With the exception of the repeal of the CLASS Act, the fiscal-cliff deal cannot be seen in any positive light by free-market and small-government advocates. Also, I find little comfort in the idea that it could have been much worse. The deal doesn’t do anything to address our future fiscal problems, the tax increase is nothing more than a symbolic measure that won’t raise much revenue — while having negative long-term consequences all the same – and we may lose the sequester savings as a result. To add insult to injury, as Scott Sumner noted yesterday, in many ways this deal adds to the complexity of the tax code rather than simplifying it.
On the plus side, I do think that if we ever needed one, this deal serves as a great example of what the president’s balanced approach is really about: tax increases with virtually no spending restraint. Let’s hope that lesson will be remembered in Washington in the months to come.
That being said, I entirely agree with Yuval that this deal is certainly not a victory for Democrats either. For one thing, I think it does show that when it comes to raising revenue, Democratic lawmakers for the most part have weak knees and are less willing to go all the way than they claim they are or than the pundits who support them would like them to be. I also think that this is the one shot they had to really raise taxes on rich taxpayers. Contrary to what the president said during his Monday press conference, I doubt that he will be able to squeeze much more revenue out of the rich for a while. He won’t be able to do it with higher marginal rates for sure. Also, I would be interested to see if this deal has effectively redefined the middle class as anyone making less than $400K, making it potentially harder to pass any more tax increases.
Now, the real test is coming for Republicans. For too long they have pretended that they were the party of small government simply based on their unwillingness to raise tax rates. Unfortunately, they have failed to recognize that as a lawmaker you won’t qualify as a small-government advocate if you increase spending like a drunken sailor, vote for, sugar tariffs, farm subsidies, SBA loans, Export-Import Bank reauthorization, and refuse any reduction in defense spending at the end of two wars. Big government and low tax rates are an unsustainable combination that seems to always lead to bad policy outcomes.
In fact, as Milton Friedman reminded us, the long-term cost of government is better measured by spending rather than current tax rates. So with the tax issue out of the way, we will see if they are willing to fight for smaller government, and hence for spending restraints. The good news is that we won’t have long to wait. We will see if they fight to implement sequestration or if they are willing to go forward with the reduction of spending growth that it would impose. We will see if they are willing to demand some true and credible entitlement reform in exchange for raising the debt ceiling, or better yet, for extending the CR to avoid a government shutdown.
So let the spending cuts begin!