January 1st, 2013

Congress’s fiscal cliff deal

Here’s the way it stands so far:

— 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, which Obama had lifted earlier this year, 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.

It’s gotten through the Senate and has yet to be passed by the House.

As for the consequences, this certainly does very little to solve our difficulties in financing government. It’s very much a case of jockeying for political gains and kick the can down the road.

That said, it seems somewhat better than I thought it would be in the political sense, although that’s a tentative conclusion at this point. I thought Obama would get much more from the Republicans and give up even less.

But the bottom line, politically—at least as best I can figure it—is that for most voters this is very much inside baseball. Bloggers and pundits can jaw-jaw all they want about it, and each side can claim some sort of victory (or criticize a perceived defeat), but my sense is that most Americans are heartily sick of the bipartisan lack of ability of our “leaders” to tackle our serious problems.

21 Responses to “Congress’s fiscal cliff deal”

  1. parker Says:

    “It’s very much a case of jockeying for political gains and kick the can down the road.”

    And the can bloats ever larger everyday. One day we will find that it has become so large it can not be kicked. Oh well, I assume the equity markets will react positively if this clears the House. I’m curious as to how the bond markets and credit rating agencies will react over the course of the first quarter. Its going to be another extremely interesting year.

    Patricia Barber’s take on the Beat Goes On, enjoy.

    http://tinyurl.com/au34fcp

  2. Gary Rosen Says:

    “I thought Obama would get much more from the Republicans and give up even less.”

    No such luck. From AoSHQ, BO is spiking the football:

    “WH tells colleague Ed Henry Obama broke R’s tax pledge. Calls it “1 of the most consequential policy achievements of the last couple decades”

    That is why I hate him so much, it’s never about what is good for the country but only what is good for him politically. As for the deal itself, it’s a fraud because spending was not addressed at all. Because BO was re-elected and the Dems control the Senate there was no way to avoid tax increases so the only play for Republicans was to demand serious spending cuts and entitlement reform which they failed to do.

  3. Kae Arby Says:

    — 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 deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.

    I take it this means that we’ll be doing this all again in February?

    And what’s this about the voluntary transfers from traditional IRA’s to Roth IRA’s?

    KRB

  4. M J R Says:

    Spiking the football:

    When the incumbent preens,

    -1- He thinks it’s all about Him to begin with;

    -2- He will preen even if He hasn’t gained all that much, because He knows that the mainstreamers will eat it up and it will appear to the lower-information dude that He’s actually accomplished something significant; and

    -3- He gets His gargantuan ego fed and comes to believe even more in His own unapproachable magnificence.

    In engineering, a feedback loop.

    Pardon me whilst I GAG.

  5. M J R Says:

    Kae Arby, 5:18 pm — “And what’s this about the voluntary transfers from traditional IRA’s to Roth IRA’s?”

    They’re counting on something to happen in a particular magnitude of happenings.

    When one converts traditional-to-Roth, one pays heretofore unpaid income tax on the heretofore untaxed traditional assets, in return for not getting taxed on the assets (or on their presumed increase) within the Roth IRA in the future.

    Something that would have happened anyway, seems to me. But what do I know?

  6. J.J. formerly Jimmy J. Says:

    KRB asks, “And what’s this about the voluntary transfers from traditional IRA’s to Roth IRA’s.”

    I think they assume that those in the higher income brackets will be motivated to transfer their traditional IRAs to Roth IRAs to avoid the bigger taxes down the road. Since I’m not in that league, I haven’t run the numbers. The tax avoidance gurus will probably be recommending this. It represents a short term boost to revenues. Obama and company seem to only think about three months ahead. Just as the alcoholic only thinks ahead to the next drink.

  7. rickl Says:

    It’s Kabuki theater. I just can’t take it seriously.

    Wake me when they start cutting entitlements.

  8. Otiose Says:

    The Republicans should fall over themselves to sign this deal.

    It’s very unlikely that Obama intends any spending or entitlement reform – he fully intends to go over that cliff probably because he believes he can blame the Republicans and it will benefit him in the 2014 elections coming out of which he will be able to consolidate power with a Democratic House and strengthened hand in the Senate.

    There are likely to be further postponements of the cliff, but it’s probably in the best interests of the Republicans to take a stand well before those elections.

    The only issues are who will get the blame and who will come out of 2014 with a better position.

    In view of the above it seems to me this deal is a gift to the Republicans that they should sign onto because it allows so many of the side issues to be put aside / minimizes collateral damage and therefore collateral political fall out.

    It also allows the focus to shift to the issue of spending and the rapid accumulation of unsustainable debt and away from tax increases on the rich.

    And that’s very firm ground for a stand on principle.

  9. KBK Says:

    The tax deal could have been a lot worse. Eight out of ten of the richest counties went for Obama, screw ‘em. The middle class retains their rates, and more importantly, they are “permanent”, for whatever that’s worth.

    The whole Kabuki does nothing for the deficit – that’s on the spending side, battle yet to be fought.

  10. southpaw Says:

    All that remains in the opening act of “Blockhead of the House”, is for “the caveman” Charlie Boehner Brown to fall flat on his back, when Lucy Reid yanks the future spending cuts out from under him.

  11. parker Says:

    I want the House and Senate republicans to vote present on any legislation dealing with the budget, taxes, and the debt ceiling between now and the campaign of 2014. Simultaneously they need to conduct a PR campaign to let the voters know that the coming disaster belongs to BHO and the rest of the dimwitted tide. Meanwhile they need to turn over the stones of F&F and Benghazi. Nasty, slimy creatures squirm in the damp darkness under those rocks.

  12. Don Carlos Says:

    Boehner and 84 fellow GOPers just voted for it, and 151 GOPers voted against.
    Pelosi and all 171 fellow Dems voted for.
    I guess Boehner will win re-election as Speaker by a lesser number.
    The fight is on in the GOP.

  13. M J R Says:

    http://www.powerlineblog.com/archives/2013/01/an-optimistic-take-on-the-cliff-deal.php

    An Optimistic Take On the “Cliff” Deal
    by John Hinderaker
    Powerline
    Posted on January 1, 2013

    Here are some glass-half-full observations on last night’s McConnell-Biden fiscal deal from an inveterate optimist.

    Raising taxes on those who are already paying roughly double their fair share, while leaving everyone else’s taxes the same, is lousy public policy. But from the Republicans’ point of view, it may be good politics. For the last four years, the Obama administration has run up unprecedented deficits, adding more than $4 trillion to the national debt. How has President Obama justified such profligacy? He has been a broken record: his mantra is that we just need to increase taxes on the “wealthy,” restoring them to Clinton-era rates, and then everything will be fine. He has never offered any other plan either to raise revenue, or to control spending. Raising taxes on upper-income taxpayers is the only card in his deck.

    Knowledgeable observers always knew that nothing Obama said about fiscal matters made any sense, because raising income tax rates on the “rich” barely makes a dent in the deficit. But we learned in November that most voters are not knowledgeable. President Obama won re-election, and now he has gotten his way: marginal income tax rates on high earners are being restored to Clintonian levels (assuming the House goes along). Isn’t that, for the Democrats, an ominous development? Their call for higher taxes on the rich was never a serious policy proposal; it was always sheer demagoguery. It was a politically popular way to deflect all meaningful talk about the budget.

    But what happens now that Obama has gotten his way? It will soon become apparent that the fiscal cliff deal, including precisely the tax increases that Obama has been demanding for four years, makes hardly a dent in the deficit. At best, it will reduce the deficit by five or six percent. We will continue to run up deficits of close to $1 trillion a year, and the national debt will continue to grow, as Obama has always intended. This fact can’t be hidden; it will be reported. Journalists who have pulled their punches in the past because they wanted Obama to be re-elected will now begin to ask, what are we going to do about the deficit and the debt? At some point, perhaps sooner rather than later, interest rates will begin to rise, at which point the debt issue will become a crisis. And Republicans will say: we told you so.

    The Democrats will have only three choices: they can try to raise taxes on the “rich” even higher. But raising them to 100% wouldn’t deal with the deficit, even if you assume all those rich people are willing to work for free. The second option is to restrain federal spending. The Democrats would rather die than do that. The third option is to try to raise taxes on all those millions of Americans who aren’t rich. That is what the Democrats will do once the moment arrives when they can no longer ignore the trillions of dollars in debt they are inflicting on our children. That will be, politically, a very bad moment for the Democrats and a very good one for the Republicans, who can offer the alternative of less spending and who will have been proved right with respect to the biggest policy debate of recent years.

    All of this is another way of saying that, with the Democrats’ BS about raising taxes on the rich out of the way, we can have a rational debate about the country’s fiscal future. And that is a debate the GOP can win, as most voters continue to believe that it is better to cut spending than to raise taxes on them. So let’s not despair: the post-cliff landscape may well prove favorable to the sorts of reforms that have been impossible for the last four years.

  14. Gary Rosen Says:

    MJR: Most of the Powerline analysis makes sense. But I disagree completely that the press will begin to question Obama’s policies. They are all bought and paid for toadies of the administration and will lie and deceive to whatever extent is necessary to put the blame for anything bad happening on the Republicans, or Tea Party, or anyone not on the left.

  15. holmes Says:

    The public can be sick all they want of our feckless leadership, but they voted them back in.

  16. Don Carlos Says:

    Hey, the Won won. The ignorant and the la-la land voters will get what they deserve. Me, I’m gonna eat my “traditional” IRA; paying a disgusting amount of tax to feed the monster, just to convert it into a (for now) tax-free Roth for my heirs was more than I could stomach. My heirs will get my nonIRA assets.

    If one eats one’s own capital, one has no income to be taxed.

  17. Sam L. Says:

    Can, kicked down the road a little, one (1) each.

  18. liz Says:

    To Don Carlos – please consult with a good tax CPA or read the tax rules before converting your traditional to a Roth IRA. There are a variety of rules on how to handle inherited IRAs, especially if the IRA goes to a non-spouse.

    But, why pay the taxes now when there is so much uncertainty as to future rules. Wait until the regs are written. You said it yourself that the government coupld change the tax implications of the Roth IRA.

    Every now and then, there is an article about the gov’t trying to convert all retirement plans to gov’t plans, since the market is “so risky” and the little ones just don’t know how to manage their accounts. (that was sarcasm)

    On another point – I think we should start calling the new tax levels as the “Obama tax increases” and not allow the media to just go back to the “Clinton-era” tax rates. They are trying to make us remember the “good times” and the huge surpluses from that time. However, I see no Democrat calling to go back to the Clinton-era spending levels.

  19. southpaw Says:

    MJR – good article, but at least one problem the Republicans need to overcome is the ability to take a winning argument to the public. Even when they’re on the right side of an issue, they’re unable to communicate it to voters.
    When the majority voters are hit with higher taxes, it’s easy to envision the Repbulicans as being blamed for the deficit spending- after all is said and done, they keep voting for legislation to raise taxes and debt ceilings which have no significant spending cuts, and then expect to point a finger at the Democrats when the s*@t hits the fan. Boehner and McConnel have fallen into this trap at every critical juncture where they might make a principled stand.
    It remains to be seen if they can win with a winning hand.

  20. M J R Says:

    southpaw, 12:24 pm — Agreed all the way.

    And I agree with neo when she cites this piece in her January 2nd blog as being too optimistic. But I thought it would provide a balance to all the pessimism afoot — my own pessimism very much included!

  21. Steve Says:

    Megan McCardle has an article explaining the pickle that dems are now in:

    http://www.thedailybeast.com/articles/2013/01/02/after-the-fiscal-cliff-what-do-democrats-want.html

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