreamed of doing: making the Bush tax rate cuts permanent for 99.3% of taxpayers.*

Did you get that? Conservatives in 2001 and 2003 couldn’t even pull that off. When right-wingers passed the original Bush tax cuts, they were only for ten years. Obama extended them for two years just before they were due to expire at the end of 2010—under Republican threats to ruin the economic recovery—and now they have been made a part of the Democratic Party canon. Bragging rights for tax cuts now belong to Democrats, which they may eventually regret.

Oh, don’t get me wrong. I’m not opposed to extending the tax cuts for most Americans. We can’t afford to jeopardize the fragile economic recovery by removing almost $200 billion a year—that’s roughly the cost of extending the cuts for the 99.3%—from the mix.

But we also can’t afford to extend the full rate cuts for that entire 99.3% permanently—at a cost of $1.9 trillion over 10 years—as doing so will serve to support the “starve the beast” tactic that radical conservatives like Grover Norquist have employed as part of their strategy to turn the country into a 19th-century small-government, rich-man’s paradise.

As I see it, Democrats may have inadvertently aided the Norquistas in their quest to some day drown government, at least part of it, in Grover’s bathtub.

There are, of course, many good things in the package passed, including a five-year extension of the 2009 stimulus expansion of tax credits for the working poor and other tax credits for the needy, including families trying to get their kids in college.

Those on long-term unemployment will get an extension for another year; doctors who accept Medicare won’t get screwed in the next year; tax breaks for wind energy and corporate research are continuing for at least another year; the Alternative Minimum Tax will be permanently indexed to inflation; the Republican-stalled farm bill will get unstalled for nine months—enjoy your cheaper milk.

Most of what Democrats got they got without having to offer significant spending cuts, which would have hurt the economic recovery. All good.

But besides the permanence of the Bush tax cuts, there are other bad things in the deal. The estate tax, which beginning on January 1 returned to Clinton-era rates (estates valued at $1 million were exempted and estate transfers over that amount were taxed at 55%), is now permanently Republican-friendly: a $5 million ($10 million for a couple) estate exemption (indexed to inflation) and a top tax rate of 40%, which, as Chris Van Hollen (D-Md) said, is a “sweetheart giveaway to the wealthiest 7,200 estates in the country.”

Capital gains taxes, which enabled the Mitt Romneys of the world to enjoy millions of dollars in income and pay only 15% in taxes on it, will rise to a mere 20% (23.8% if Obamacare taxes are figured in) for those couples making more than $450,000 ($400,000 for individuals). So, if you are Mitt Romney, you will have to find a way to live without that extra dough. Somehow I think he’ll cope.

But he may not even have to worry about coping. Bloomberg Businessweek reported the following about the increased capital gains tax in the new bill:

Many households with incomes above $500,000 won’t face the higher rates at all, because deductions are subtracted from gross income before the rates are assessed.

Finally, the deal Joe Biden brokered with Mitch McConnell does nothing but delay a fight over the sequester and over the dreaded and fast-approaching fight over the debt ceiling that Republicans have pledged to use as a tool to force Democrats to cut entitlements. We are guaranteed to go through all this nonsense again, though this time it would threaten an economic crisis that would dwarf the one we just averted.

President Obama, in his statement after the House vote on Tuesday night, said this:

Now, one last point I want to make — while I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed. Let me repeat: We can’t not pay bills that we’ve already incurred. If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff.

Even though the President went to some trouble to explain that he will not negotiate with Congress over yet another stalemate over the debt ceiling, it is hard to see how he can avoid it, especially since Obama’s press secretary took the “constitution option” off the table recently:

This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling — period.

Section 4 of that amendment says,

The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Now, it is true that the President himself has not actually ruled out such a thing, saying this summer only that,

I have talked to my lawyers. They are not persuaded that that is a winning argument.

That statement, obviously, assumes court involvement. But any judiciary action—and some smart people believe the courts would not even get involved in this political matter—would require time. And Mr. Obama may conclude that by educating the public on the dire consequences of a failure to raise the debt ceiling, and given the extreme unpopularity of Republicans in Congress, that he will have plenty of latitude to do what needs to be do.

Additionally—and this may be the saving grace of this deal for Democrats—Obama said on Monday:

…if Republicans think that I will finish the job of deficit reduction through spending cuts alone — and you hear that sometimes coming from them, that sort of after today we’re just going to try to shove…spending cuts at us that will hurt seniors, or hurt students, or hurt middle-class families, without asking also equivalent sacrifice from millionaires or companies with a lot of lobbyists, et cetera — if they think that’s going to be the formula for how we solve this thing, then they’ve got another thing coming.  That’s not how it’s going to work.  We’ve got to do this in a balanced and responsible way.

That rather strong statement suggests that Obama has a definite strategy in mind for dealing with Republican threats to wreck the economy in order to get what they want.  If he does, and if his strategy is successful, the bad things in the fiscal cliff deal will not look so bad.

And let us hope that what Democrats have done—setting in stone tax cuts that have partly contributed to our fiscal problems—will not someday hinder them as they attempt to protect vital government programs from those who mean to drag the country back into the 18th century.

_____________________________

*For those couples earning between $250,000 and $450,000, less generous Clinton-era tax exemptions and deductions will return, which will increase their tax liability and likely satisfy President Obama’s insistence of tax increases for the “top 2 percent”; but the tax rate cuts themselves are permanent for those couples making under $450,000, which is less than 1% of taxpayers.

13 Comments

  1. King Beauregard

     /  January 2, 2013

    Here’s the thing about “permanent”: nothing is permanent. With a different Congress it will be possible to increase tax rates as needed, but with this Congress you take what you can get. Lots of administrations have raised taxes before; even the conservative man-god Reagan did.

    Like

    • King B,

      Yes, nothing is permanent. But I think you are underestimating how difficult it is to pass and keep tax increases. The most broad-based tax increase in recent history was the 1993 Deficit Reduction Act , right after the election of Bill Clinton, who actually campaigned on higher taxes on the rich. The new marginal tax rates as part of that package lasted a grand total of 7 years, thanks to George Bush and the Republicans. And as you know, restoring those higher marginal rates to less than 1% of taxpayers was, well, a disgusting process.

      That 1993 bill, advanced in a Democrat-controlled Congress, did not receive a single Republican vote and many Democrats even voted against it. It ultimately passed the House 218-216 and VP Al Gore had to break a tie in the Senate. That’s how hard it was to get taxes raised to help keep starve-the-beast deficits from eating us alive.

      And I don’t have to remind you of what happened to George H.W. Bush when he raised taxes, against his pledge not to do so. We can also go back to Sen. Bob Dole and that big increase in 1982 under Ronald Reagan. Both of those moments are legendary among conservatives, in terms of their idiotic idea that “we give them tax increases and never get the promised spending cuts.”

      I just happen to believe that this was a unique moment for Democrats to act more responsibly than Republicans relative to the need in the future to bend the curve away from unsustainable deficit spending. I would have advocated for a temporary extension of the cuts for the 98% (say, five years), along with a gradual increase in the marginal rates for folks in the upper middle class (say, $100,000 and up). And, sure, that would have meant President Obama especially would have taken a hit, since he campaigned strongly not to raise taxes on the middle class. I think, though, he could have made the case, using Clinton-era rates as an example, that it was the responsible thing to do and that Republicans were acting completely irresponsibly.

      And in my opinion, the fallout from that would have paled in comparison to the fallout of the deal he will likely have to make with Republicans over the debt ceiling, sequestration, and budget resolution, should he forgo the controversial constitutional option or weirder things (like a $1 trillion coin).  I am absolutely convinced that Republicans will risk the fiscal health of the country, if not the world, in late February or March. They are receiving too much criticism from the far right over this modest deal, and they will not disappoint the fringe next time.

      Duane

      Like

      • King Beauregard

         /  January 3, 2013

        What was passable in 1993, tax-wise, may not be what is passable in 2014 or 2016. 1993 still saw a lot more faith in supply-side economics, and demographics for the Democrats were worse than they will be in coming years. With a better Congress, we could see the top level go up to, say, 45% … can’t happen with the Congress we have now, but in a few years, we’ll see.

        Like

        • King B,

          A better Congress, indeed, is what we need. But I will tell you that we can take the top rates up to 45% or 55% or whatever percent we want, and we still won’t have enough money to meet our obligations, at least as they exist now. The middle class will have to be asked to pay a little more in taxes or the things government does (like infrastructure improvements, which it is not sufficiently doing even now, or social insurance programs) will go away or get reduced so much it will cause real harm.

          That’s my point in this piece. And since I wrote it, I have heard others with much more clout say the same thing, that Democrats may live to regret the permanence of what they have done, even if it was the wise thing to do as a temporary measure.

          Duane

          Like

          • King Beauregard

             /  January 4, 2013

            As Abe Lincoln said at one point during the Civil War, when there was a risk of an international incident with England blowing up: “One war at a time”. I don’t see any other way to proceed, therefore I’m going to be reasonably fine with this.

            Like

  2. ansonburlingame

     /  January 2, 2013

    Duane,

    You have pointed out the coming debate quite well. Two Congressional leaders did so also last night. Camp (GOP) said “We have now defined the appropriate level of revenues for the federal government” (or words to that effect). Levin (Democrate) said “No, we have not done so” (or words to that effect). Thus round two is set to begin today.

    Note the mantra from the President calling for a “balanced approach”. Last night Congress approved a $41 dollar tax increase for every $1 dollar in spending cuts. As well all the increase in tax revenues (about $60 Billion annually) will be needed to cover unfunded spending in the next year (like $30 Billion in unemployment benefits) and the “natural” inflation in big ticket items like Medicare. So for sure, last night nothing was done to “reign in the deficit”.

    I believe we all understand the “form” of the next “cliff” debate. The President has achieved a relatively meager increase in tax rates on the rich, an increase that does nothing to “reign in the deficit”. While nothing is permanent, you know as well as I do that NO ONE will call for a tax increase for people below the new threshold of “rich” ($450,000). But Democrats will now focus on further tax increases on the “rich” through changing tax codes (deductions).

    Bohner even suggested some $800 Billion in revenue increases (with no specifics) through such “loophole” changes. You can bet Democrats will take that figure and run with it to further increase federal revenues.

    But the real question is how much in spending cuts will be agreed upon by you and Democrats in general? Not much is my supposition and certainly nothing that will lower entitlement spending by any significant amount and do so “permanently”.

    You might recall about a year or so ago I suggested that we try to define the real number needed to be spent by the federal government each year. Forget taxation, spending, etc.; just define exactly how much money does the federal government “need” to spend each year. The President did so in 4 different budget submissions and Congress voted them “down” each year or completely ignored such suggestions. Instead we have paid for government through continuing resolutions for now 4 years and probably will do so for this fiscal year as well.

    If we the people could ever agree on that number alone (the amount we “need” to spend) then we could then decide where the money must come from to pay for all our “needs”. Camp said we have now so defined that number and Levin says “no way have we done so”.

    Thus last night Congress, again, failed to “define the scope of the problem” and has yet again kicked the can down the road for others to decide “later”. That is “compromise” in America today, kick the can down the road for others to deal with, “later”. That frustrates both of us for sure which I suppose is some form of agreement in frustration.

    Anson

    Like

    • Anson,

      1. You are correct that the worst is yet to come.

      2. The reason there was a roughly 41:1 ratio in the fiscal cliff settlement is because GOP hardliners refused to give an inch prior to that settlement. Thus, they got stuck with very little spending cuts and zero reforms. But they did get, as only a few of them realize, a major concession from Democrats: a permanent cut in taxes that Democrats used to partially blame for the deficit problem we have.

      3. President Obama has clearly demonstrated he is open to entitlement cuts, particularly those that piss off liberals like me: changes in CPI calculations and raising the eligibility age for Medicare recipients. But he has also said that going forward he will discuss those cuts only in the context of an increase in revenue, which presumably in the context of the present constitution of Congress means in the form of some kind of tax reform proposal.

      4. Your side now has the burden of presenting to the public clear cuts in the budget it wants to undertake. Democrats will not, or I should say, “should not,” do the dirty work for Republicans. If they intend on taking the country to the brink of financial ruin, they are obligated to say exactly what they want out of any deal. That means they will have to be honest with the people and tell them specifically what it is they want to do, in terms of “reforming” entitlements and other reductions in government spending. If Democrats don’t make them do at least that, then Democrats are a sorry lot.

      5. I am frustrated by the fact that Democrats seem to have bought into the Republican orthodoxy of fat tax cuts and skinny government. You might not think so, but that is the direction we are headed, if Democrats become afraid of Republican threats coming in six weeks or so. Essentially, the language is set in Republican terms, as from this point on we will be talking about “cuts” and “Greece” and other such terms of Republican dark arts. Democrats should, in my humble opinion, not only force Republicans to name the cuts they want, but allow them to self-destruct, should they be completely serious about shutting down the government and ruining the full faith and credit of the country, if they don’t get those cuts.

      But I have my doubts about the courage of President Obama and other Democrats in calling the bluff, if it is a bluff, of extremist Republicans in Congress.

      Duane

      Like

  3. Troy

     /  January 2, 2013

    This morning some Republicans said that they will let the country default on its debts in order to get the President to make serious cuts in the entitlement programs. And I believe they will. Get ready for another serious recession. And the beat goes on. This is going to be some real fun, eh?

    Like

    • Troy,

      I believe them, too. And this won’t just be a recession, if they do what they threaten to do. It will be a worldwide problem, with the full faith and credit of the United States in grave danger.

      I heard Sen. Pat Toomey on MSNBC this morning saying that the debt ceiling was definitely leverage and they were going to use it. Of course, he said they could manage it in such a way so as not to do real harm to people. Bullshit. As 2011 showed, fiddling around with our credit worthiness can do real damage, especially if it is widely believed that Republicans mean it this time.

      We need an uncharacteristically bully-Obama. One who will first have to educate the public about what is about to happen, thus short-circuiting Republican efforts to use Americans as hostages, and one who will have to have the will to let the GOP commit electoral suicide by intentionally inflicting harm on the country to satisfy their extremist core.

      I plan to write about that soon because I find it so important for the country and such an important moment for Obama and the Democrats.

      RDG

      Like

  4. ” You are correct that the worst is yet to come.”

    Duane, I agree the worst is yet to come but largely for republicans. This was not the best deal that we could’ve hoped for but far better than the republicans would’ve liked. The republican party is becoming fragmented, disoriented, and about to implode on itself. The photo op with Obama and Christie hugging had a positive impact for both during the election, and that positive is about to be revisited. During the late hour “fiscal cliff” negotiations another very important concern was left hanging without any immediate hope for resolution.

    The victims of hurricane Sandy are still without needed government aid that was promised them. Unfortunately for the right some of the areas hit the hardest by Sandy are areas with a high density of right-wing voters which places both Representative Peter King, and Governor Christie in a uniquely personal and stressful situation. Republican members of congress are actually debating member of its own party as to the amount of money to be allocated to Sandy victims with the congress right reducing funds to essentially pennies of what was promised. Enough said. Watch this video.

    Like

    • HLG,

      I don’t disagree that at this time, the GOP “is becoming fragmented, disoriented, and about to implode on itself.” But such things have a tendency to change. For instance, if Republican leaders withdraw their pledge to fight over the debt ceiling, and say they will only argue over the budget resolution, then I see a way for them to regroup and save themselves from electoral destruction, as long as they don’t shut down the government wholesale. Boehner can accomplish this by simply allowing any Senate-passed legislation on the budget to go to the floor and bet passed with the 200 Democratic votes plus a handful of Republicans. I don’t look for that to happen, but it is a way that fortunes could change for them. (This also assumes that Democrats don’t back away from filibuster reform, which is a distinct possibility, since they have extended the opening day of the session for a few weeks.)

      The Sandy Hook aid is something Republicans will fix rather quickly. Sure, the fringe elements of the party, like the nutty congressman next door to me in Kansas, will say stupid things about it, but the party chiefs no what it would do to the party if the aid gets held up for much longer. As you know, Peter King has been appeased, and he stopped saying bad things about his party. Christie, I am guessing, will soon be the same way.

      Duane

      Like

  5. I agree, nothing is permanent. Nothing is set in stone. It’s like 1,000 lawyers at the bottom of the sea. It’s a start. Also, we got an increase in the capital gains rate, not an elimination, which is what the righties wanted. I can’t see how that’s a bad direction to be going. Let’s see how it goes in the next few months. The President all but said that he would raise the debt ceiling himself and would refuse to negotiate. That’s good news. The 2014 elections will be the prize we have to keep our eyes on, don’t forget. And we’ll all survive until then, thanks to this compromise. Happy New Year!

    Like

    • Brad,

      Happy New Year to you!

      I agree that how Obama conducts himself over the next couple of months will tell us a lot about how much of a “victory” was for Democrats. If he truly refuses to negotiate over the debt ceiling, if he chooses another option like the Fourteenth Amendment, then he will go a long way to making the deal worth it.

      But there are also limitations from the deal that he will find restraining. The only way out of them, that I can see, is a plan to use tax reform to get additional revenue going forward. Absent that, I don’t see how Democrats can get completely out of the box they are in, even though robust economic growth will take care of a lot of the deficit, through increased government revenue.

      Duane

      Like

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