Published January 2, 2013
For Republicans, the question presented by the fiscal-cliff deal was fairly straightforward: Is the bill better or worse than the plausible alternatives? The answer was not self-evident, and it depended in part on one’s trust in the Republican congressional leadership. The peculiar structure of this particular showdown, with tax rates expiring and higher ones automatically taking effect, meant that taking no action at this point would have sent taxes far higher for far more people than this deal would. And what we know about congressional Republicans suggests to me that the ensuing public, press, and voter pressure would have led them to accept a far worse outcome than the bill congress passed. Those who think that opposing any deal would have somehow created the conditions for Republicans to insist on reinstating all the Bush tax rates after they expired have a far higher opinion of the backbone of Republican leaders than I do. But that’s a prudential debate about how, as the minority party in Washington focused on keeping taxes and spending down, to minimize the harm of a uniquely bad set of circumstances. Maybe Republicans did that, maybe they could have done a little better, but they probably couldn’t have done much better.
But the Democrats could have, and the story of their failure here has not yet gotten the notice it deserves. In the long run, when the dust has settled, I think that will be the real story of the fiscal cliff. For liberals, this was not a moment of danger to be minimized but by far their best opportunity in a generation for increasing tax rates (which is the only fiscal reform they seem to want) and for robbing Republicans of future leverage for spending and entitlement reforms. And it is likely the best one they will encounter for another generation. Many on the left have seemed convinced lately that the politics of taxes had changed dramatically in their favor, and that the opportunity presented by the cliff could result in the kind of surge in revenue that could put off the coming fiscal crunch for years (until, they seem to think, it will just magically go away at some point) and so could save our entitlement programs from the need for reform. Their politicians gave up a lot of that leverage well in advance, when they announced they would repeal the Bush rates only for people making more than $250,000. But some liberals believed this could be overcome through much expanded caps on deductions in addition to higher rates for the wealthy (that is, a broader base with higher rates), which would both raise more revenue and make Republican-style tax reform (a broader base with lower rates) much more difficult later. And they believed that the Republicans’ opposition to tax increases would also give Democrats an opportunity to score some other points, like forcing Republicans to sign on to Obamacare-style counterproductive provider cuts in Medicare, so that Republicans couldn’t criticize those anymore.
The White House at first tried to do all of that. They wanted about $1.6 trillion in revenue–a trillion from rate increases and $600 billion from the elimination of deductions. They wanted $400 billion in exactly the wrong kind of Medicare cuts–provider cuts that not only make the health-care system less efficient but also tend to increase spending in the long run due to increases in the volume of services–to blunt Republican criticism of Obamacare and to make real (if incremental) structural reform far more difficult. And they wanted control of the debt ceiling, so Republicans would never have that leverage again. That would not only have given them relatively significant new revenue, it would also have strengthened their hand to get even more later.
But that hasn’t happened here. This deal is projected to yield $620 billion in revenue over a decade–increasing projected federal revenue by about 1.7% over that time. And that’s about it. The Democrats have made the Bush taxrates permanent for 98 percent of the public, which Republicans couldn’t even do when they controlled both houses of Congress and the presidency. They did not get to pick and throw away the low-hanging fruit that could be used in future rate-reducing tax reform (in fact, they retained some “extenders” of tax credits and deductions that could better enable such reform, and the new and more honest CBO baseline that results from this deal eases the way for it), they did not get to claim that they have reformed Medicare without touching its structure, and they now have to move immediately into a debt ceiling fight. Right after a tax-only deal, and just as people start to notice higher payroll taxes, they’re not in a great position to demand more rate increases in that fight, or others to come.
If even under the conditions of the past month–with a very liberal president just re-elected, Republicans in disarray, public opinion on taxes seemingly friendlier to them than it has been in decades, and higher tax rates automatically taking effect–the Democrats can’t get more than a tiny pittance of revenue and no chips to use later, then their basic approach to fiscal issues just won’t work. The idea that they will raise rates again in the Obama years when they don’t have all these factors working in their favor is a fantasy. And the notion that the politics of taxes has decisively changed in their favor has been disproven by their own behavior: Many Democratic senators were as relieved as Republicans to see the threshold for higher rates rise well above $250,000, and would not have stood for it dropping below that level to where their upper middle class voters are. Having discovered an effective political wedge in the tax debate, the Democrats have now basically used it up and gotten awfully little in return. They can’t begin to acknowledge that the levels of spending they want to sustain will require a far greater tax burden on far more people (and in a far more regressive way) than today’s code, and if they can’t even state what they want out loud then they’re not likely to get it. Their bluff has been called. The welfare state they want to retain and expand cannot be funded, and they apparently have no way to do anything about that.
That surely doesn’t simply come as a shock to some on the left, including the president. In a press conference in 2011, when for a moment his arrogance–in the form of his unending desire to inform the universe that he is its most reasonable inhabitant–overtook his cynicism, Obama said the following about his fellow Democrats:
the vast majority of Democrats on Capitol Hill would prefer not to have to do anything on entitlements; would prefer, frankly, not to have to do anything on some of these debt and deficit problems. And I’m sympathetic to their concerns, because they’re looking after folks who are already hurting and already vulnerable, and there are a lot of families out there and seniors who are dependant on some of these programs. And what I’ve tried to explain to them is, number one, if you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up. I mean, it’s not an option for us to just sit by and do nothing.
Right. The fiscal trajectory of our welfare state is not sustainable, no matter how much taxes go up. That is the truth at the heart of our budget crisis. The fiscal-cliff debate ignored that truth from start to finish, and so has achieved nothing worthwhile for anyone. The Republicans know why they got nothing out of this: The expiration of the tax rates meant they could only contain their losses here. But what about the Democrats? Now they have gotten their tax increase, and what has it gained them but the prospect of an even slower economy? What’s their game plan?
Yuval Levin is Hertog fellow at the Ethics and Public Policy Center and editor of National Affairs.