The Budget Battles Ahead
A debt-limit showdown is a dead end for the GOP.

President Barack Obama


James C. Capretta

Two months after the president handily won a second term and the Democrats increased their numbers in both the House and Senate, GOP congressional leaders were in no position to negotiate a good “fiscal cliff” resolution. So it’s not at all surprising that what emerged from the Biden–McConnell negotiations has satisfied almost no one, and certainly not many conservatives.

That being said, the January 1 tax deal needs to be put into proper perspective. The media are fixated on what is being called an Obama victory: He forced the GOP into retreat on the top income-tax rate. Yes, that was certainly a win for the president, something that was all but inevitable after November 6. But, despite what the president (and his apologists in the media) say, the top individual income-tax rate is not the sum and substance of the Bush-era tax policy. The benefits of the tax cuts enacted in 2001 and 2003 went overwhelmingly to the American middle class, not high-income households, as the tables summarizing the deal from the Joint Tax Committee and the Congressional Budget Office have made clear. Compared with what would have happened if the Bush-era tax schedule had been allowed to expire entirely, the deal is a net $3.6 trillion ten-year tax cut.

This is no small matter. For a dozen years, most Democrats resisted these tax cuts. Indeed, most Democrats voted against them (see here and here). They wanted more revenue to pay for the expansive government they have been building for half a century. But now, with this agreement, Democrats have signed onto a permanent lowering of the tax burden for the vast majority of American households. And it’s hard to imagine a realistic scenario emerging any time soon that would allow Democrats to reverse course and impose higher income taxes on these households.

Part of the problem for Democrats is that the Bush-era tax cuts are far more meaningful for most moderate-income families than anything ever done by the Obama administration. According to the Tax Policy Center, the Bush-era rates reduced the tax burden on households with incomes between $50,000 and $75,000 per year by $1,400 annually. For households with incomes between $75,000 and $100,000, the tax cut is worth about $2,250 each year. The president and his party fancy themselves the great protectors of the American middle class; certainly their campaign rhetoric in 2012 reflected this grandiose self-image. The irony is that, to put money where their mouths are, they were forced to become champions of George W. Bush’s tax policy. Rich, indeed.

The main criticism, and an accurate one, of the fiscal-cliff agreement is that it secured a tax hike for the president that was not paired with any spending restraint whatsoever. The bill includes spending increases (an extension of unemployment compensation and another one-year undoing of the scheduled cut in Medicare physician fees), but not nearly enough cuts to offset them. Nothing has been done to address the real problem in the nation’s finances: the ballooning costs of entitlement programs.

Some conservatives have taken heart in the fact that the agreement did not raise the debt limit, setting the stage for a more successful budgetary confrontation in another 60 days or so, when federal borrowing is expected to bump up against the current statutory ceiling. The argument is that raising the debt limit is so unpopular with the public that Republicans will have substantial leverage to extract meaningful spending cuts from the president. Unfortunately, this is more wishful thinking than a sound assessment of the political landscape.