One cliff at a time

John Boehner

American politicians have not disappointed. After creating the fiscal cliff themselves, they proved incapable of avoiding it entirely and have set themselves up for another round of gruelling negotiations on raising the debt ceiling and replacing the sequester (across the board spending cuts worth $110 billion per year) pretty much as soon as the current deal is signed into law. This latest law jewel emanating from a dysfunctional Congress extends the Bush tax cuts for individuals and couples earning less than $400,000 and $450,000, respectively. Above that threshold the marginal rate will rise from 35% to 39.6%. Inheritance taxes will go up from 35% to 40% after the first $5m for individuals and $10m for couples, whilst taxes on capital gains and dividends will rise to 20% from the current 15%. The enhanced unemployment benefits affecting some two million people will be extended for another year whilst the tax credits for poorer and middle-class families have been extended for another five years.

Lawmakers have not exceeded our expectations then. The deal does nothing to address the spending cuts, which have been delayed for a few months, and the debt ceiling, which the Treasury reached on Monday (although it still has some wiggle room to allow it to borrow for another two months). Furthermore, the payroll-tax cut was allowed to expire as scheduled meaning that workers’ purchasing power will decrease by about $1,000 each, causing a significant drag on the economy. Entitlements, which many analysts agree will be a key driver of the burgeoning US debt in the future, have not been tackled although they will probably become a sticking point in the next negotiations as Republicans will demand cuts to them as a price for raising the debt ceiling. Given that they won not a single spending cut in the latest round and backed down on increasing taxes for the rich, they will most likely not be enthused by a sincere spirit of cooperation in the next round. 

President Obama, for his part, has not hesitated to brandish this deal as a Democrat victory and set a worryingly belligerent tone for the next round of negotiations by claiming that “If Republicans think that I will finish the job of deficit reduction through spending cuts alone…they’ve got another thing coming.” His key request that taxes should go up on the rich always made more political than economic sense: higher taxes for the rich should raise about $600 billion over a period of ten years against a projected deficit of $10 trillion over the same period. In other words, pocket change. But it does chime in well with the public sentiment that the rich have weathered the crisis at the expense of the poor and now need to pay their dues. It also goes some way towards appeasing those on the left who perceive Mr. Obama as too often caving in to the demands of the Republicans on protecting the rich. Unfortunately, it does not foster bipartisan cooperation (something Mr. Obama had campaigned on) and basking in symbolic political victories should not come at the price of achieving significant economic ones for the good of the country. Given the unlikelihood of either side steering clear from ideological battles and the fractured chaos of the G.O.P., let us see what deal an ineffective Congress can rustle up next.