Americans have notoriously short memories, but it was only 18 months ago that Congress created the unstoppable scythe that would automatically raise taxes and cut spending if members couldn’t come up with $1.2 trillion in deficit reduction on their own. This was it, remember? The sword of Damocles, the doomsday clock, the nuclear option that was going to force Washington’s hand at last. There was talk of major cuts to military spending, an end to tax loopholes — possibly even the home mortgage deduction — and tough medicine for all.
But as the brinkmanship, the blather, and breathless media countdown subsided earlier this week, we were left with a yawning missed opportunity to address income inequality and the federal debt with anything approaching shared sacrifice. Call it the fiscal whiff.
For months, Congress and the White House were locked in an epic struggle fought in the margins between $200,000 and $400,000 in individual income, or between $1 million and $5 million in inherited estates. Quite apart from “preventing a tax hike on the middle class,” nearly all of the agony and energy in the fiscal cliff negotiations was focused on parsing tax rates for the top 2 percent and, ultimately, the top 1 percent of Americans. The actual “middle” of the American income spectrum is $49,800, yet tax hikes were averted for people making up to almost 10 times that amount.
And those automatic spending cuts that were supposed to galvanize conservative champions of the military and liberal defenders of entitlements alike? They’ve been kicked down the road for another two months. The austerity bomb turned out to be a big never-mind. The deal President Obama signed Wednesday trims only about $60 billion a year from the debt, roughly the amount the Senate approved in relief for states harmed by Hurricane Sandy.
And what about shared sacrifice? A person making over $400,000 — a hefty income for almost anyone — will now pay an extra 4 percent tax, if he can’t find enough deductions and dodges to bring his income below that magic number. The fortunate few who inherit up to $5 million in estates will pay nothing; the next million — or billion — after that will be dinged at 40 percent. Republicans howl, but it is still less than the rate in force when George W. Bush was president.
The austerity bomb turned out to be a big never-no-mind.
The “temporary” Bush-era tax cuts on income and capital gains — emblematic for a decade of the inequity in the tax code — won’t just be extended another two years, as they were in 2010, but made permanent. The one temporary tax break that will be allowed to expire is the only one aimed at lower-income Americans: the 2 percent break in the payroll tax that Obama enacted in 2011.
Because workers pay that tax on their first dollar of income, every worker will pay more starting this week. And because the tax fades out completely after incomes reach $113,000 — a cutoff many Americans will never see, but which those $400,000 folks hit by early April — it is the most regressive federal tax in the land.
Despite what some conservative policymakers say, all tax cuts are not created equal: The $120 billion that wage earners got to keep in their paychecks this year moves through the economy much more effectively than the same break among the wealthy; that’s what economists call velocity. Apparently the country could afford billions in foregone revenue from capital gains and dividends, but not a break in ordinary paychecks. Not even House Minority Leader Nancy Pelosi argued to extend the payroll cut.
Taken individually, there are several good things in the fiscal cliff agreement. Income tax rates were raised on the wealthy for the first time in 20 years. Unemployment insurance for the long-term jobless is extended for two years; a tuition tax credit and the earned-income tax credit that helps the working poor are safe for another five years.
But there is also enough pork in the plan to enrage the Tea Party and the Occupy movement alike. Costly tax breaks for rum manufacturers, racetrack owners, asparagus and algae growers, and Hollywood film producers all were extended.
Perhaps the most defensible part of the fiscal cliff deal is the provision that stops a scheduled pay raise for Congress.
Renée Loth’s column appears regularly in the Globe.