Recommended Reading: Fiscal Cliff Deal

by Theresa Riley, Bill, January 2, 2013

Want to know more about the 11th hour deal Congress and the White House reached early Tuesday morning? Here’s a collection of articles explaining what’s in the deal and differing viewpoints on the consequences.

The Fiscal Cliff Deal
by Chris Hellman and Mattea Kramer of the National Priorities Project

As our analysis shows, the deal focused on tax revenue and included a number of changes to the tax code, including a permanent extension of the Bush-era tax cuts on income below $450,000 for families and below $400,000 for individuals.

This deal left major issues unresolved, including the debt ceiling, the automatic spending cuts known as sequestration, and a final version of a budget to fund the federal government in the current fiscal year. Read more »

An Ugly, Ugly, Ugly Deal
by Robert Borosage in Common Dreams

The most ominous part of the deal is what was left out. The deal makes no provision for lifting the debt ceiling. It postpones the sequester (automatic cuts in domestic and military spending) for only two months. It is a smaller deficit reduction package than that originally sought by the president. It therefore sets up the right-wing House zealots to hold the economy hostage once more, while demanding deep cuts in public services (known as cuts in domestic spending), backed by a media frenzy about deficits. And while Social Security, Medicare and Medicaid escaped unscathed in this deal, they will be the prime targets in the coming debate. Read more »

Obama’s Tax Deal a Victory for His Base—and the Country
by Matthew Rothschild in The Progressive

I was frankly surprised that Obama didn’t give more ground, since he had signaled a willingness to do so.

I wasn’t surprised, though, that the super-rich got a big part of what they really wanted: which is a huge break on the estate tax.

If there hadn’t been any deal, the wealthiest Americans upon their deaths would have been able to give their heirs only $1 million tax-free. Now they’ll be able to give their heirs $5 million tax free, as they were able to last year (though the rate on anything above that will rise from 35 percent to 40 percent).

That’s one Bush tax cut for the super-rich that survived virtually intact.

And that’s the one they cared about most. Read more »

Perspective on the Deal
by Paul Krugman in The New York Times

[W]hat are the two sides really fighting about? Surely the answer is, the future of the welfare state. Progressives want to maintain the achievements of the New Deal and the Great Society, and also implement and improve Obamacare so that we become a normal advanced country that guarantees essential health care to all its citizens. The right wants to roll the clock back to 1930, if not to the 19th century. Read more »

The cliff deal is better than it looks
by E.J. Dionne, Jr. in The Washington Post

Of course, there was much wrong about how Congress, particularly the House of Representatives, dealt with the best-known deadline in recent political history. A better deal was available weeks ago. But in the end, some very important and positive things happened.

Democracy, in its messy way, worked. An election had a real impact on public policy, moving it in a more progressive direction. Thus, for the first time since 1990, a significant number of Republicans voted to raise taxes — and they raised them most on the very rich. House Speaker John Boehner allowed a bill to become law on a vote in which far more Democrats (172) than Republicans (85) said “aye.” The old rule that Republicans would allow floor action on only bills that could pass with GOP votes was swept away, at least this time.

The cliff deal made our tax code more progressive. The top income tax rate is back up to 39.6 percent. Capital gains taxes, cut repeatedly since the 1970s, were raised. Consider: The provisions enacted Tuesday night combined with the tax hike in the Affordable Care Act mean that capital gains taxes will now be 18.8 percent for couples with annual incomes of more than $250,000 and 23.8 percent for couples earning over $450,000.

True, Democrats caved in by failing to tax dividends as ordinary income, as they used to be. Capital gains should also be taxed as ordinary income, or, at the least, at around 30 percent. But is this progress? The answer is yes. Read more »

It’s Not About the Deficit
by Robert Reich in American Prospect

So if the ongoing war between Republicans and Democrats was really over those future budget deficits, you might expect Republicans and Democrats to be focusing on ways to hold down future health-care costs.

They might be debating how to make the cost controls in the Affordable Care Act more effective, for example, or the merits of moving to a more efficient single-payer system, as every other advanced country has done.

But they’re not debating this, because the federal deficit is not what this war is about.

It’s about the size of government. Tea Party Republicans (and other congressional Republicans worried about a Tea Party challenge in their next primary) want the government to be much smaller. Read more »

‘Cliff’ Deal is a Decent Start for Low-Income Americans
by Greg Kaufmann in The Nation and on

If you had told me in recent months that on January 2, 2013, we would have unemployment insurance extended for a year, an improved child tax credit and earned income tax credit extended for five years and no cuts to food stamps (SNAP), Medicaid or Social Security — I would have told you that you were out of your mind.

I understand that the criticism coming from the left about this deal is based largely on where things stand for the next round of negotiations, and also a concern that the deal didn’t raise sufficient revenues to avert substantial cuts down the road. But I’m troubled by the lack of attention being paid to how this deal benefits the more than one in three Americans living below twice the poverty line — earning less than $36,000 annually for a family of three, and the 46 million Americans living below the poverty line (less than $18,000 annually for a family of three). Read more »



Battles of the Budget

By PAUL KRUGMAN, New York Times, January 3, 2013

The centrist fantasy of a Grand Bargain on the budget never had a chance. Even if some kind of bargain had supposedly been reached, key players would soon have reneged on the deal — probably the next time a Republican occupied the White House.

For the reality is that our two major political parties are engaged in a fierce struggle over the future shape of American society. Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war…

According to the normal rules of politics, Republicans should have very little bargaining power at this point…But the G.O.P. retains the power to destroy, in particular by refusing to raise the debt limit — which could cause a financial crisis. And Republicans have made it clear that they plan to use their destructive power to extract major policy concessions.

Now, the president has said that he won’t negotiate on that basis, and rightly so. Threatening to hurt tens of millions of innocent victims unless you get your way — which is what the G.O.P. strategy boils down to — shouldn’t be treated as a legitimate political tactic…



Congress gives out end-of-year perks to interest groups

By Editorial Board, Washington Post, January 2, 2013

CONGRESS, APPARENTLY, couldn’t end the year without showering billions on a handful of interest groups, some of which you probably didn’t even know existed.

The Post’s Brad Plumer points out that the “fiscal cliff” bill that passed Congress on Tuesday contained a bonanza for single-issue lobbyists, extending supports for Puerto Rican rum distillers, Hollywood studios, tribal-lands coal, electric-scooter makers and other corporate interests that Congress will subsidize through the tax code for another year or two. It’s easy to blame some combination of policy inertia and congressional distraction for the largely rote reauthorization of some of these items; most lawmakers simply didn’t have the capacity to think much about the relatively small tax loophole for NASCAR racetracks. Yet that’s not true of some of the biggest-ticket items, which have been the subject of reform discussions all year long.

One of those is the production tax credit (PTC) for wind energy. Extending the decades-old subsidy will cost more than $12 billion through 2022, Congress’s Joint Committee on Taxation reckons. True, lawmakers have a more legitimate interest in supporting renewable electricity than they do in rum. Yet the PTC is an unnecessarily crude and expensive way to do it, and a group of lawmakers wanted to cancel, or at least reform, the policy. Even the wind industry agreed last month that, after two decades of direct assistance, Congress should set the PTC to phase out by 2019. Instead, lawmakers made only one change as they extended the credit for another year, and that change made the policy more generous.

Yet another expensive piece of the cliff deal was a nine-month extension of the 2008 farm bill, a monstrous money-waster that lawmakers had also aimed to reform last year. Reform bills had even advanced in both houses of Congress. Among other things, members were finally contemplating the elimination of one of the most egregious wastes of taxpayer money, the direct-payments program, which hands cash to folks who don’t even farm. Instead, direct payments will linger on, along with much of the rest of the government’s byzantine farm-support apparatus, until September.

The most positive spin on these measures is that Congress has given itself more time to fine-tune reforms; perhaps the fiscal wrangling scheduled for 2013, in which the big budget renovation that the nation’s leaders keep talking about is supposed to happen, will even provide a more favorable context. Yet lawmakers have already had plenty of time, and the fiscal cliff did not force a policy breakthrough. Congress has no excuse for more procrastination.

Fiscal Cliff Deal Sneaked In Wall Street Gifts, NASCAR Perk

by Ben Hallman,  Christina Wilkie,  Chris Kirkham,,  01/02/2013

The 11th-hour deal to avert the so-called fiscal cliff preserved billions of dollars in corporate tax giveaways even as it slashed take-home pay for millions of American workers.

Tucked inside the last-minute fiscal cliff package were more than a dozen tax loopholes, many of which will benefit Wall Street financial firms and some of the nation’s biggest corporations. These breaks will cost billions of dollars in the coming year, underscoring the lobbying power of corporate interests.

The deal was less kind to the middle class. Congress permitted a cut in the payroll tax to expire, meaning that the tax burden for the average worker will increase about $1,000 in 2013.

“This shows that the lobbyists are able to get what they want even when everyone else is starving,” said Phineas Baxandall, senior analyst for tax and budget policy at the U.S. Public Interest Research Group. “It also shows they are best able to get what they want when no one else is paying attention.”

The corporate loopholes were part of a package of so-called tax extenders tacked onto the main bill. The extenders package, first approved by the Senate in early August, mixes popular benefits, like a deduction for teachers who buy classroom supplies, with corporate-friendly carve-outs, such as the “active financing” exception that permits businesses earning interest on overseas lending to defer U.S. taxes on that income indefinitely. There is even a tax break for construction of new racetracks.

The tax extenders were passed for only one year, and they still need to clear another potential hurdle: upcoming negotiations over mandated spending cuts and the debt ceiling. President Barack Obama and congressional leaders have indicated they’d like to see a “grand bargain” on taxes, which would feature lower overall rates but close a slew of loopholes.

The financial services industry, whose leaders had earlier joined a group of other corporate executives pushing for a “fair” solution to the fiscal crisis, is one of the primary beneficiaries of special-interest tax breaks. The active-financing exception, for example, permits banks like Morgan Stanley to avoid the 35 percent U.S. corporate tax rate on interest income from money lent overseas. A handful of other U.S.-based multinational companies with financing arms, such as Ford Motor Co. and General Electric, also use that exemption to lower their tax bills. The two-year cost to taxpayers is an estimated $11.2 billion, according to the congressional Joint Committee on Taxation.

U.S. financial institutions argue that the active-financing exemption is necessary for them to compete in overseas markets with foreign banks that carry a lower tax burden. The loophole was repealed in the Tax Reform Act of 1986, but was reinstated in 1997 as a temporary measure after fierce lobbying by multinational corporations.

The exemption belongs to a small group of boutique corporate tax loopholes that are worth a lot of money to a relative handful of corporations. It even has its own lobbying coalition, the Active Finance Working Group, which serves as a prime example of how important the 20 or so companies that benefit from the exemption consider it. Founded in 2005, the group was quiet during the last few years of the Bush administration, but roared to life again in 2009.

That year, the coalition retained the services of former top Democratic congressional aide-turned-lobbyist Steve Elmendorf, whose firm, Elmendorf Ryan, has earned more than $1.2 million in lobbying fees from the working group in the past four years. Lobbying disclosure reports reveal that the coalition was housed in the same office as Elmendorf Ryan and that the coalition’s lobbyists had just one task: protect the active-financing exemption.

In Elmendorf’s firm, the Active Finance Working Group has a top-flight team: All eight of the Elmendorf Ryan lobbyists working on the issue in late 2012 were former congressional staffers, most with ties to powerful lawmakers, including to Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Committee Chairman Max Baucus (D-Mont.).

According to Citizens for Tax Justice, the financial services industry paid an average effective tax rate of 15.5 percent from 2008 to 2010, far lower than that of most other industries.

As part of the fiscal cliff deal, Congress also extended another little-known tax break that benefits large multinationals selling products through overseas affiliates. This “pass-through” exemption permits a U.S.-based company to set up a new corporation in a tax haven like the Cayman Islands and sell it a patent owned by the U.S. parent company. Royalties on overseas licensing of that patent would then route to the tax-sheltered firm, instead of the U.S. parent company. The Joint Committee on Taxation says the two-year cost of extending this shelter is $1.5 billion.

One of the more unusual tax benefits in the fiscal cliff legislation is a longstanding carve-out for racetracks used by NASCAR.

Since 2004, Congress has passed a series of stopgap measures that allow owners of motorsports complexes to accelerate their depreciation expenses. This means that owners can deduct more in expenses, reducing the taxes they must pay.

Track owners and NASCAR together have spent hundreds of thousands of dollars lobbying for the tax benefit over the past five years, according to lobbying disclosure forms. The International Speedway Corp., which owns and manages NASCAR race tracks, has spent more than $1.1 million lobbying Congress since 2008. Over the same period, NASCAR spent more than $300,000 on lobbying efforts, which included a push to “make permanent the depreciation classification.”

Supporters in Congress and industry groups have argued that the tax break is necessary to “maintain the current standard expected by our competitors and fans.” According to estimates by the Joint Committee on Taxation, the so-called NASCAR loophole will cost taxpayers $46 million this year and an additional $95 million through 2017.

A spokesman for the International Speedway Corp., Charles Talbert, said the industry is simply seeking to preserve a tax designation it has relied on for years. He said in an email that racetracks had always used the accelerated depreciation schedule, but Congress had specifically written it into law after the Internal Revenue Service argued that it was improper in the early 2000s.

Though Congress was willing to sign off on all these business-friendly goodies, legislative leaders couldn’t muster enthusiasm for extending the payroll tax holiday, which had cost the federal government $120 billion each year in lost revenue.

As a result, a worker who earns $50,000 a year will now pay at least $80 more per month in taxes. The payroll tax increase will affect as many as 160 million people.

CORRECTION: A previous version of this story overstated the cost of the business tax extenders. The cost of the rising payroll tax to an average American has also been clarified.

Cliff After Cliff

By CHARLES M. BLOW, New York Times, January 2, 2013

We have a deal. But please hold your applause, indefinitely.

We momentarily went over the fiscal cliff but clawed our way back up the rock face. Unfortunately, we are most likely in store for a never-ending series of cliffs for our economy, our government and indeed our country. Soon we’ll have to deal with the sequester, a debt-ceiling extension and possibly a budget, all of which hold the specter of revisiting the unresolvable conflicts and intransigence of the fiscal cliff. Imagine an M. C. Escher drawing of cliffs.

Be clear: there is no reason to celebrate. This is a mournful moment. We — and by we I mean Congress, and by Congress I mean the Republicans in Congress have again demonstrated just how broken and paralyzed our government has become, how beholden to hostage-takers, how vulnerable to extremism.

A fiscal cliff deal was cut at the last possible minute, covering a minimal number of issues. It was far from perfect and barely palatable. It was a compromise, and compromises are inherently imperfect. No one likes the whole of it, but they balance the bad parts against the good and see beyond dissension.

As the fiscal cliff votes came down to the wire, many repeated the aphorism: don’t let the perfect be the enemy of the good. But sadly, we are beyond even that. Now the perfunctory has become the victim of the grueling.

The American people suffered through another moment of manufactured suspense brought on by political malpractice. There was no grand bargain. There was only a begrudging acquiescence.

Not only is the era of grand bargains “over,” as Jennifer Steinhauer wrote in The Times on Tuesday, I believe that the era of basic governance is screeching to a halt.

As Steinhauer pointed out in September:

“The 112th Congress is set to enter the Congressional record books as the least productive body in a generation, passing a mere 173 public laws as of last month. That was well below the 906 enacted from January 1947 through December 1948 by the body President Harry S. Truman referred to as the ‘do-nothing’ Congress, and far fewer than even a single session of many prior Congresses.”

That’s an abominable shame. The one function of a lawmaker is to make laws. They can no longer seem to do that in any meaningful way.

It is no wonder that Gallup finds Congress’s approval rating stuck in the teens.

We have moved from a type of governance where the art of the compromise was invaluable to one where adherence to ridiculous pledges is inviolable. (By approving this fiscal cliff deal, many Republicans voted to broadly raise taxes for the first time in decades and many are still grousing about it.)

The change has taken place primarily among Republicans, who have struggled to balance the responsibilities and prerogatives of minority-party status with the anxiety of losing their long-held power at the expense of the growing influence of minority and historically marginalized constituencies like women and gays.

Smaller federal government! Out-of-control federal spending! States’ rights! Defense of Marriage! Defund Planned Parenthood! There is an individual argument (merit not withstanding) to be made about each of these issues in its own right. But only a person who is willfully blind or hopelessly ignorant would not acknowledge the common thread that runs through them: the fear of a future in which income, wealth and cultural inequalities dissipate and traditional power structures dissolve.

The country’s debt and solvency are real and legitimate concerns, but the true crux of the friction lies in the implicit arguments about the cause of our troubles. It is the tired and worn takers vs. makers argument just slathered in lipstick — Resistance Red, I suppose.

And since some of these Republicans are from safely gerrymandered districts, they have little to lose and something to gain by holding the line even if it continually pushes the country to the brink.

House Republicans like to say that Americans voted for a divided government and this gridlock is what becomes it. But that’s not entirely correct. As The Economist pointed out in November:

“The Democrats won 50.6% of the votes for president, to 47.8% for the Republicans; 53.6% of the votes for the Senate, to 42.9% for the Republicans; and… 49% of the votes for the House, to 48.2% for the Republicans (some ballots are still being counted). That’s not a vote for divided government. It’s a clean sweep.”

Republicans control the House in part because of the geography of ideology — cities tend to have high concentrations of Democrats and rural areas have high concentrations of Republicans — and because of the way district lines were redrawn, in many cases by Republican-led state legislatures.

So we will be soon be pushed back into a state of panic because Republican members of Congress demand a state of paralysis.

We are stuck with this reckless, whining and ultimately dangerous gaggle of wounded spirits. As many people can attest, an animal is often at its most dangerous when it’s sick, wounded or afraid. Brace yourselves.

Wall Street Manipulates Deficit Angst with ‘Fiscal Cliff’ Fear

by Dean Baker, The Guardian/UK, December 4, 2012

Deficit hawks rely on media allies to report budget doom to advance their agenda of cutting Medicare and social security

Many of the nation’s most important news outlets openly embrace the agenda of the rich and powerful that colors its coverage of major economic issues. This is perhaps nowhere better demonstrated than during the current budget standoff between President Obama and Congress, which the media routinely describes as the “fiscal cliff“. This terminology seriously misrepresents the nature of the budget dispute, as everyone in the debate has acknowledged. There is no “cliff” currently facing the budget or the economy.

If no deal is reached this year, then on 1 January, daily tax withholdings will rise by an average of about $4 per person. Any money actually deducted from pay checks will be refunded if a deal is subsequently reached that returns tax rates to 2012 levels. Government spending probably won’t change at the start of the new year, since President Obama has considerable discretion over the flow of spending. No one can think that this modest increase in tax withholdings would plunge the economy into a recession, but the Wall Street types seeking to dismantle social security and Medicare have used their enormous wealth and allies in the media to generate this kind of fear-mongering across the country.

One way in which they have pushed their agenda has been in misrepresenting projections from the Congressional Budget Office (CBO). The CBO’s projections show that if higher tax rates and lower spending are left in place for the whole year, then it will substantially slow growth and push the economy into a recession. However, these projections explicitly assume that we go a whole year without reaching a deal. They say nothing about what happens if the government cuts a deal by the second or third week in January. Even a Washington Post editor should be sharp enough to understand this distinction; nonetheless, many stories have implied that the recession projections apply to missing the 1 January deadline.

Wall Street types have also pushed this idea that the markets are demanding for programs like social security and Medicare be cut. This sort of assertion, which is treated as a fundamental truth by the Washington insider crowd, has the wonderful feature of escaping contradiction. Of course, none of us knows exactly what will trouble the financial markets or by how much that trouble would hurt the economy. (In fact, even a sustained drop in the stock market has a limited effect on the economy, and short term fluctuations have almost no impact.) This means that when Wall Street, or their designated mouthpieces, make authoritative-sounding claims that the markets will be upset if we don’t cut social security or Medicare as part of a budget deal, there is no direct way to refute them. After all, it is possible that they might be right.

If economic reporters did their job, though, they would be looking for evidence to support these assertions about financial markets. They could start by looking at the track records of those issuing the warnings. If they examined the track records of people at organizations like the Campaign to Fix the Debt, and other deficit hawks, they would reveal to their audiences that these “experts” have the distinction of being almost 100% wrong on just about all their economic predictions over the last five years.

This crew has been predicting that large budget deficits would cause interest rates to skyrocket ever since President Obama’s first round of stimulus, almost four years ago. Many also predicted that inflation would explode. Yet, none of them warned us about the housing bubble: they were too busy running around the country yelling about the budget deficits even when the deficits were small enough that the debt to GDP ratio was actually declining.

In short, major national news outlets have adopted the agenda of the Wall Street elite that displays zero evidence of any understanding of what drives the economy, wholesale. Their assertions that the markets will panic without a budget deal that cuts social security and Medicare have no apparent foundation in reality. It is just a threat that they have concocted to advance their agenda. Now, that would make for a very good news story.

© 2012 Guardian News and Media Limited

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues.

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