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Jan 03 2013

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Foolish GOP Hand-Wringing on Cliff Deal

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Deal Makers....

 As expected, Congress failed to meet the December 31 deadline for a fiscal cliff deal.

Better late than never, Vice President Biden and Senate Minority Leader Mitch McConnell did finally cut an admittedly narrow deal, which served to prevent the worst impacts from the cliff without additional delay.

But no sooner had the deal been brokered and voted on in the Senate, than a chorus of criticism emerged from the right, jeopardizing passage of the measure in the House.

One after another, Republican members took to the airwaves to oppose the Biden-McConnell deal. Anguished conservatives in the pundit class talked about another Senate “sellout” of conservative principles by the Establishment.

It was only through the overwhelming support of Democrats that the measure got over the goal posts, sparing the nation a genuine fiscal crisis. In the end, only 85 Republicans supported the Senate bill, which was the only legislative vehicle to avoid the cliff and market pandemonium. And the recriminations in Republican, Tea Party and conservative circles continues, unabated.

This is as frustrating as it is counter-productive.

Why?

Put another way, the deal cut by Biden-McConnell to avoid the cliff permanently memorialized the Bush tax cuts for 99 percent of taxpayers. Those cuts had been a fault line in domestic US politics for over a decade, and yet, in the final vote, Democrats overwhelmingly supported the bill. It was the GOP – more than 150 of them – that voted against the deal.

Where on earth is the logic in that?

It gives me no pleasure to say that House Republicans and GOP critics of the cliff deal have morphed into a political version of fussy old scolds; devoid of even an elementary understanding of the political physics in which they operate in the capital, and astonished – astonished – that a deal would be presented for consideration that did not achieve all of their most cherished objectives. That the purpose of government is to deliver the House agenda, even when the other branches of government are controlled by the opposition.

Shame on the GOP that it has devolved into a sewing bee of cackling hens, unable or unwilling to see the advantages of the deal struck by McConnell, both immediately, and in the longer term – in the service of conservative principles.

Proof? Look at President Obama’s negotiating position when the cliff talks began in earnest after the election and compare that to the final deal.

POTUS wanted $1.6 trillion in new taxes over ten years, an end to the “sequester” that would cut $110 billion in 2013 discretionary spending, plus hundreds of billions in new stimulus spending, and most ominously, abolishing the congressional role in the debt ceiling, allowing the US government to run up the debt without any check from the people’s elected representatives. Central to Obama’s position was that income taxes had to rise for those Americans making more than $250,000. He has campaigned on it and he had won. And not to put to fine a point on it, but without the President so much as raising a finger, the income tax rates would magically conform to his preference on December 31st, absent any additional congressional action.

It is hard to phathom a harder position for the GOP to be in, where the President’s goals were self realizing.

So after Biden-McConnell, what did the President actually get?

$620 billion in tax increases over ten years ($62 billion a year – or a week’s worth of federal spending), or a little more than a third of what he had proposed, and much less than he would have received had he simply gone over the cliff. No new stimulus. No resolution to the debt ceiling, and the sequester postponed for only 60 days.

If this is victory for the President, who had the GOP effectively cornered, Republicans should hope for more Obama victories.

The final deal had income tax increases, yes.  A big GOP fault line. But those increases kicked inat nearly double the rate the President had insisted upon; $450,000 for couples, $400,000 for singles. Taxes on capital gains and dividends only increased for this new cohort, where under the Clinton era rates, they would have applied to everyone. The estate tax went up by five percent, but McConnell increased the exemption and indexed that rate to inflation, to ensure that future estates would not be captured by a static tax rate.

It is not too much to repeat again what McConnell accomplished, and for which he seems to be getting nothing but grief; to get Democratic agreement to permanently extend 99 percent of the Bush tax cuts. It is nothing short of a extraordinary accomplishment.

Context is crucial here.

Since the Bush tax cuts were going to expire on December 31st, and the President was flatly opposed to extending tax cuts on earners above $250,000 in any event, there was no option on the table that would have allowed the Bush era tax cuts to continue intact.

The question was not whether taxes would go up, but how high. McConnell’s tax triage protected a cohort of taxpayers in high cost cities such as LA, NY and DC where costs of living make a 250,000 salary effectively upper middle class, as astonishing as that may be to people in Texas, who can buy a three bedroom ranch on half an acre for less than $100,000.

And the rest of the deal?

Despite all the GOP snorting, which element of the rest of the deal was the GOP going to oppose?

Permanently patching the AMT? The deal saved 30 million Americans from falling into a higher, alternate tax rate that was designed originally to capture the super rich who used loopholes to pay little if any tax.

Preventing cuts for Medicare reimbursements? Without this one year agreement, Medicare doctors would have sustained a near 30 percent cut in reimbursements. What was going to happen when doctors refused to see granny and her aching hip?

Extending business tax breaks? This is the much vaunted R&D tax credit and bonus depreciation that have helped the private sector in difficult economic times. Yes, there’s pork here too, for NASCAR and rum manufactures in the form of “tax expenditures,” but nothing stops the Congress from revisiting those issues when tax reform is considered.

Extending unemployment benefits? Actually, more than a few GOPers would have preferred to allow the one year extension to expire, but it is a political loser of epic proportions – marginal savings in return for a horrific public relations problem.

And for those spending hawks, the payroll tax cut was in fact allowed to expire.

No doubt the middle class is going to take a hit on this. But the cut was never envisioned as a permanent fix, but a stimulus measure to goose the economy. As a matter of policy, the payroll tax cut was suspect. It hurt the long term viability of Social Security, and had the immediate challenge of forcing the Treasury to use finance shortfalls in Social Security payments from the general Treasury revenues, adding to the deficit.

What is more, strategically speaking, the McConnell deal makes even greater sense.

The tax debate was a losing debate for the GOP. Obama wanted higher taxes on the rich. And according to public surveys, so did a large majority of Americans. McConnell’s actions settled it. What’s more by settling on income tax rates,  confidence and predictability have been restored to the tax system – permanently. That is a plus for investors and for the economy.

But more importantly, having broken the fiscal puzzle into two parts, the McConnell deal deprives the President of the tax weapon in the next phase of the fiscal confrontations, which deals exclusively with spending. POTUS has been a broken record for 18 months, talking about the need for tax fairness. Well, he cut the deal. He has what he wants. The fair share argument has been neutered.

And what has been tee’d up for Congress is a fiscal challenge with multiple deadlines, but on GOP territory.

The debt limit expires in February, leaving the nation facing a default – again. The $100 billion sequester kicks in again in early March absent action, and the government runs out of money to fund itself on March 27th, which, unaddressed, would cause a government shutdown. For all the Republicans whining over the lack of spending cuts in the fiscal deal, there is a real opportunity in the next 10 weeks to leverage the expiration of spending authority to bring real restraint to long term drivers of our national debt.

The McConnell deal engineered that, as Harry Reid himself told the President, concerned that the fiscal cliff deal robbed the Democrats of leverage in the budget battles to come.

How is it that the Democratic leader in the Senante gets that, but the rank and file in the House Republican caucus don’t?

The GOP has got to stop thinking that every battle is its own war, and think over the horizon to achieve its goals for the longer term. McConnell did that.

Is the fiscal cliff deal perfect? Of course not.

But all too often the House GOP has made perfect the enemy of the good – believing that politics is the art of perfection – perfection mind you, in its image –  instead of the art of the possible. The GOP paragon, Ronald Reagan understood that intuitively, saying time and again that he would take a deal that gave him 70 percent of what he wanted and come back for the rest at another time.

Each of us, in our everyday lives, faces situations where we must make the best of a bad situation – where circumstances control the terms of decison. This is what confronted Congress in the cliff. McConnell capitalized on a bad situation, while the House GOP was off in the corner, prattling on about life’s unfairness.

We all would like to have Brad Pitt’s looks and Warren Buffet’s money.

But that just isn’t the way it works in real life.

McConnell understood it.

The jury is still out on whether the House GOP will every understand it.

In any event, kudos to Mitch McConnell.

He has been a faithful public servant and savvy negotiator and operative on behalf of his country and Party.

He and the deal deserve better from his Party.

 

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