President Obama has made clear that he will not accept a deal to avoid the "fiscal cliff" that does not include tax rate increases for families making more than $250,000 annually. But just how much will this tax increase accomplish in terms of reducing deficits and putting the nation on the right fiscal track? As it turns out, not much.
For some perspective, think back to how Obama and Congress arrived at this point. In 2011, Congress created the so-called supercommittee to reduce the deficit as part of a deal to increase the debt ceiling and let the federal government borrow more money. But when it failed to agree on a sufficient amount in actual spending cuts, the supercommittee instead adopted notional spending cuts that are now set to take effect on New Year's Day -- the dreaded "sequestration." These cuts come to $1.2 trillion over 10 years -- about half a trillion each on defense and domestic spending, plus associated savings on debt service.
But during the third presidential debate, when Mitt Romney brought up the sequestration, Obama stated emphatically that it "will not happen." It was a politically necessary position for him, considering the devastation that the sequestration would inflict on swing states such as Virginia. So just to avoid the sequestration, Obama has already committed to $1.2 trillion in extra spending that adds to the deficit. Add in the cost of avoiding scheduled cuts to doctors' payments in Medicare (the "doc fix") and the extension of unemployment insurance -- both of which Congress is certain to do -- and you end up with at least $1.5 trillion in additional spending overall. That's not even counting the annual adjustment that prevents the Alternative Minimum Tax, which is supposed to hit only the wealthy, from slamming tens of millions of middle-income taxpayers.
If tax rates on the wealthy increase to pre-Bush levels, as Obama is demanding, they will raise only $866 billion in new revenue over 10 years, far less than the cost of preventing the sequestration. Granted, Obama did include additional revenue raisers in his September 2011 deficit reduction plan. But not only would these provisions not pay for all the items listed above anyway, but most of them (such as reducing deductibility of charitable contributions) are political fantasies that face insurmountable bipartisan opposition in Congress.
In short, Americans are about to get a large tax rate hike on small businesses, which will inhibit their ability to hire, expand and survive. Add to that the growing threat to businesses from Obamacare, which is rapidly accelerating a shift to part-time workforces from full-time ones, and the full extent of the looming disaster for lower-income workers becomes clearer. And for all this pain, there will be no corresponding reduction to the federal deficit.
Obama has talked about taking "a balanced approach" to the deficit, and he criticizes Republicans for their unwillingness to accept tax increases in exchange for spending cuts. But GOP skepticism toward such deals is well-grounded. Whenever these deals are struck, the spending cuts are inevitably undone and the tax increases go into effect. The Republican skeptics are now being vindicated in real time.