It's Better Than It Looks

A Progressive Accord

To be deemed a serious analyst at the moment seems to require a lot of hand-wringing and sneering over how awful Congress looked over the last few days as it rushed a fiscal cliff deal into law.

So permit me to burn my membership card in the League of Commentators and Pundits.

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 only allow floor action on 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.

There are other pieces of good news in the bill, including an extension of unemployment benefits and of the various refundable tax credits that are especially helpful to lower-income people. The estate tax rises to 40 percent on fortunes of more than $5 million. Yes, it's still too low. But at the end of George W. Bush's term, we were looking at a complete repeal of the estate tax. Isn't 40 percent better than zero?

It is a real shame that Congress didn't include more stimulus measures, especially an extension of the payroll tax holiday for another year, as President Obama originally requested. This would have helped the overall economy and hard-pressed families. But it was blocked not only by conservatives but also by liberals worried about the financing of Social Security. This was a mistake.

Nonetheless, the broadly progressive thrust of the accord is the only way to explain why Boehner had to face down a rebellion from his right, and why a substantial majority of his Republican colleagues voted against it.

Many liberals are unhappy for the same reasons that Republicans who backed the bill are hopeful. Both groups assume that (1) Obama has now lost all his leverage; (2) he will fold during the next round of negotiations as a vote on the debt ceiling approaches; (3) this was the last chance to win tax increases; and (4) the deal contains a lot less new revenue (roughly $620 billion over a decade) than it should have.

There's no question that significantly more revenue will be needed to avoid steep cuts in social insurance programs. And it's useful that many on the left have signaled their dissatisfaction because this will expand their influence (and Obama's negotiating room) in the coming months.

But we should at least consider the possibility that this week's Midnight Madness was actually a first step down a better road. This will be true if Obama hangs as tough as he now says he will; if he insists on more revenue in the next round of discussions; and if he immediately begins mobilizing business leaders to force Republicans off a strategy that would use threats to block a debt-ceiling increase to extract spending cuts. Real patriots do not risk wrecking the economy to win a political fight.

Obama has to prove wrong both his skeptical allies and foes inclined to underestimate him. He needs to move the discussion away from a green-eyeshade debate over budgets and foster a larger conversation over what it will take to restore broadly shared economic growth. His presidency really does depend on how he handles the next two months.


(c) 2013, Washington Post Writers Group

About the Author

E. J. Dionne Jr. is a syndicated columnist, professor of government at Georgetown University, and a senior fellow at the Brookings Institution. His most recent book is Our Divided Political Heart: The Battle for the American Idea in an Age of Discontent (Bloomsbury Press).



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I agree this was a total rout of GOP tax stance. What more can be done?

How do we progressives get more revenue? My suggestion is that IRS form a Zeccheus squad of 500 new tax collectors.[named after Jesus' new found friend and Jesus' host] About 500 young CPAs hired at $50,000 a year salary and a .05% commission on all new tax income though audits. Every $1 million booked gives him/her agent a $5000 bonus. easy to make an extra $50,000 for a total $100,000 a year with some jackpots also to be booked.

Distribute this Zaccheus squad in Manhattan, lower Conn. Chicago suburbs, LA/ Malibu and my Bay Area. Target stock traders, hedge funders, real estate developers etc.An easy $200 billion costing only $25 million in salary and $25 million in bonuses. An extra easy  take is that all stock trades are now reported to IRS. ..When the cable news show a lot of perp walks another $200 billion will come in from the small time scofflaws. This is per year folks, which in DC talk is 4 trillion in a decade. deficit goes poof.

Dionne's evaluation of the "fiscal cliff" is directionally correct, although I believe the strategy used by the President portends even larger victories ahead for liberal proposals.  The President's stiffer negotiating posture, enabled by his reelection, brought a substantially more liberal resolution of the "cliff." The success of that strategy produced a rout in which virtually all Republican Senators and 36% of House Republicans concluded that their only salvation was to vote for a bill that none would have supported just a few months ago. Not too long ago a formula of one dollar in new revenue for ten dollars in spending cuts was briefly considered, and a major goal of Republicans was reform of corporate taxes, which were left unchanged in the new law. Looking forward, expect the President and liberals in Congress to reap more gains from this strategy. Spending cuts, if any are considered, will be met with further tax increases on household incomes above $400K/$450K. More likely, there will be additional stimulus measures (infrastructure, more teachers, green energy, etc) without the need to trim Medicare or other safety-net programs. It is even possible that the payroll tax holiday will be restored, to live up to the President's campaign pledge not to raise taxes on the middle class.

There are still challenges. As Dr. Christina Romer (Obama's Chair of Economic Advisors 2009-2010) has written, every tax increase since World War II produced a significant, negative impact on GDP. That does not mean a new recession is imminent, but the new law will most likely slow the recovery, especially job creation. Many college graduates of the class of 2008, and many high-school graduates of the same age, remain unemployed or underemployed. They are outgrowing the ACA provision of health insurance under their parents' policies till age 26. That provision will need to be extended to age 28 or 30. Similarly, unemployment insurance benefits probably need to be extended further, beyond the new one-year extension, perhaps as part of the coming debt ceiling or sequestration debates. Yesterday's spike in 30-year Treasury bond rates (the interest rate paid by the US government on borrowed money) back above 3% might also be seen as a looming challenge. However, that rate stayed below 3% throughout the Great Depression of the 1930s. Business borrowing was so low (due to scarcity of profitable private-sector investments) that increased government deficits were easily absorbed in the bond market. The new capital gains and dividend tax rates render every business investment less rewarding today than it was in 2012, so there remains some chance of keeping bond rates low as more people avoid the risk of new business, and some decide that the profits the past few years no longer justify the risk of continuing under the new taxes.

But history doesn't always repeat itself. Maybe this time it's different.

Joseph J. Dunn    Author of After One Hundred Years: Corporate Profits, Wealth, and American Society.



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