Despite loud warnings from many quarters that 'no deal, was better than a bad deal' the US Senate passed a fiscal agreement two hours after midnight in order to meet a self-imposed deficit deal deadline masquerading as a financial crisis.
With bipartisanship evidenced in the 89-8 vote, the agreement was interpreted as a "lousy one" by economist Robert Reich, who had been among those publicly advising Senate Democrats and President Obama to avoid making unnecessary concessions to Republicans in a fight that was contrived to protect the nation's wealthiest from tax increases in the New Year.
Nobel economist and New York Times columnist Paul Krugman—who spent much of New Year's Eve excoriating President Obama for the direction of developments and calling him the 'world's worst poker player'—argues the deal is less bad than it could have been (given the Obama's earlier willingness to concede much in terms of cuts to social programs), but said the real problem with the deal was the path taken to achieve it.
"[Obama] kept drawing lines in the sand, then erasing them and retreating to a new position," said Krugman in response to the Senate deal. "And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling."
Enumerating the negative aspects of the deal, Reich explains:
1. Republicans haven’t conceded anything on the debt ceiling, so over the next two months – as the Treasury runs out of tricks to avoid a default – Republicans are likely to do exactly what they did before, which is to hold their votes on raising the ceiling hostage to major cuts in programs for the poor and in Medicare and Social Security.
2. The deal makes tax cuts for the rich permanent (extending the Bush tax cuts for incomes up to $400,000 if filing singly and $450,000 if jointly) while extending refundable tax credits for the poor (child tax credit, enlarged EITC, and tuition tax credit) for only five years. There’s absolutely no justification for this asymmetry.
3. It doesn’t get nearly enough revenue from the wealthiest 2 percent — only $600 billion over the next decade, which is half of what the President called for, and a small fraction of the White House’s goal of more than $4 trillion in deficit reduction. That means more of the burden of tax hikes and spending cuts in future years will fall on the middle class and the poor.
4. It continues to exempt the first $5 million of inherited wealth from the estate tax (the exemption used to be $1 million). This is a huge gift to the heirs of the wealthy, perpetuating family dynasties of the idle rich.
Noam Scheiber, writing at the New Republic, echoes some of these concerns, but also comes down with Krugman when it comes to putting emphasis on the "strategic dimension" of how the deal developed and the manner in which Obama continues to negotiate. Scheiber writes:
[the deal] will reinforce the convictions that have made the GOP such a toxic presence in Washington. If Obama will cave even when he’s got all the leverage, when won’t he cave? Never, the Republicans will assume. If Obama’s too scared to stop bargaining and let the public decide who’s right in this instance, when the polls appear to back him, then he must think our position is more popular than he lets on. Suffice it to say, these are not sentiments you want at the front of Republicans’ mind as they prepare to shake him down over the debt limit in another two months. The White House continues to maintain that it simply won't negotiate over the limit. After this deal, why would any Republican ever believe this? I certainly don’t, and I desperately want to.
As in previous rounds of Obama-GOP negotiations, a lot of liberals are surely hoping that the lunacy of the House Republicans will save us from Obama’s overly generous offers. And, it’s true, House Republicans can normally be relied upon to reject a deal that’s absurdly generous by any objective measure but falls short of their virtue-police standard of purity. They may well do so again tonight, inshallah. But that doesn’t solve the broader strategic problem. Obama has already shown his cards on the parameters that will define his negotiations with Republicans throughout his second term. And there’s no one to save us from that.
For a summary of what the deal included, the Washington Post's Suzy Khimm provides this rundown:
- Tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.
- The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)
- The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).
- The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.
- The pay freeze on members of Congress and all other federal civilian employees, which Obama had lifted this week, will be re-imposed, .
- The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
- The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.
- The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.
- Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.
- The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year.
- Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.
- Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.
- A nine-month farm bill fix will be attached to the deal, Sen. Debbie Stabenow told reporters, averting the newly dubbed milk cliff.