With the usual drama and theatrics, Congress and the White House put together a last-minute New Year’s Day deal to avert pushing the economy into recession. As a result, we have temporarily overcome our cremnophobia – fear of cliffs.
But once again, our leaders averted immediate crisis without addressing any of the nation’s most pressing fiscal problems.
By way of background, during an absurd tangle over the nation’s debt ceiling in the summer of 2011, Congress and the White House agreed to get serious about reducing the deficit and accumulated debt. But when they couldn’t agree on how, they instead struck a deal.
Congress created a super committee that was given the job of developing a long-term budget solution. The deal stipulated that if the committee failed, a $600 billion mix of spending cuts and tax increases would automatically take effect on January 1, 2013. Half the spending cuts would come from the defense budget and half from domestic spending.
Nobody wanted the cuts, but that was the point. They were designed to be so intolerable that Congress would make a deal to avoid them.
Predictably, it didn’t work. The super committee failed and Congress and the White House did nothing until just before New Year’s, when they passed the American Taxpayer Relief Act of2012.
The law makes most of the Bush tax cuts permanent- at least for now. Current tax rates were extended for individuals with incomes up to $400,000; $450,000 for married couples.
Households above these thresholds will see their income, capital gains, dividend and estate tax rates increase slightly. The law also permanently fixes the Alternative Minimum Tax and extends an additional year of unemployment benefits to two million people.
It also postpones the first installment of automatic spending cuts for two months while Congress works on a fiscal plan and the country hits the current $16.4 trillion debt ceiling. Congress and the White House again star as Scarlet O’Hara- I’ll worry about it tomorrow.
After all the sound and fury, the headline number for increased revenue is about $600 billion over 10 years. But the Congressional Budget Office estimates that compared to going off the cliff, this deal will add about $4 trillion to the debt during that time.
The inconvenient truth is that the fiscal cliff minideal was another missed opportunity to remodel our fiscal house. It dodged all the important questions about entitlement reform, stabilizing debt as a share of the overall economy, and comprehensive tax reform that helps America’s long-term prospects by promoting growth and generating revenue.
But special interests benefited from the deal. Several tax breaks that were to lapse at the end of 2012 were extended.
Accelerated tax write-offs for NASCAR track owners will cost taxpayers about $70 million. Film and television producers get to expense the first $15 million of production costs incurred in America to encourage domestic TV and film production, at an estimated cost of about $430 million.
Tax perks for algae growers total $59 million, consumers get $7 million in breaks for buying electric motorcycles and manufacturers of energy-efficient appliances retain perks worth about $650 million.
Meanwhile, the expiration of the temporary 2 percent payroll tax cut means the average American worker will pay another $1,200. So much for good old-fashioned middle class tax relief.
As Democratic Sen. Joe Manchin of West Virginia noted, “Something has gone terribly wrong when the biggest threat to our American economy is the American Congress.”
Now it remains to be seen whether the recent fiscal follies are a coming attraction for the next crisis, when Congress must again raise the $16.4 trillion debt ceiling in March.
Is this any way to run a country? To paraphrase 19th century writer Sydney Smith, if Americans had made the same progress in the culinary arts as they have in governing themselves, they would still be eating soup with their hands.
originally published: January 12, 2013
