From Fiscal Cliff to Debt Ceiling – Watch Your Head

Analysis:
By Paul Kleyman
New America Media

Ah, Washington. The good news is that our national leaders saved our butts (for the moment) from bottoming out off the “fiscal cliff.” The bad news is: Watch your head—it’ll soon come crunching up against another unnecessary “debt ceiling” crisis.

The most important Good vs. Bad News about the New Year’s Day cliff dive is that the Ugly—the prospect that Congress’ failure to raise the debt-ceiling could actually cause the United States to default on its international debts with genuine economic consequences—is now put off, but only until March.

While Tuesday’s deal has many complexities—with pundits and politicians on both sides of the aisle grousing about its imperfections—those who thought they voted for positive change in November should be aware of how the White House and Congress have cut a deal affecting average, and not-so-average Americans.

Here are some highlights from the fiscal agreement—both the good news and the bad.

Good News on Taxes: President Obama swore he’d preserve the middle-class range of the Bush tax cuts below $200,000 for individuals/$250,000 for couples filing jointly. And he did—but up to $400,000/$450,000. Top tax rates for the wealthiest 2 percent above that level will revert to the pre-Bush level of 39.6 percent (up from 35 percent).

Also, the tax on capital gains income for investment moguls like Mitt Romney will edge up slightly from the Bush-era rate of 15 percent to 20 percent.

Bad Tax News: While the wealthy dividend divers get slightly smaller pearls with a tax rate of 20 percent on investment earnings, speculators will face no tax on the kind of risky investments that got us into this recessionary mess in the first place.

And although the increased income-tax on the rich—if preserved—would raise $600 billion in the next decade, the fiscal deal will fall about $200 billion short of the revenue that would have been raised had the president not agreed to raise the income level for the tax cut. Will that $200 billion come from even greater program cuts?

Oh, yeah, and heirs to estates up to $5 million get a free pass, instead of the $1 million limit that Democrats proposed. Those who leave $10 million will see their estate tax level rise from 35 percent to 40 percent, still below what it was only four years ago.

The deal was so sweet for the right that even anti-tax hawk Grover Norquist blessed it for making most of the Bush cuts permanent.

Good News for Working Stiffs: First, the budget pact extends unemployment insurance for one year, vital for 2 million Americans. In addition, the fiscal bargain preserved the Earned Income Tax Credit, the Child Tax Credit and the Opportunity Tax Credit , which subsidizes college education, for up to five more years. Tax credits are important to lower-income families, because they not only allow taxpayers to deduct a set amount, but the credit actually provides a cash refund to those who don’t earn enough to take advantage of the tax break.

The Bad News: Those middle-class tax credits got only a five-year extension—while the Bush tax cuts mentioned above are now permanent. That’s right, the Democrats, fresh off a substantial electoral victory that rendered the GOP leadership in disarray, failed to make the tax reductions temporary, such as the original Bush tax cuts, which were on a 10-year timer enabling the country to reconsider now. The fiscal-cliff deal left average Americans to regroup for another fight for their tax credits in only five years—short of the 10-year time frame for other key parts of the bipartisan deal.

Good News on Payroll Taxes: The payroll-tax “holiday” over the last two years provided a welcome stimulus to everyone’s paychecks—but had it continued would have increased a worrisome amount of Social Security’s long-term deficit. By letting the temporary payroll tax break lapse (the employee’s amount will go back up from 4.2 percent to 6.2 percent of wage) there should be no long-term hit to the program.

Bad Paycheck News: Democratic deal-cutters evidently missed that most workers are still struggling, and they did nothing to replace the extra cash from the payroll-tax holiday that most Americans have been spending, thereby boosting the economy. For most low- to middle-income workers, the difference of perhaps $30-$40 a month will mean less food on the table.

What’s a poor White House to do? Misters Obama and Biden never seriously considered reinstating the president’s own Make Work Pay Tax Credit, which put that kind of cash into workers’ pockets for the two years of his stimulus program.

Not only would this program have boosted workers’ paychecks without adding to Social Security’s debt, Congress could have limited the credit to, say, $800, placing most of the money in the pockets of working people. You see, the 2 percent payroll tax wasn’t a great deal for many Americans. While the affluent banked up to over $2,000 per year, many lower-income Americans saw only a couple of hundred dollars, if that, each year. Still, now workers will feel the pinch of an emptier pocket—and grocery basket.

The Good News on Medicare: The so-called “doc fix” is in—Medicare will freeze its current rates for physicians and not chop the 26.5 percent from their fees that would have gone into effect in 2013. Congress made up for that spending, for instance, by trimming reimbursements to hospitals, many of which have a talent for gaming the system for higher fees, anyhow. The agreement also preserves crucial protections for low-income Medicare beneficiaries for one year, such as the Qualifying Individual program that picks up Medicare premiums for doctor and outpatient services.

Negotiators agreed to extend access for patients at or near poverty to physical, occupational and speech therapy for another year.

Medicare Side Effects: Congress and the administration did little to address underlying health care inflation, such as in the drug industry, running up all costs, not just those in Medicare.

Also the budget bill killed the long-term care insurance program championed by the late Sen. Ted Kennedy. The consequences are unclear. The program would have done little if anything to help the growing ranks of family caregivers in the short run. Passed as part of the Affordable Care Act, the program (called Community Living Assistance Services, or CLAS), would have encouraged employers to offer long-term care insurance to their workers—but on a voluntary basis.

The Obama administration put the program on hold after the Congressional Budget Office found that it could not sustain itself financially. The new budget deal does create a commission to study long-term care for seniors and people with disabilities—which is covered in one way or another in most other democratic nations. But it remains to be seen whether the biggest health care issue for aging America hasn’t just been swept back under the budgetary rug once more.

Good News on the Fiscal Cliff: The U.S. economy went over the Dec. 31 deadline and lived another day, as if it were beyond the Mayan calendar. Those feared automatic, across the board federal cuts and tax increases didn’t happen. Federal education spending alone would have felt the budget ax by 8.2 percent.

Bad Debt Ceiling, Bad Debt Ceiling: It’s ba-a-a-ck! Remember the debt-ceiling showdown in 2011—when congressional Republicans threatened to let the United States default on its international bond obligations and see its global credit trashed unless the Democrats agreed to massive budget cuts and slashed benefits? You know, those weeks of headlines that left most Americans scratching their heads—until Occupy Wall Street refocused the country’s attention on real and deepening inequality.

Our leaders are about to slug it out over the same debt ceiling, again. Those same automatic “sequestration” cuts Washington just kicked down the road will dominate the headlines again in two months. Despite the Democrats superior bargaining position now, numerous observers believe they ended up with the same ‘ol short end of the deal.

If the fiscal accord turns out to be as weak as it seems to many observers, one upshot is that even though Medicare, Medicaid and Social Security benefits have been spared major reductions for now, they could well be back on the negotiating table before spring. And a newly emboldened GOP may well be pressing a weakened Barack Obama for new concessions, along with other significant domestic program cuts.

As to why the presumably triumphant Democrats should have capitulated on issues that seemed to be their strengths, perhaps Jared Bernstein of the Center on Budget and Policy Priorities said it best: “This is a predictable outcome of a political system with no effective firewalls between big money and politics.”