Obama, Republicans Reach Deal On
Fiscal Cliff; Senate Vote Expected Tonight
(By Lori Montgomery,Paul Kane,Jerry Markon,The Washington
Post, 31 December 2012)
President
Obama and Senate Republicans reached a sweeping deal late Monday that would let
income taxes rise significantly for the first time in more than two decades,
fulfilling Obama’s promise to raise taxes on the rich and averting the worst
effects of the “fiscal cliff.” Vice
President Biden arrived at the Capitol just after 9 p.m. to explain the details
of the pact he negotiated with Senate Minority Leader Mitch McConnell (R-Ky.).
A Senate vote on the package could be held by 10:30 p.m., beating a midnight
deadline, Democratic aides said. The Republican-controlled House will begin
considering the bill on Tuesday, with a final vote expected in the next day or
two.
The
agreement came together after negotiators cleared two final hurdles involving
the estate tax and automatic spending cuts set to hit the Pentagon and other
federal agencies later this week. Republicans gave ground on the spending cuts,
known as the sequester, by agreeing to a two-month delay paid for in part with
fresh tax revenue, a condition they had resisted. White House officials yielded
to GOP wishes on how to handle estate taxes, aides said.
The
revelations about the pending deal came after Obama had said a pact was “within
sight,” and House Republican leaders announced they would hold no votes Monday
night, making it appear that that the nation would go over the fiscal cliff for
at least a day. The two sides have been negotiating frantically to avert the
automatic spending cuts and tax increases set to kick in on Tuesday, which many
economists believe would push the nation back into a recession.
Around 9:15
p.m., Biden emerged from the office of Senate Majority Leader Harry M. Reid
(D-Nev.) and walked with the Senate leader into a corridor, past a bank of
television cameras broadcating the images live.
"Happy New Year!" the vice president said to awaiting
reporters. "Don't you love spending New Year's Eve here?" Biden then proceeded into a conference room
for a meeting with his former Senate colleagues expected to last at least an
hour.
Regardless
of the emerging agreement, many Americans are all but certain to face a broad
hike in taxes starting Tuesday because of the expiration of the payroll tax
cut, which was enacted in 2011 as a temporary measure to boost economic growth.
The increased payroll taxes, combined with hikes affecting the very wealthy,
would effectively mark the end of a prolonged period of declining taxation that
has become a defining characteristic of the American economy.
The pact
came after a day of intensive negotiations and political battles between the
two sides, with Obama urging lawmakers to “stop taxes going up for middle-class
families, starting tomorrow,” and calling on them to remain focused on the
needs of the American people rather than politics. In what the White House billed as an event
with middle-class Americans, Obama said the potential agreement would prevent
federal income taxes from rising on middle-class families, extend tax credits
for children and college tuition, provide tax breaks to clean-energy companies
and extend unemployment insurance for 2 million Americans. He would have preferred to “solve all these
problems in the context of a larger agreement,” the so-called grand bargain,
that would have dealt with spending in a “balanced way,” he said. “But with this Congress, that was obviously a
little too much to hope for at this time,” Obama said, adding that perhaps “we
can do it in stages.”
Congressional
Republicans immediately pushed back, objecting to comments that one GOP senator
described as “heckling Congress.” The
president made the remarks as negotiators were moving closer to a deal but were
still hung up on spending, with Democrats esisting Republican proposals for
spending cuts that would come in exchange for delaying automatic spending cuts
at federal agencies for just three months.
As Obama prepared to deliver remarks about the fiscal cliff at the White
House, negotiators for the administration and McConnell appeared to have nailed
down many of the most critical tax issues, including a plan to let taxes rise
on income over $450,000 a year for couples and $400,000 a year for individuals,
according to people in both parties familiar with the talks.
McConnell
said after Obama’s speech that he and Biden spoke multiple times Monday morning
since their first 6:30 a.m. call and managed to resolve their differences on
taxes. But he echoed Obama’s contention that the two sides had not yet resolved
a dispute about whether to delay automatic spending cuts. McConnell urged
Congress to pass the tax agreement — and debate replacing the so-called
“sequester,” as the automatic spending cuts are known, in coming months. “We’ll continue to work on finding smarter
ways to cut spending, but let’s not let that hold up protecting Americans from
the tax hike that will take place” on New Year’s Day, he said. “We can do this.
We must do this.”
Under the
proposed accord, households earning less than $450,000 would largely escape
higher income tax bills, though couples earning more than $300,000 a year and
individuals earning more than $250,000 would lose part of the value of their
exemptions and itemized deductions, under the terms of the emerging
agreement. Low-income households would
also benefit from a five-year extension of credits for college tuition and the
working poor first enacted as part of Obama’s stimulus package in 2009. And
businesses would see a variety of popular tax breaks extended, including a
credit for research and development.
The tax on inherited estates would rise from 35 percent to 40 percent,
though Democrats agreed to keep in place the current exemption for estates
worth up to $5 million. And nearly 30 million households would be protected
from paying the costly alternative minimum tax for the first time — either on their
2012 tax returns or at any time in the future. The developing agreement calls
for a permanent fix.
The two
sides also appeared to have reached consensus on unemployment benefits, with
Republicans acceding to Democratic demands to keep benefits flowing to the
long-term unemployed for another year. Medicare payments would not be cut for
doctors next year, and the cost of preserving those programs would not be
offset with other spending cuts.
However,
negotiators were still at odds over how to handle the automatic “sequester”
spending cuts, which are set to decimate budgets at the Pentagon and other
federal agencies in the New Year. Democrats initially demanded that the cuts be
delayed until 2015, but Republicans balked, arguing that the cost of any delay
should be covered through additional spending cuts. Instead of delaying the cuts for two years,
at a cost of more than $200 billion, Republicans suggested delaying the
sequester for three months — at a cost of $33 billion, according to people
close to the talks. It was unclear Monday whether the hang-up was the brevity
of the extension or the need to identify offsetting spending cuts. All told, the proposal would raise roughly
$600 billion in new revenue over the next decade from the wealthiest 2 percent
of households — less than Obama had been seeking, and less than House Speaker
John A. Boehner (R-Ohio) had offered in negotiations earlier this month. But
the new tax revenue was a first step, Democrats said, toward asking the wealthy
to do their part in reducing record budget deficits.
In the
House, Republicans once again met Monday evening with little information and no
idea what to expect in the coming hours. Boehner convened his party conference
together, but little was discussed regarding fiscal matters. Rep. Steve LaTourette (R-Ohio), a key Boehner
ally, derided the emerging agreement as “small-ball’’ and said “everybody
involved should be embarrassed.’’ But he
left open the possibility that a bill passed by the Senate with no additional
spending cuts could still pass the House. If such a bill is presented to the
House, “the math becomes different, because then you would think that the
president would bring a number of Democrats along. And then it’s just a
question of how many Republicans.”
Rep. Michele
Bachmann (R-Minn.) said she and her colleagues would quickly return if a Senate
deal suddenly materializes. “The House
is here. We are here, we passed a same-day rule so that if something happens,
we’re here, we’ll come up until 11:59 and 59 seconds,” she said. “We’re here in
the city, no one’s going anywhere, we’re here and we’re ready. We’ve done our
work in August. Now Harry Reid and the president need to do their work as
well.”
In his
remarks in the South Court Auditorium of the White House with a contingent of
middle-class Americans standing behind him, Obama highlighted progress in the
fiscal cliff talks by noting that “just last month Republicans in Congress said
they would never agree to raise tax rates on the wealthiest Americans.” He
continued: “Obviously, the agreement that’s currently discussed would raise
those rates, and raise them permanently.”
But he warned that “we still have deficits that have to be dealt with,”
and he stressed that tax hikes represent only one part of the fiscal
cliff. “I want to make clear that any
agreement we have to deal with these automatic spending cuts that are being
threatened for next month, those also have to be balanced,” Obama said. “And
that means the revenues have to be part of the equation in turning off the
sequester and eliminating these automatic spending cuts.”
He added:
“Now, if Republicans think that I will finish the job of deficit reduction
through spending cuts alone ... that will hurt seniors, or hurt students, or
hurt middle- class families without asking also equivalent sacrifice from
millionaires or companies with a lot of lobbyists, et cetera, if they think
that’s going to be the formula for how we solve this thing, then they’ve
another think coming. That’s not how it’s going to work. We’ve got to do this
in a balanced and responsible way. And if we’re serious about deficit reduction
and debt reduction, then it’s going to have to be a matter of shared
sacrifice.”
Americans
“need us to all stay focused on them,” Obama said. “Not on politics. Not on,
you know, special interests.” Minutes
after Obama spoke, Sen. Bob Corker (R-Tenn.) took to the Senate floor to
denounce Obama’s suggestion that Congress consider new tax dollars as an
acceptable offset to delaying the sequester spending cuts. “I know the president has fun heckling
Congress,” he said of Obama’s speech. “It’s unfortunate that he doesn’t spend
as much time working on solving problems as he does with campaigns and pep
rallies.”
A top aide
to House Majority Leader Eric Cantor (R-Va.) tweeted that Obama was making a
deal harder with his speech, in which he observed that he would be president
for the next four years and that Republicans have already caved on higher taxes
for the wealthy. Both comments drew hearty campaign-style applause from his
audience. “If Obama’s goal was to harm
the process and make going over the cliff more likely, he’s succeeding,”
tweeted Doug Heye.
A top aide
to McConnell charged that Obama had changed the terms of negotiations in his
speech. “Potus just moved the goalpost
again. Significantly. This is new,” wrote Josh Holmes, McConnell’s chief of
staff. Sen. John McCain (R-Ariz.)
delivered a blistering critique, accusing Obama of seeking short-term political
gain at the expense of the nation’s economy. He denounced the speech as “a
cheerleading, ridiculing of Republicans exercise.”
“So, what
did the president of the United States just do?” McCain asked in a floor
speech. “Well, he made a couple of jokes, laughed about how people are going to
be here for New Year’s, sent a message of confrontation to the Republicans....
I guess I have to wonder — and I think the American people have to wonder —
whether the president really wants this issue resolved, or is it to his
short-term political benefit for us to go over the cliff?” Earlier, with the New Year’s Eve deadline hours
away, Democrats abandoned their demand to raise tax rates on household income
over $250,000 a year. Obama had vowed repeatedly during his reelection campaign
to allow tax cuts to expire for incomes over that level.
“There are a
number of issues on which the two sides are still apart, but negotiations are
continuing as I speak,” Senate Majority Leader Harry M. Reid (D-Nev.) said in a
floor speech shortly after the body convened at 11 a.m. Monday. “But we really
are running out of time,” he added.
Reid said there were “still some issues that need to be resolved before
we can bring legislation to the floor.”
Speaking after Reid on the Senate floor Monday morning, Sen. Tom Harkin,
a liberal Democrat from Iowa, said he was “disturbed” to read in The Post that
Democratic negotiators had agreed to raise the threshold for the income tax
rate increases to $450,000, from $250,000, and to maintain estate taxes at the
same level.
“This is one
Democrat that doesn’t agree with that — at all,” Harkin said. “I just think
that’s grossly unfair.” He added: “If you make $250,000 a year, you’re not
middle class. You’re in the top 2 percent of income earners in America.... If
we’re going to have some kind of deal, the deal must be one that really does
favor the middle class — the real middle class, those that are making 30, 50,
60, 70,000 dollars a year. That’s the real middle class in America. And as I
see this thing developing, quite frankly, as I’ve said before, no deal is
better than a bad deal, and this looks like a very bad deal the way this is
shaping up.”
Biden, a
veteran dealmaker who served in the Senate for 36 years, entered the talks
Sunday at McConnell’s request after the Republican leader said he had grown
“frustrated” by the pace of negotiations with Reid. Personal relations between the two Senate
leaders have deteriorated after two years of draining battles over the budget.
On Sunday, their antagonism produced a confusing day when talks seemed to be
collapsing even as the two sides were moving closer to agreement on several
fundamental issues. As McConnell and
Biden tried to bridge the divide, time had become as much of an enemy as the
gritty details of tax and spending policy. Even if the leaders forge an
agreement, the midnight deadline would be daunting to meet. Reid and McConnell
would require the consent of all 100 senators to dispatch with the normal
parliamentary procedures and complete debate and vote in hours rather than
days. And Senate passage would not
guarantee an easy ride in the House, where Boehner’s conservative flank has
shown deep resistance to any tax hikes. The speaker has indicated he does not
want to approve a bill with mostly Democratic votes and a sliver of his
241-member Republican conference.
‘Fiscal Cliff’ Resolution Falls To
Biden And Mcconnell, Longtime Senate Colleagues
(By David A. Fahrenthold and Ed O’Keefe, Washington Post, 31
December 2012)
In the end,
it came down to two 70-year-old men, talking on the phone. They are not the most powerful men in
Washington: Each, in his own way, is a second fiddle. Joseph R. Biden Jr. is
vice president. Mitch McConnell (R-Ky.) is the Senate minority leader, in
charge only of the senators who are not in charge. But these two men — rivals,
colleagues and wary friends for almost 28 years — were the ones who finally
struck a deal to end the “fiscal cliff” crisis.
The New Year’s Eve agreement between Biden and McConnell provided a
glimpse at the ways that personality quirks and one-to-one relationships can
still change the course of Washington politics. On the Hill’s most dramatic
night in 16 months, these things seemed to matter far more than raw power.
House
Speaker John A. Boehner (R-Ohio) didn’t have enough political muscle to strike
a bargain with the president. The president was so intent on showing his muscle
that he alienated the Republicans he was supposed to bargain with. Those two,
the most powerful Democrat and the most powerful Republican in Washington,
tried to strike a historic, sweeping deal, and failed. Instead, they got what Biden and McConnell
could wrangle on the phone at the last minute: a small deal that solved few of
the big problems outside the immediate crisis.
Starting
Sunday, Biden and McConnell talked repeatedly, hammering out agreements on a
complicated array of topics: income tax rates, inheritance taxes, huge budget
cuts set to take effect in January. While they talked, the rest of Congress
waited. And waited. And complained.
“There are two people in a room deciding incredibly consequential issues
for this country, while 99 other United States senators and 435 members of the
House of Representatives — elected by their constituencies to come to
Washington — are on the sidelines,” Sen. John Thune (R-S.D.) said on the Senate
floor in the afternoon. Thune was wrong
about one thing: In a day of phone conversations, Biden and McConnell were
never actually in the same room.
But Thune
was right that legislators had, essentially, been cut out of the legislative
process. By the time a deal was announced, about 8:45 p.m. Monday night, there
was little time for anything but a vote.“At least we would have had an
opportunity to debate this, instead of waiting now until the eleventh hour,”
Thune said. By now, however, nobody on
Capitol Hill should have been surprised at how this would end. Monday marked the third time in two years
that a congressional cliffhanger had ended with a bargain struck by McConnell
and Biden. The first time came in late 2010, during a year-end showdown over
the expiring Bush-era tax cuts. The second was in August 2011, during the fight
over the debt ceiling. In both cases, Washington’s new power players — Obama
and the tea-party-infused House GOP — couldn’t reach an agreement. They were
saved by a bargain struck in Washington’s oldest tradition, not much changed
from the days of Henry Clay except the size of the dollar figures and the
presence of a phone.
Two men,
both with 20-plus years in the capital, working out the final touches
alone. “Happy New Year!” Biden said to
awaiting reporters, as he swept in to brief Democratic senators on the deal,
around 9 p.m. “Don’t you enjoy being here New Year’s Eve?” Washington’s two unofficial “closers” are
remarkably different. The smiling, garrulous Biden has a reputation for
empathy: You could spot him as a politician from 40 yards away. McConnell is
reserved, deliberate and calculating. He looks like a politician only within
the arcane, closed world of the Senate.
But their relationship was built over 24 years spent together in the
Senate, where Biden served as a Democrat from Delaware. “It’s not so much a buddy thing,” one senior
Republican aide said. “The two of them can do business, they can find solutions
together.”
McConnell,
aides say, came to see Biden as somebody who could make decisions fast, and who
could cut deals without lecturing his opponents or spiking the ball afterward.
Biden, in turn, came to see McConnell as somebody who didn’t over-promise. He
always knew what his supporters would accept.
“Mitch knows how to count better than anyone I have ever known,” Biden
told an audience in 2011, during a visit to the center named after McConnell at
the University of Louisville. The audience laughed. “This is not a joke. When
Mitch says, ‘Joe, I have 41 votes,’ or ‘I have 59 votes,’ it is the end of the
discussion . . . He has never once been wrong in what he’s told me.” In this crisis, the two men were called upon
when other politicians, far more central to the drama, had faltered.
First,
Boehner failed the counting test. Before Christmas, the speaker sought to rally
his fractious House behind a “Plan B” to raise taxes only for people making
more than $1 million per year. They didn’t. Boehner pulled the bill and backed
out of negotiations. Then, Washington’s
top two Democrats — Obama and Senate Majority Leader Harry M. Reid (D-Nev.) —
proved unwieldy negotiators. Reid seemed to have trouble coming up with a fast
counter-offer to a proposal from McConnell. Obama, fresh off reelection, was
defiant in public and in private. Even on Monday, as a deal seemed to be
drawing closer, Obama gave a televised speech in which he noted that
Republicans had already caved on their key demand never to raise tax rates.
To some
Republicans, that seemed like a premature and unseemly celebration. “This is so disappointing. Why wouldn’t the
president be sitting down with people working out this agreement instead of
having a Republican-bashing event?” Sen. John McCain (R-Ariz.) said. For Biden and McConnell, the catch is that —
like the two men’s previous deals — this agreement doesn’t solve Washington’s
biggest problems related to taxes and spending. The second fiddles had neither
the time, nor the power, to do that.
Instead,
they scheduled a new crisis in place of the old one, just a few weeks away. It
appeared that the fight over budget cuts would be put off for only a few weeks,
to coincide with a new showdown over the debt ceiling. “This is disgusting, and everybody involved
should be embarrassed,” said Rep. Steven C. LaTourette (R-Ohio), as the deal
was coming together. The embarrassment, LaTourette said, would stem from the
fact “that we’re talking about this small-ball — it’s not even small ball, it’s
a Ping-Pong ball — of a proposal. I think it’s awful.” As he emerged from a Democratic caucus
meeting shortly after 11 p.m., Biden spoke briefly with reporters and
photographers who awaited him. “I feel
really very, very good about how things are going to go,” Biden said. “Having
been in the Senate as long as I have, there’s two things you shouldn’t do: You
shouldn’t predict how the Senate’s going to vote before they vote. You’re not
going to make a lot of money. And number two, you surely shouldn’t predict how
the House is going to vote. So I feel very, very good. I think we’ll get a very
good vote tonight. But happy new year, and I’ll see you all maybe tomorrow.” Asked what he said to wavering members of the
Democratic caucus, Biden smiled and said: “I said this is Joe Biden and I’m
your buddy.”
Winners And Losers In The Fiscal
Cliff Deal
(By Chris Cillizza , Washington Post, 31 December 2012)
The deal is,
finally, done. After the usual hemming
and hawing, horse-trading and partisan hysterics, Congress and the White House
have seemingly agreed to a deal to get the country passed the so-called “fiscal
cliff.” (Worth noting: The deal has yet
to pass the Senate or House — meaning that it is not totally done just yet.
But, it does appear to be as close to a done deal as possible.) With the conclusion of this latest round of
wait-until-the-last-possible-minute negotiations, we thought it made sense to
cut through all the spin and give you what you really want — a list of who won
and who lost in the cliff fight. Our
picks are below. Agree? Disagree? The
comments section awaits.
WINNERS
* Joe
Biden: Biden’s entrance into the cliff
negotiations over the weekend- after a
personal plea from Senate Republican Leader Mitch McConnell - seemed to serve
as a sort of oiling of locked Congressional gears. The press in the wake of the
deal (and even in the runup to the final agreement) will focus on the idea of
Biden as the closer, the guy who got the debt ceiling and fiscal cliff deals
done for the White House. Couple that
image with the lead role Biden will play in whatever legislative package the
Obama Administration comes up with on guns and gun control earlier this year
and the “Biden as major White House asset” storyline writes itself. That narrative helps Biden in the
still-way-behind-the-scenes 2016 game too, although if the fiscal cliff deal is
ultimately judged as having given away too much to Republicans, it has the
potential to bite him down the line.
* Mitch
McConnell: The working relationship — built over many years — between Biden and
the Kentucky Republican is the story of these fiscal cliff negotiations;
without it, there’s a very real possibility no deal gets done. McConnell stayed
behind the scenes (as is his preference) for almost the entirety of the fiscal
cliff debate but after House Republicans proved unable to move the needle, he
stepped in to save the party. (Make no mistake: No deal on the fiscal cliff was
a political loser for Republicans; this is an issue they needed to get off the
table in order to find better political ground — debt ceiling — to make their
stand.) McConnell proved himself (again)
as the “Red” of the Senate — he’s a man who knows how to get things.
* President
Obama: It appears as though Obama learned the messaging lessons of his past
political defeats on things like the economic stimulus. From the start, the President sought to sell
the need to raise taxes on the wealthy to the public in a campaign-style pitch
that was heavy on the stick and light on the carrot when it came to Republican
Members of Congress. Obama’s statement on the eve of the deal might have
crossed the line to a bit of spiking the football — more on that later — but it
was quite clear he believed he had finally won a message battle with
Republicans. That’s because he had.
* Joe
Manchin: Manchin’s proposal — known as the CALM Act — to help gently avert the
fiscal cliff got him some positive press amid the broadly negative coverage of
Congress. Manchin also emerged as the common sense centrist of record — the
role long played by retiring Connecticut Sen. Joe Lieberman — during the fiscal
cliff back and forth, not a bad place to be for a Democrat representing
Republican-friendly West Virginia.
* Debt
ceiling: President Obama’s initial proposal to take the power to raise the debt
ceiling from Congress disappeared amid the negotiations over a cliff deal. That
means that sometime in late February or early March, there will be (another)
fight over whether to raise Congress’ borrowing limit. And, it’s likely to make
the fiscal cliff fight look like child’s play when you consider the stakes.
*
Legislative jargon: AMT. Chained CPI. UI benefits. This cliff debate was an embarrassment of
riches for lovers of Congressional-ese.
C-SPAN was in its glory.
LOSERS
* John
Boehner: The fiscal cliff talks were cast as a moment for Boehner to cement his
legacy as Speaker — to use his years of legislative know-how to find a way to
get a “grand bargain” that would set the country on the right financial course
through the Republican-controlled House. The exact opposite happened when
Boehner’s “Plan B” failed to even make it to the House floor for a vote, a
development that effectively sidelined him in the talks and raised questions
about how much — if any — control he had over his fellow House Republicans.
It’s near-certainty that Boehner will be re-elected Speaker on Thursday but his
image clearly took a hit in the cliff negotiations.
* Congress:
Members of Congress proved that all the bad things people say about them were,
basically, true. They do wait until the
last minute to do anything. They are incapable (or close to it) of getting
anything “big” done. Their idea of compromise is agreeing on a date sometime in
the future when they will — seriously this time — make the hard decisions. The
funny thing? Members of Congress, individually, know that what they have done
with the debt ceiling and the fiscal cliff is bad politics. But they don’t seem
to have the political will or ability to do anything else. Depressing.
* President
Obama: Obama’s handling of the fiscal cliff talks felt pitch perfect up until
his Monday event with “middle class” citizens. The rally felt too much like a
campaign rally — Obama was repeatedly cheered — and the president himself was
in a joking mood that didn’t seem to fit the moment. Will it be overshadow the fact that he got a
deal? No. But it was an off-key note from the country’s top communicator.
* New Year’s
Eve plans: The Fix is not a big New Year’s Eve guy. (It ranks right up there
with St. Patrick’s Day in our least favorite holiday list. And, yes, we have a
list.) That said, lots of people in and around D.C. had plans to send out 2012
in style and, instead, had to sit around waiting for a deal to be done. What’s
that? Only political reporters and Hill types did that? Well, fine then.
Most Will Face A Rare Tax Increase
With Or Without ‘Fiscal Cliff’ Resolution
(By Zachary A. Goldfarb, Washington Post, 31 December 2012)
Americans
will face a broad increase in taxes Tuesday for the first time in at least two
decades, ending a prolonged period of declining taxation that has become a
defining characteristic of the U.S. economy.
Despite the tentative agreement reached late Monday to avoid much of the
fiscal cliff, many Americans will see a higher tax bill because of the
expiration of the payroll tax cut, which was enacted in 2011 as a temporary
measure to boost economic growth. The tax holiday was preceded by a similar
temporary cut in 2009 and 2010. The deal
negotiated by Vice President Biden and Senate Minority Leader Mitch McConnell
(R-Ky.) addresses a separate tax — the income tax — and would prevent tax rates
from increasing for all but the wealthiest Americans. But both sides have
decided to leave the payroll tax out of the agreement.
Unlike
income taxes, which rise along with a worker’s income, the payroll tax is a
fixed percentage of an employee’s salary. Allowing the tax cut to expire
increases taxes on salaries by 2 percent for every American worker. Up to
$110,100 a year in salary is subject to the tax. This jump in payroll taxes, combined with
other tax increases affecting the very wealthy as a result of the deal, would make
for the largest increase in taxes in about half a century. With the country going over the fiscal cliff
for at least a day because Congress did not approve the deal before the
year-end deadline, a wide range of taxes go up Tuesday, although perhaps only
for a matter of hours. If lawmakers ultimately fail to approve the tentative
agreement, it would mean thousands of dollars would come out of the pockets of
average workers, the largest tax increase on Americans since World War II.
But support
was mounting late Monday for the deal, which would extend lower tax rates for
families earning less than $450,000. At the same time, higher-income earners
would face steeper income taxes and potentially fewer tax breaks, as well as an
already enacted new tax to pay for the Affordable Care Act health-care
legislation. For most American workers,
the expiration of the payroll tax cut would be the only increase they
experience. With the end of the payroll
tax holiday, a worker earning $50,000, for instance, will pay $1,000 more in
taxes this year; a worker earning less than $20,000 a year will pay about $100
more. Someone in the upper fifth of households, making $150,000 a year, will
pay about $2,200 more. The increase in
taxes on workers means that “the era of asymmetrical tax policy — where taxes
can only go down — is over,” said Jared Bernstein, a former White House
economic adviser. “What’s been weird is in this history of taxation in America,
there’s been this long period when it’s been forbidden to increase taxes at
all.”
While the
Obama administration fought for the payroll tax cut in previous years to goose
a weak economic recovery, the White House has been more ambivalent this year.
Before the election, even as prominent Democratic economists and lawmakers
argued in favor of extending the tax cut, the White House declined to call for
its renewal. Then, during its
post-election talks with congressional Republicans, the Obama administration
requested an extension. But Republican lawmakers were skeptical, viewing the
payroll tax holiday as contributing to federal deficits because the Treasury
had borrow money to replace payroll tax revenue, which ordinarily would go to
fund Social Security. The administration quickly dropped the payroll tax cut
from negotiations. “I know for a fact
that the White House economists think about it much the same way I do — as a
very important part of stimulus in 2013 — but I think they just judged they
couldn’t get it,” said Bernstein, who served as a top adviser to Vice President
Biden.
The tax
increases come after a period of tax cutting that began in 1997. That year,
President Bill Clinton trimmed rates on investment income. President George W.
Bush cut a wide range of taxes in six of his eight years in office, first as a
response to projected budget surpluses and later in an effort to stimulate the
economy. President Obama continued the
trend, cutting taxes in 2009 and then even more deeply in 2011, largely in
response to the deep recession. As a
result, nearly half of American workers probably have never experienced a tax
increase. “We haven’t seen broad-based
individual tax increases at the federal level in the last 30 years,” said Owen
Zidar, an economist at the University of California. “In the 1960s through the
1980s, payroll tax increases affected most taxpayers, but the vast majority of
broad-based tax changes have been cuts rather than increases.”
When
considered as a percentage of the size of the nation’s overall economy, the
increase in taxes set to occur Tuesday is likely to be largest in about 50
years, according to a study of previous tax policy changes by Jerry Tempalski,
a tax analyst in the Treasury Department.
Payroll taxes last went up in 1988, when they increased by 0.72
percentage points. Some very small tax
increases have taken effect in recent years, including an increase in levies on
cigarettes to pay for expanded health care for children and a tax on tanning
salons to pay for Obama’s health-care plan. Clinton raised taxes in 1993, but
that mainly affected the wealthy. (By contrast, state and local taxes have been
increasing over the years, in part to make up for budget shortfalls caused by
the recession.)
Middle-class
Americans will not only be wrestling with higher taxes this year; they will
also be earning less than they did just five years ago. “Many more households are living paycheck to
paycheck than just a few years ago given the very tough economy and the decline
in real incomes. This amplifies the negative fallout from the expiration of the
payroll tax holiday,” said Mark Zandi, an economist with Moody’s Analytics.
“The still very weak consumer confidence, due in part to lower real incomes,
also reinforces the negative impact of the end of the holiday.” Economists say the expiry of the tax cut will
be a major drag on the economy this year. Estimates suggest it could cost
between 500,000 and 1 million jobs, leaving the unemployment about 0.4
percentage points higher than it otherwise would be. Tax increases on the wealthy, by contrast,
are expected to have much less of an effect on the economy.
