Left Side of the Aisle #89 - Part 5

What "the deal" to avoid the "fiscal cliff" means

So - you heard about "the deal," the way we avoided stepping off the fiscal curb - excuse me, "cliff." It was all last-minute drama, all breathless rumors and reports, the heroine is tied to the railroad tracks and the train is coming and the hero is racing to her on his trusty steed and will he get there in time oh my oh my.

The media loves this stuff, loves dwelling on portents and possibilities because that's more fun than trying to do the boring work of understanding what it all actually means.

But, in any event, they did it. The Senate passed its measure at 2AM on New Year's Day and the House, after some rumblings of rebellion among the more foaming-at-the-mouth members of the GOPper caucus, followed suit at around 11PM the same day - with Democrats providing most of the margin of victory, as more than half of the GOPpers voted no.

So it's done.

Uh, yeah, but what is?

I'm not going to go through all the details of what was passed, including all the various special deals and breaks, but these are the major points:

On taxes:
- Permanently raised tax rates to 39.6% on income over $400,000 for individuals and $450,000 for couples filing jointly.
- Raised taxes on capital gains and dividends for those same households, from the current 15% to about 20%.
- Reinstated a limit to the value of personal exemptions as well as the value of itemized deductions for high-income earners.
- Set the estate tax rate at 40% on estates over $5 million, up from the 35% that applies now to those over $5.12 million.
- Continued tax breaks for middle- and lower-income folks such as the Earned Income Tax Credit and the Child Care Credit.
- Allowed the payroll tax holiday to expire.

On other matters:
- Continued extended unemployment benefits.
- Delayed for two months part of the $110 billion in spending cuts that otherwise would have taken place in early January with the $24 billion cost of that delay paid for by other cuts, half of which come from the DOD.

There was more to it than that, but I'm going to skip those details for now; you can research that information in any number of places, newspapers, TV, blogs, online news, wherever. I'm more concerned with, again, as I said earlier, what does it mean.

The White House issued a statement lavish with self-praise, which included the unintentionally-amusing statement "In 2012, he [that is, Obama,] kept his promise of asking the wealthiest 2 percent of Americans to pay more." Except, of course, his "promise" was that he absolutely would not accept any continuation of tax cuts for individuals making over $200,000 - and the agreement was for twice that, $400,000. And the changes would produce $620 billion in new revenue over the next 10 years - which was half of the proclaimed goal.

But more important is something that has not gotten enough consideration:

Federal government spending today is around 23% of Gross Domestic Product, or GDP, a figure that is not particularly high by historical standards or in comparison to other industrialized nations. Even total government spending at all levels is not high by international standards. Check out the two illustrations:

One is a map of Europe with nations color-coded by the portion of their respective economies that is represented by government spending. Without going into what all the colors mean, notice Switzerland there in the blue. That is the only one of those nations whose government spending is a smaller portion of their economy than the US. All the others are in the same range or higher.

The other illustration graphs government spending for the 20 largest economies on a per capita basis - that is, how much each government spends per person. The vertical axis is per capita spending, the horizontal axis is the size of the economy. The important line is the dashed one: That represents the average of all the countries graphed. Notice that the US is below the average. The conclusion - and the point - being that, again, US government spending is not large by international standards.

But getting back to the immediate issue, the point here is that tax revenue is around 16% of GDP. Now, it would probably be around 17% to 18% of GDP in a better economy: The historical norm since the end of World War II has been right about 18%. If Congress had allowed the Bush tax cuts to expire, that would have raised tax revenue by around 2.5% of GDP, to around 21% or even 22% of GDP, by the end of the decade. The Obama, the Senate plan, the House plan, the plan that was passed, will keep tax revenue at around 18% of GDP.

Whatever the exact numbers might have turned out to be, it still means that the White House unilaterally and permanently gave away more than 2% of GDP in net revenues, all in the name of symbolically "taxing the rich" and "protecting the middle class." The agreement raises taxes slightly on the top 1% of households, perhaps by 0.3% of GDP, while making permanent well over 2% of GDP in Bush tax cuts, tax cuts it's necessary to remind everyone were supposed to be temporary. That is, the deal just gives away large amounts of revenue to spare you, me, us, the horrifying inconvenience of having to pay same tax rates we did 12 years ago.

This was the time for tough negotiating, for using your leverage. Instead, the White House gave up the revenues permanently and without a fight. But that sort of criticism from President Hopey-Changey's left only irritates the White House, which sniped about "armchair criticism." I have no idea what that means; if I'm standing up, does that make my criticism valid? What does that even mean? Anyway, the administration attitude was more or less "How dare you question us instead of being grateful for whatever crumbs we offer you."

But the defensive whining doesn't alter the fact that yesterday's deal will make it impossible to get tax revenues to 21% of GDP under any realistic scenario, perhaps not even to 19%. With a revenue baseline of around 18% of GDP, there will be years of massive spending cuts ahead, cuts in spending on the poor, on the environment, on jobs, on social needs, on human needs.

And that's what's going to happen. The GOPpers are already saying that "Okay, taxes are now done, off the table. From now on it's all about spending cuts." Remember, the whole business of the sequestration comes up again in two months along with the need to raise the debt ceiling. When the GOPpers demand massive cuts, when they say (without, of course actually saying it) that we have to sacrifice the poor and the elderly and the hungry and the cold and the sick to satisfy the bankers, what is Obama going to say? What can he say? What is he going to negotiate with? How can he say "I'll only give you that if you give me this" when he no longer has a "this?" On domestic issues, on social needs, Obama now looks like a lame duck even before being sworn in for his second term.

Oh, but don't worry, he'll be tough next time. Oh yes, he will. He declared that he will not negotiate with Republicans over the debt limit - just like he would not negotiate about the $250,000 limit. Or just like last year when he would not let the Bush tax cuts continue for the rich. Or just like any of a dozen or more occasions that any of us could come up with, with a little thought. So now, just like all the other cases, it's "don't worry - we'll get 'em next time." A next time that I think is not going to come.

A footnote to this: The White House used incredibly deceptive arguments in trying to make its case for its bill. One that particularly irritated me was the claim that letting the payroll tax holiday expire, a holiday the White House originally wanted to continue, would cost the average taxpayer $2000 a year in increased taxes.

Since the cut was 2% of earned income, sure, that would be true - if the "average" taxpayer was making $100,000 a year. That's not quite double the actual median household income - not individual income, household income - in the US. As it turns out, the package as passed would raise taxes by that amount only on people earning more than $200,000 per year.

Sources:
http://online.wsj.com/article/SB10001424127887323320404578215373352793876.html
http://www.politico.com/story/2012/12/democrats-win-tax-fights-in-emerging-fiscal-cliff-deal-85625.html
http://www.whitehouse.gov/the-press-office/2013/01/01/fact-sheet-tax-agreement-victory-middle-class-families-and-economy
http://www.huffingtonpost.com/jeffrey-sachs/reject-the-deal_b_2392654.html
https://en.wikipedia.org/wiki/Government_spending
http://www.nytimes.com/2013/01/02/us/politics/some-liberals-say-obama-squandered-his-tax-leverage.html
http://www.washingtonpost.com/business/economy/house-members-meet-to-review-senate-passed-cliff-deal/2013/01/01/6e4373cc-5435-11e2-bf3e-76c0a789346f_story.html
http://www.washingtonpost.com/politics/the-impact-of-tax-increases-on-taxpayers/2013/01/01/4bef53f0-5475-11e2-8b9e-dd8773594efc_graphic.html
http://usatoday30.usatoday.com/money/economy/story/2012-02-09/income-rising/53033322/1