The Cliff Deal in the Offing

December 31st, 2012 at 4:09 pm

From what I’m picking up in the ether (and from Ez Klein’s tweets and from here) it sounds like a deal is forming to avoid the cliff.

–The income tax rate for households with income above $450,000 goes from 35% to 39.6% ($400,000 for individuals);

–Couples with incomes above $300,000 would lose some tax exemptions from which they currently benefit;

–Dividend and capital gains rates go from 15% to 20% but only for households above $450,000;

–The estate tax goes to a 40% rate up from 35% and a $5 million exemption for an individual’s estate, $10 million for couples;

–Sequester is unresolved; AMT and doc fix (payments to Medicare docs) get patched;

–Another year of extended unemployment benefits; payroll tax break expires;

–Raises $600 billion in revenue over 10 years;

–Nothing on the debt ceiling!

I don’t know if this deal could pass both houses but I suspect it could.

Well, I’m always saying that politics is about compromise, and there are important parts of this deal that are real wins for the country—the deal marks the long-awaited end of asymmetrical tax policy on income tax rates that has prevailed for decades: the idea that rates can only go down, never up.  And a year’s UI extension is very welcome news, both for the long-term jobless and for the overall economy (it’s great stimulus).

But jeez…this meets the R’s further on their side of the field than one might have expected given the White House’s (WH) leverage.  The wealthy end up facing a considerably smaller tax increase under this deal—I’m sure the TPC will soon tell us how much smaller—than any other deal that the WH or D’s have offered thus far, including the Boehner-Obama deal under discussion in 2011.

As Ezra notes in the link above, the theory of the case for the WH is a) we avoid the cliff, finally break the R’s on tax rates, and get UI, and b) when we get to the debt ceiling fight, we’ll insist that for every dollar of spending cuts, there’s a dollar of new tax revenue.  If the R’s want a trillion in spending cuts for a debt ceiling increase of that magnitude, the WH will only agree if a) the R’s identify the cuts–no more D’s doing that work for them, and b) any such cuts are accompanied by the same amount in new tax revenues.

OK—but what are you gonna do, WH, when R’s say, “forget it…let’s default?”  Unless the President is willing at that point to tell his Treasury Secretary to go forth and borrow as needed—i.e., override the R’s—this plan will fail.

So, here’s my first blush response to this deal.  The thing that worried me most in the endgame is that the WH would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there.  Remember, the ultimate goal of Repubicans here is still to “starve the beast”–to shrink government by hacking away at both sides of its ledger–receipts and outlays.

Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default.  If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.

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38 comments in reply to "The Cliff Deal in the Offing"

  1. Russ Abbott says:

    Would you mind explaining why the Ds have abandoned the payroll tax holiday?

    • fausto412 says:

      Payroll Tax Holiday means that Social Security is borrowing funds from the government general funds which means they can claim it adds to the deficit. The normal way that SS is supposed to work it doesn’t add to the deficit until the trust fund runs out which won’t be for many years.

    • Jared Bernstein says:

      See piece by Zach Goldfarb in today’s WaPo on that.

  2. foosion says:

    You forgot:

    – the 2% payroll tax holiday will expire

    Is that enough to make this one of the largest middle class tax hikes in our history? Want to take bets on whether the Rs campaign in 2014 on Obama and the Ds raising your taxes?

    Obama may think he’s being conciliatory or some such, but everyone sees him as weak. The spending and debt ceiling fights are not going to go well.

    • Jared Bernstein says:

      I’ll add that–but it was lost a while ago…I’ll post on it soon if I can.

      • Billlaurelmd says:

        Jared, even if that payroll tax holiday was lost awhile ago, I would never expect the Rs to not claim that about Mr. Obama and the Ds. I’m very disappointed, and a little surprised that Mr. Biden would be even allowing such a result. 🙁

        • fausto412 says:

          It’s better. Now SS can’t be connected to any deficit discussion because again it isn’t adding to the deficit as it was originally designed.

  3. Blake says:

    If Obama were actually to deviate from his past behavior as conceder in chief and actually stick to his promise not to negotiate about the debt ceiling, then he would have to have the design for the $1 trn platinum coin already drawn up. That could have been the source of his comment about “being president for the next 4 years (I hope)”. He could be imagining a scenario where the Rs try to force the US government to default and, upon the minting of the $1trn platinum coin, shift tactics to try and impeach him (they did Clinton for much less).

    That sounds crazy, I know, but so does a lot of what comes out of the Rs mouths.

    • fausto412 says:

      I wish he did pick the fight…the man just got reelected. The only reason the house is controlled by R’s is because of gerrymandering.

      In many state wide elections the Democratic candidates got more votes yet sent ridiculous GOP delegations to the house. We should have a Democratic majority if the system wasn’t rigged.

  4. Alyosha says:

    The asymmetry of tax policy will end as of tomorrow morning.

    As for White House resolve in debt ceiling negotiations, we now have plenty of data points to make a realistic assessment.

  5. save_the_rustbelt says:

    Getting beat by Boehner and McConnell is like getting beat by the Detroit Lions.

    Anything on corporate tax rates? I did hear something about bonus depreciation.

  6. Bob Walling says:

    Well …. What I don’t see from you or Ezra (I did read it @Krugman) is this: To do this ‘DEAL’ is not only stupid, but irresponsible. The ‘Golden Rule’ is do not ever negotiate with terrorist! By accepting this deal you only guarantee to continue the hostage scenario! I can already give the script for the debt ceiling ….. Obama: ‘I will not play that game again’ …. Conservatives: No increase in the ceiling unless we end the Safety Net!!!!! ….. Obama: (after some posturing) OK lets change the CPI and cut benefits by 10% for SS, increase the age for Medicare to 75 and pay only 50% of a claim, OH MY! and we will turn over Medicaid to the states and not fund it any more, and finally you guys were right about ObamaCare!!!!! Now that is what I would consider a ‘Grand Bargain’!!!!!

    • Th says:

      Exactly. And to think the Democratic Senators stood there last night believing Biden when he promised they wouldn’t negotiate over the debt ceiling is beyond gullible. Nobody should believe that unless Geithner explains how he will keep borrowing without a debt ceiling increase and I haven’t seen that yet.

  7. TMG says:

    I heard quite a bit of grousing from some of my wealthy Democrat friends about their taxes possibly going up, so let’s not assume Dems budged on this solely as a cave to GOP.

    Lest we forget, both parties have their collection of people not wanting to “pay fair share.”

    • fausto412 says:

      if you voted for Obama, you knew what you were allegedly voting for…so the notion of Democrats not wanting to pay their fair share is nonsense.

      • readerOfTeaLeaves says:

        But then, the wealthy Dems that I know travel a fair amount and have zero interest in living in a nation that has become a Banana Republic. They’ve seen more than enough of that in other places on the globe. The folks that I know are far more focused on living in a healthy society than obsessing over specific tax rates and loopholes.

  8. urban legend says:

    Let’s imagine a scenario: the House passes a debt ceiling bill, but when it gets to the Senate, a single anonymous Senator, fully in conformity with Senate rules, puts a hold on the companion Senate bill. The President is supposed to default on payments on obligations incurred and shut down the government at great risk to the public on this basis?

    Paying the bills and enforcing the laws is an executive action. Construing the debt ceiling as forcing the executive branch default or refusal to execute laws duly passed by Congress and signed into law is unconstitutional — not because of the 14th Amendment, but as a fundamental violation of the separation of powers.

    The President does not need to dot every i and cross every t in explaining why he will not under any circumstances be the first President to default on paying the countries bills or to shut down the government. He just needs to say it, and let the Republicans and DC pundit class fulminate and do nothing — while the public and the markets are thrilled.

  9. davesnyd says:

    What am I missing– I thought you posted earlier that the “deal” had no increase in estate tax, dividend/capital gains, and reduced deductions but would bring in $600B.

    This deal has both of those things but you still list as only bringing in $600B– shouldn’t it be higher?

    What about the carried interest/hedge fund tax break– there was a lot of noise about that months ago but nothing any more. Any chance that gets fixed?

    Also– when you say patches for AMT and Medicare– does that imply this year only? Is there any movement for fixing both of those permanently? Are they still talking about a major tax reform that might finally fix those? Or is that now off the table?

    If there is major tax reform, when do you see that happening? What shape do you think it is likely to take? Which is perhaps a weak way of asking– do you think we’ll have a better tax system after that is done (assuming it happens)?

  10. rjs says:

    crawler on the evening news says no deal, house went home, we’re over the cliff..

  11. PeonInChief says:

    Last night my husband suggested that the only thing that could save us from Obama’s willingness to snatch defeat from the jaws of victory was Republican intransigence. He’s right!

    • fausto412 says:

      I hope it fails in the house. I am holding out hope. We need this fight…sometimes you have to get down and dirty to get what you really want.

  12. Fred Donaldson says:

    Under this proposed deal if you have family income of $500.000, you pay an extra less than $2,500. Talk about the rich stay richer.

    Meanwhile they want to cut the upper tier Social Security folks (less than $115,000) by nearly 40% under the BS chair guys’ plan. So, we will lose about $7,500 under this new regressive Soc Sec benefit plan (if passed), while the families with a half million a year income will pay a third that.

    How hard would it be to just stick to your promises if you are the leader of the country? If a neighbor threatens to blow up my house if I don’t cut off my hand, do I counter by ONLY cutting off my fingers? You don’t have to negotiate.

    • fausto412 says:

      Agreed…Obama should have taken it to the people…every day, multiple times a day and when he can’t talk…find someone else who can.

  13. The Raven says:

    I think, just maybe, Obama is hoping that some of the House Republicans will jump ship.

    …and they may.

    • fausto412 says:

      I hope they all stay consistent with the Boehner debacle…they voted no to anything less than full extension…so whoever votes yes now will look weak…open to primary challenge in 2014 assuming their district isn’t too gerrymandered.

  14. John T says:

    Jared, I didn’t hear anything about the overseas earnings tax holiday, which the GOP have been pushing for. If they get this there will be a huge loss to the Treasury.

    • Jared Bernstein says:

      Definitely not in the deal, thankfully! WH doesn’t like this tax break–and neither do I.

      • fausto412 says:

        nor I. It would be idiotic to do that.

        I heard my CEO go on the record as wanting that. Something wrong with businesses parking money overseas waiting for a tax break but it would be even more wrong to let them bring it over with a tax break.

  15. David in Cambridge says:

    Jared, if we dropped the payroll withholding back down to 4.2% from 6.2%, how much revenue does that represent? Could we make that cut revenue-neutral by:
    – subjecting earned income above $110,000 to the full payroll tax or some fraction thereof?
    – leaving a donut hole and subjecting earned income above some other threshold (perhaps $250,000) to the full payroll tax or some fraction thereof?
    – subjecting investment income above some threshold (perhaps $250,000) to the full payroll tax or some fraction thereof?
    – some combination of the above? And what would your ideal scenario be?

    And how stimulative would any of the above be relative to leaving the withholding at 6.2% for earned income below $110,000?

    I always hear grumbling about how silly the $110k cap is, but there never seems to be any serious discussion about changing it.

    Thanks, and Happy New Year.

    • Jared Bernstein says:

      It’s $110 bn in 2013. So real money and an unfortunate loss in stimulus when we still need it–many workers paychecks are already pinched. Raising cap of course makes sense–it’s not good that this option dropped out of tax debate–a failure by progressives.

    • purple says:

      There is a cap at $110,000 but there is also a cap on benefits.

      If you look at Social Security pay outs, they are decidedly progressive.

  16. T says:

    “Unless the President is willing at that point to tell his Treasury Secretary to go forth and borrow as needed”

    That to me is the biggest weapon in his arsenal. I keep hoping against hope that he will use it…I just don’t think it’s very likely.

  17. rjs says:

    havent seen anything about renewing the Mortgage Forgiveness Debt Relief Act…
    that would mean mortgage debt forgiven in short sales will be treated as income and be taxable in 2013…

    here’s the sausage: (157 pp)

  18. purple says:

    The payroll tax holiday was an awful compromise to begin with, as it fit right in with starve the beast. Now Dems are going to reap the whirlwind of that awful compromise, as Republican cries of tax increases are going to mesh well with what Joe Six Pack sees in his paycheck. And I’m pretty sure the majority of Americans forgot there even was a payroll tax holiday, they will just notice a smaller paycheck in 2013. Probably the majority can’t read all the fine print on their stub to begin with (not being elitist, just factual).

    Ugly times ahead in two months.