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The good, bad & ugly of the ‘fiscal cliff’ deal

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Fiscal Cliff
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When it comes to assessing federal legislation, as with most things in life, people’s reviews are often pre-determined by their expectations. It’s worth keeping this in mind as feedback comes in from the “fiscal cliff” deal that passed through the Senate in the wee hours of New Year’s Day and that is now under consideration by the House of Representatives.

Conservatives believe that higher taxes are a bad thing, that the tax code needs to be dramatically overhauled and that the true driver of long-term debt is out of control spending, particularly on entitlements. For those who thought it was possible to emerge from the “fiscal cliff” showdown without tax increases, with genuine tax reform and with real spending cuts that made fundamental changes to entitlements, this deal is obviously a nonstarter.

For those who assumed that President Obama’s reelection and continued Democratic control of the Senate at a time when the nation was facing an automatic $4.5 trillion tax hike would inevitably mean higher taxes without actual tax or entitlement reforms, the deal is less bad. As the House considers the legislation today, I thought it would be worth assessing the good, the bad and the ugly of the “fiscal cliff” deal.

The Good

At the start of 2013, income taxes were scheduled to go up on nearly every American, but if this deal becomes law, roughly 99 percent of taxpayers would be protected from those tax hikes. For over a decade, Democrats opposed the Bush tax cuts and prevented them from becoming permanent. Now, they have voted overwhelmingly to preserve about 84 percent of the dreaded cuts, which for years they demagogued as only benefitting the very rich.

Lawmakers also agreed on permanent changes that minimized the tax increases on estates and capital gains. In addition, the deal permanently prevented the Alternative Minimum Tax (originally passed in 1969 to capture a small number of rich households who were avoiding taxes) from hitting tens and millions of Americans. From a more technical standpoint, this also means that the deal locks in a Congressional Budget Office revenue baseline that will be as low as possible. So, if future Republicans propose real tax reform, we won’t end up with estimates saying that their proposals would cost trillions of dollars, because such proposals will no longer be judged against an unrealistic baseline that assumes all of the Bush tax cuts would otherwise expire and open the floodgates to new revenue.

A less publicized but still significant positive from the deal is that it formally repeals the CLASS Act, a long-term care entitlement that is part of Obama’s national health care law. Originally the brain child of the late Sen. Ted Kennedy, the program was slated to collect years of premiums before paying out any benefits, so Democrats cynically exploited this fact to claim twice as much deficit reduction through Obamacare as existed in reality. The Obama administration has already suspended implementation of the CLASS Act after conceding it is unworkable. But it still remains on the books, waiting to be reinstated at some point in the future. The fiscal cliff deal would put a stake through the heart of this program once and for all.

The Bad

Taxes are still going to go up. Even with the cut off at $400,000 for individuals and $450,000 for families, the deal is still going to suck more money out of the economy and hit small businesses. And this is on top of the Obamacare tax hikes already slated to go into effect in 2013 – an additional Medicare tax, higher taxes on investment income and a tax on medical devices.

Also, the deal doesn’t represent actual movement toward a simplified tax code with fewer deductions and lower rates. Instead, it extends a whole lot of special interest tax benefits. For instance, there’s the “railroad track maintenance credit;” “extension of 7-year recovery period for motorsports entertainment complexes;” “special expensing rules for certain film and television productions;” and a smorgasbord of tax subsidies for alternative energy.

And for all of Obama’s talk about a “balanced approach” to deficit reduction, the deal allows taxes to go up, but there are no real spending cuts here and certainly no entitlement reform. This deal won’t put a dent in the deficit, no matter which baseline is used.

The Ugly

Last month, Reason’s Peter Suderman coined the term “The Doc Fix Economy.” In 1997, Congress passed a law aiming to curb the growth of Medicare by slowing the growth of doctors’ payments over time. But ever since, whenever it comes time to actually implement the cuts, Congress has found some way to delay them for a few months, or a year at a time. It’s become known in Beltway parlance as the “doc fix” and it has become emblematic of the way business is done here. The fiscal cliff deal represents another prime exercise in Washington can kicking.

Not only does it include a “doc fix” (offset with various health care savings detailed here), but the deal extends unemployment insurance without offsetting spending cuts. And in a broader sense, it delays the implementation of the sequester by two months. For those too dizzy to remember, when Congress was scrambling to find ways to cut spending to raise the debt limit in the summer of 2011, they decided that they’d delegate the job to a ‘super committee.’ This group of 12 members of the House and Senate from both parties was supposed to magically come up with an agreement for an additional $1.2 trillion in spending cuts. The magic wand was the threat that if they didn’t act, both parties would have to accept painful automatic cuts to defense and mandatory spending. To the surprise of nobody, they were unable to reach a deal, which was supposed to trigger these automatic cuts known as the sequester in 2013. But as part of the deal, these cuts would be postponed for another two months, by substituting in lower caps to discretionary spending and taking advantage of a tax-shifting gimmick with Roth IRAs.

Beyond the specifics of the deal, the process was awful. Even though lawmakers knew this reality was coming for two years (on the tax side) and a year (on the sequester side), they waited until New Year’s Eve to strike a deal that passed through the Senate at 2 a.m. on New Year’s Day. The public has had no chance to review – let alone understand – the legislation. So much for transparency.

There’s a lot to hate in this deal, no doubt. But any honest assessment of it must grapple with the reality of Obama as president, Harry Reid as Senate Majority Leader and $4.5 trillion in automatic tax hikes hitting in the new year. With this in mind, I’d rate the deal as objectively bad, but relatively good.

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