Senate Passes Fiscal Cliff Deal

I awoke this morning in the New Year -- a few revelers still making noise on the street below -- to learn that the Senate passed in a 89-8 vote what's being called the McConnell-Biden Plan, details of which are compactly supplied in a New York Times sidebar.

The top tax rate for individuals earning above $400,000 a year, $450,000 for couples, reverts to the Clinton-era 39.6%, and capital gains and dividend taxes go from 15% to 20% for these earners; also, personal exemptions and deductions are phased out for singles making more than $200,000 and couples making more than $250,000.  The deal is projected to generate $600 billion in new revenue over ten years.

Where the administration got rolled was on the estate tax which bumped up a modest 5%, from 35% to 40%, on inheritances over $5 million.  Right now until the House passes the McConnell-Biden Plan and Obama signs it estates over $1 million are taxed at 55%.  This is a big giveaway and a huge loss of leverage.  Apparently Obama was pressured by some Democrats in Senate to go easy on concentrated wealth.

What the administration got was a one-year extension of emergency unemployment benefits (which are absolutely vital to millions of people), a permanent indexing of the alternative minimum tax for inflation, and an extension for five years of the middle-class tax cuts in the 2009 stimulus bill -- the child tax credit, an expanded earned income credit and a college tuition credit.

What all workers lost and what was never really on the table to maintain was the payroll tax holiday of 2%.  Most of us will notice a smaller paycheck in the next couple of weeks.

Overall no one appears satisfied with the McConnell-Biden Plan.  David Brooks supplies the consensus opinion that all this deal portends is more conflict: "Far from laying the groundwork for future cooperation, it sentences the country to another few years of budget trench warfare. There will be a fight over drastic spending cuts known as sequestration, then over the debt limit and on and on."  Then he proceeds to blame the dysfunctionality of our political economy on voters who feel entitled to health care when they retire; not a word about rising inequality or the outsized role of a too-big-to-fail financial sector.

Jonathan Weisman tells us what's in store the next couple of months:

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes would continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a law financing the government expires.

We'll hit the debt ceiling at the same time the two-month hold on the sequester expires.  Then after that, assuming we make it through without a default, we have to negotiate the continuing resolution that keeps the government running.

Paul Krugman frames the big picture on his blog this morning.  After being critical of the McConnell-Biden Plan as it was coming to fruition he is more positive today.  Neither Medicare nor Social Security is tomahawked, and the difference in new revenue between what Obama originally proposed and what he got is not a big deal when looked at in terms of GDP.  Krugman explains why it is the McConnell-Biden Plan leaves this bachelor feeling lousy:

So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.

If Obama stands his ground in that confrontation, this deal won’t look bad in retrospect. If he doesn’t, yesterday will be seen as the day he began throwing away his presidency and the hopes of everyone who supported him. 

Maybe the House will do us a favor and vote McConnell-Biden down.