The agreement on taxes and spending that was announced last night must have been reduced to legislation, since the Senate has voted on it. Have you read it? I haven’t; nor have I yet seen the text published anywhere. John Boehner says he will delay a House vote for a few days so that members and the public can study the bill and figure out what it says. That is good, as far as it goes, but what we have seen over the past few weeks illustrates once again the evils of relying on secret, back-room negotiations rather than an open and transparent budgetary process.
For now, we have to rely on press accounts of what the legislation contains. The Washington Post says that taxes will rise for households earning $250,000 above, fulfilling President Obama’s campaign promise. Households over $450,000 ($400,000 for individuals) in income–reporters seemingly never think to ask whether we are talking about adjusted gross income, taxable income or something else–will see their rates rise to Clinton-era levels. Taxes on dividends and long-term capital gains will rise from 15% to 20% for the same group. Households with incomes over $250,000 will lose deductions, as yet unspecified in the press.
These provisions are bad for two reasons. First, they are unfair. They raise taxes on the very citizens who are overtaxed already. Second, the amount of revenue they raise is pitifully small. The press describes it as a $600 billion tax increase, but all of the numbers used to describe the deal are grossly inflated because they ostensibly cover ten years. So the tax increase amounts to roughly $60 billion per year. With annual federal budgets in excess of $1 trillion, the new tax increases will close approximately six percent of the budget, assuming that no taxpayers take any actions to avoid the new taxes. With marginal income tax rates set to exceed 50% in some states, it is easy to predict that to some degree, affected taxpayers will choose leisure over work, or structure their incomes to avoid the new taxes. So the real impact on the deficit is likely to be less than six percent.
Then we have the spending side, where it is not clear exactly what is going on. The Democrats had the chutzpah to demand that the scheduled sequestration, which involves more dollars than the agreed-upon tax increases, be deferred for several years–i.e., never happen at all. The parties apparently agreed last night to a two-month delay in implementation of the sequestration. What is the point of a two-month delay? Congress will be a little more Democratic in two months, and I can only assume the Democrats want to take a run at canceling the impending spending cuts after the new Congress convenes. If that is correct, then the Democrats do not consider the deal, as announced last night, to be final. And, of course, Obama has suggested that he intends to go back to the well for more tax increases. So the nation’s fiscal drama is only beginning.
The deal passed the Senate last night on a lopsided vote, but it is not a foregone conclusion that it will pass the House. The Washington Post suggests that some of the needed votes will come from lame-duck Republicans who don’t need to face the voters again. Funny how “statesmanlike” those Republicans can be when they are on their way out of office, and into (in many cases) lucrative lobbying jobs.
I didn’t make any predictions for 2013; I figured I was so wrong about 2012–I picked Mitt Romney to win, among other things–that I should give predictions a rest. But here is one: in the weeks to come, we will learn at least one or two not-yet-reported facts about last night’s compromise that will cause an uproar.
STEVE adds: Found one already, John. Apparently an extension of the wind production tax credit, a pure cave-in to a rent-seeking lobby, was included in the tax bill.