Conservative Analysis of the Fiscal Cliff Tax Deal

The details of the “fiscal cliff” tax deal approved by the United States Congress after New Year’s Day and signed into law by President Barack Obama a few days later have been widely published.  I shall analyze and comment on the key provisions.

The deal extends nearly all of former President George W. Bush income tax cuts – those for the middle class and most upper class – permanently.  However, it raises income taxes on the highest earners, as well as on capital gains and estate taxes, although to a lesser degree than Obama had demanded.  The $400,000/450,000 individual/household threshold for the increase in the income taxes is much higher than the $200,000/$250,000 threshold the President had wanted. 

The capital gains tax and especially the estate tax increases Obama sought were also paired.  A number of other tax credits were extended.  The total $620 billion in projected additional revenue is less than the $800 billion Obama called for during the presidential campaign.  Note: after the election, the 43^rd President doubled his demand for total tax revenue. 

Although legally the deal represented a tax cut because the Bush income tax cuts had expired after the beginning of the calendar year, thereby returning tax rates to those of the Clinton era, essentially the bill represents a tax increase over 2012.  Not only will the upper class and some small businesses be affected, as well as some one-time earners (See my last post), but the capital gains tax increase will affect many in the middle class, as will the estate tax, especially for farmers and other small businessmen.

The end of the Social Security payroll tax holiday would have occurred without this deal, as neither political party intended to extend the temporary measure intended to stimulate the economy.  It was originally intended for one year, but was extended for 2012.  The payroll tax is the only method of funding Social Security.

The necessary annual fix of the Alternative Minimum Tax was made permanent by indexing it to inflation, thereby sparing tens of millions of American taxpayers this year alone from this burdensome income tax that was originally intended to prevent the wealthy from escaping total income tax liability, as well as countless taxpayers in the future. 

There were few spending cuts in this bill, as it was primarily a tax bill and also because it was mutually intended to delay temporarily most of the sequestration (the automatic across-the-board cuts to entitlements and defense Congress imposed on itself as in incentive to reach a more comprehensive fiscal deal), including the dangerous cuts to defense.  It was also necessary to do the annual “doctor fix” in regard to Medicaid reimbursements.  There were some spending increases, such as Obama’s proposal to extend insurance for the long-term unemployed.  The net cuts thus amounted to only around $15 billion.  The size of the cuts was surprisingly disappointing to us conservatives who were expecting – at worst – another deal such as the ones Presidents Ronald Reagan or George H.W. Bush accepted with a ratio of spending cuts to new revenue of at least two or three to one, especially given the leverage of the Republican majority in the House of Representatives.  With the tax issue finalized, they retain leverage after two months when the sequestration delay expires, if not before when the reaching of the debt limit becomes necessary to address.  Additionally, they will have the leverage on the appropriations bills.  It remains to be seen if this leverage, if used skillfully, will suffice to force the necessary drastic spending cuts, especially to entitlements, to improve the fiscal health of the United States.

The deal, for good or ill, ends uncertainty on taxes, which allows people to budget accordingly.  It avoided as much economic harm as Obama and the liberal Congressional Democrats would have imposed, but its tax increases will still be harmful to the economy, while it failed to address the debt crisis significantly.  Conservatives must continue to repeat the obvious: that the debt is the result of overspending, not inadequate taxation, and that increasing revenue only allows more spending, unless it is coupled with significant, long-term spending cuts.  Conservatives and Republicans were placed in a difficult fiscal and political position by the fiscal cliff.  Conservatives, such as the majority of Republican House members, were right to oppose the tax increase, but the GOP members in that body and the majority of conservative Republican Senators who voted for it were not entirely unreasonable in voting essentially to cut taxes from the Clinton-level and preventing irresponsible cuts to defense, as well as avoiding the continuation of the uncertainty of the fiscal cliff.  The political fear of being blamed for a massive tax increase on the middle class on top of the expiration of the payroll tax holiday was understandable. 

We conservatives and Republicans must stand firm on the fiscal crises to come, despite the expected intense political pressure from the liberal Democrats and their allies in the media, by promoting the principle of fiscal responsibility.  Only if the conservative Republicans in Congress are at least somewhat significantly successful in decreasing spending, in addition to blocking the additional tax increases sought by Obama and the liberal Congressional Democrats, then the fiscal cliff tax deal will be viewed in the context as a necessary minor loss that led to a larger victory.