On New Year's Day, just after the expiration of the Bush tax cuts, Congress approved a tax package to avert the fiscal cliff.
The deal postpones only briefly the pending political battles. In March, automatic spending cuts, originally agreed upon in 2011 and delayed by the just-concluded deal, will kick in. A new fight over the debt ceiling also awaits, as does a new round of mudslinging and handwringing about deficits, debt defaults and Washington dysfunction.
In terms of deficit reduction, the deal accomplishes relatively little. Had all the Bush tax cuts expired, the increase in revenue over the next decade was estimated to approach $4 trillion.
But that increase was never going to happen, as President Obama and Democrats had always supported permanently establishing lower tax rates for individuals earning less than $200,000 a year and couples under $250,000. And Republicans had long opposed raising anyone's tax rates.
The final deal represents a compromise. Rates will increase from 35 percent to 39.6 percent on incomes over $400,000 for single filers and $450,000 for joint filers.
Many Democrats and liberals have been disappointed by this. If no agreement had been reached, taxes would have gone up automatically for the top 2 percent, rather than just the top 1 percent.
Furthermore, numerous liberal critics, including economist Paul Krugman, believe that Obama's capitulation on the $250,000 figure portends poorly for subsequent political clashes. It signals to Republicans that no matter how adamant he claims to be, the president will always yield in the end.
Most Republicans, on the other hand, consider this deal an obvious defeat, since they were forced to agree that some Americans' tax rates would increase, anathema to the party's prevailing ethos.
The yield to the treasury is about $600 billion or so over the next decade, a relative pittance, representing about a third of 1 percent of expected economic output during that time span.
President Obama did win other concessions in the legislation. Unemployment insurance receives an additional year of funding, helping 2 million people. The bill extends by five years various credits that liberals favor, including expanded earned income and child tax credits. Tax deductions phase out for couples making more than $250,000 a year. Capital gains and dividend taxes also go up on wealthy earners.
At the same time, the deal ends the 2-year-old payroll tax cut. To put our skewed political discourse in perspective, we have spent years intensively debating the merits and fairness of raising taxes on incomes over a quarter of a million dollars. Had we done so, a couple earning $300,000 a year would have paid an extra $1,800. By contrast, there was nary a peep about the elimination of the payroll tax cut, which results in a tax increase of $1,000 for anyone making $50,000 a year. These inequities have simply become part of the air we breathe.
More broadly, the focus on reducing deficits, particularly during a very sluggish economic recovery, is the wrong one. In fact, there is very good reason to believe that, for now, we should be running higher deficits, devoting more money to infrastructure, to job creation and to helping struggling Americans.
The economist Peter Diamond has argued that our political elites have acted as if we have a jobs problem and a deficit crisis when, in fact, we have a deficit problem and a jobs crisis.
In fact, non-defense discretionary government spending, relative to total economic output, is at its lowest level in decades, as are tax rates. In sum, we are not suffering because government is too big.
The mass confusion about this point stems from the mainstream media's failure to report coherently on these issues. During the debt ceiling fight in 2011, most media outlets parroted the conventional wisdom that we faced an intolerable fiscal situation requiring immediate and resolute action to reduce our deficits.
As the fiscal cliff loomed 18 months later, those same outlets insisted that impending tax increases and spending cuts—in other words, significant deficit reduction—would be an economic catastrophe. Obviously, both positions cannot be true, an elementary point lost in virtually all of the breathless reporting on these events.
The problem comes when the next fights begin, over those briefly postponed spending cuts and the debt ceiling. The money that President Obama bargained away from people making between $200,000–$400,000 a year will have to come from somewhere. In all likelihood, in addition to the Pentagon, it will come from vital public investments like education and from programs such as Medicaid vital to those already struggling. Millions of Americans face awful choices every day between postponing necessary health care, paying the rent or putting food on the table.
Government should be stepping into that breach. Instead, it is locking into place a taxation system that remains historically favorable to wealthy Americans at the inevitable expense of ordinary folks.
This article appeared in print with the headline "Cliff diving in D.C."