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The Fiscal Cliff Deal's Biggest Winner May Be George W. Bush

Note: This item was revised to reflect news developments early Tuesday morning.

First things first. At 12:00:00 a.m., we went over the fiscal cliff. And at 12:00:01 a.m., most Americans were talking about the new year, not the new fiscal regime.

As they should have been. In theory, midnight ushered in huge policy shifts: The tax code returned to what it was in the Clinton era, while a series of automatic spending cuts began to take effect. In reality, neither change will affect people right away. Employers and payroll companies haven’t adjusted their systems to withhold the extra income taxes, while the administration has instructed agencies to hold off changing their spending pattern. Everybody has assumed that President Obama and Congress would soon reach a deal averting most of the tax increases and postponing, or repealing, those spending cuts. That assumption was probably correct.

In the wee hours of Tuesday morning, just after the new year began, the Senate approved a compromise bill, the "American Tax Relief Act," that would raise taxes on the wealthiest Americans, extend emergency unemployment benefits for another year, renew expansions of financial assistance for working families, while postponing for two months a set of automatic spending cuts. The agreement, which emerged after last-minute negotiations between Vice President Biden and Senate Minority Leader Mitch McConnell, passed overwhelmingly, by a margin of 89 votes to 8. Now it goes to the House, which could take up the measure as early as Tuesday.

We'll find out soon enough whether it will pass. And I wish I could tell you how to feel about that. The truth is, I am really not sure—and probably won't be sure for a little while.

I could make a solid case that this deal, if it holds, would represent a massive defeat for liberals. Expiration of the Bush tax cuts represented the best opportunity for undoing the damage of those acts—for reclaiming the revenue those tax cuts squandered and, as a result, providing the government with enough money to continue funding vital programs. The deal the administration and Republicans were negotiating as of Monday would raise just $600 billion in revenue, which is less than half of what President Obama sought initially. 

To give you some perspective, it would take about $2 trillion in total deficit reduction to stabilize the debt-to-GDP ratio over the next decade, which is the goal many economists believe is necessary for medium-term fiscal policy. The less we get money from revenue, the more we have to get it from spending cuts. It’s as if President George W. Bush finally won—the tax cuts he’d always wanted would be staying on the books indefinitely, "starving the [government] beast" of the resources it needs to survive.

But that analysis is also too simplistic. For one thing, not all of the Bush tax cuts would be staying on the books under this deal. Taxes on higher incomes would return to their Clinton-era levels. Meanwhile, the non-rich would reap direct benefits from this deal. Jobless workers would continue to get unemployment benefits when state programs stopped sending checks. Kids and parents paying college tuition would get tax credits, while would low- to middle-income families with children and jobs would get extra assistance from the government.

Transferring money from the wealthy to the poor and middle-class—a fair interpretation of what this deal would do—is surely not the kind of policies that Bush had in mind when he took office. The shift would be temporary, yes: The expansions of the tax credits, for example, would last only a few years. But money now is more valuable than money in the future, since lawmakers can always take it away. 

In the end, how you think about this deal really comes down to expectations—for now and for the future. The expectations for now are about what you think the administration could have gotten (and maybe could still get) by holding fast to stronger demands. Given that all the Bush tax cuts expire at midnight anyway, the group Citizens for Tax Justice said, "America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely." AFL-CIO president Richard Trumka took to his twitter account to express his reservations, though he stopped short of asking lawmakers to oppose the deal. Wrote Trumka, "its not a good #fiscalcliff deal if it gives more tax cuts to 2 percent and sets the stage for more hostage taking."

Could the administration have gotten more revenue by holding out for a better deal? Quite possibly. But could the administration have gotten a lot more revenue? That’s less clear. Administration allies point out that congressional Democrats frequently floated ideas, like extending all tax cuts for incomes below $1 million, that would have generated far less revenue. Meanwhile, the administration managed to get a deal that, despite the revenue, includes no spending cuts whatsoever—on discretionary programs or Medicare, Medicaid, Social Security—even though Republicans had been demanding them.

Here's how one Democratic insider put it to me:

If you'd asked me, the Wednesday after Election Day, if I'd be happy with an [income tax] threshold at $450 billion, basically a split-the-difference on the estate tax—they got exemption, we got rates—unemployment insurance for a year, and a doc fix—which is the republicans main weapon to attack Obamacare—I'd tell you that's a pretty fair deal. And I basically feel the same way today.

In a sense, the real key to this deal is what happens next. The government will each its borrowing limit sometime in late February, right around the time those automatic spending cuts start up again. Republicans have said they will stick to a principle they established in 2011—that for every dollar they increase the ceiling President Obama must agree to a dollar in cuts. Republicans like Senator Lindsey Graham, who were among the first to concede that income tax rates for the wealthy would rise, have frequently cited the debt ceiling fight as the place their party can regain what it's losing now.

So how will Obama respond? Obama has said repeatedly he won't negotiate on the debt ceiling. And, in what was perhaps the most important public statement made Monday, Obama during a press conference made clear he thinks future efforts at deficit reduction must have "balance." Obama's idea of "balance" is deficit reduction that includes both spending cuts and new revenue, in roughly equal proportions—and Republicans acted angrily. On twitter, McConnell's chief of staff wrote "POTUS just moved the goalpost again. Significantly. This is new."

Actually, Obama has talked about balance before. But never mind that. If Obama follows through on these promises, then the fiscal cliff deal would look a whole lot better. It would mean deficit reduction through a more reasonable balance of new revenue and spending cuts—and an end to Republican economic extortion.

But to achieve those goals, Obama cannot cede new ground. He really can't negotiate on the debt ceiling. And he really must get deficit reduction that balances revenue with cuts. If the last 72 hours have made you doubt his ability to do these things, you have plenty of company.