Wednesday, January 2, 2013

Cameron Smith: GOP support for fiscal cliff tax bill: Tactical or terrible?

  Over the last few years, Washington politicians created a “crisis” where a combination of tax hikes, spending cuts, and reaching the federal debt limit stood to send a hobbled American economy back into a recession.

  Instead of comprehensively dealing with the problems in a timely fashion, legislators waited until mere weeks before beginning serious negotiations to avoid falling off the “fiscal cliff.”

  Only Washington politicians would have the hubris to name the mangled response to a crisis of their own creation the “Job Protection and Recession Prevention Act of 2012.” In spite of the fact that the measure permits a net tax increase over 2012 tax policy for all Americans, the measure passed the Senate 89-8 and the House 257-176. Senator Jeff Sessions and Representative Terri Sewell were the only members of Alabama’s federal delegation to support the legislation.

  November’s election provided Democrats the leverage they needed to ensure that the 2001 and 2003 tax cuts expired for some portion of high-income earners. But in order to secure the tax hikes, most Americans expected the GOP-dominated House to insist on Democrats agreeing to spending reforms. This anticipated compromise never materialized.

  After Speaker John Boehner’s “Plan B” failed, House Republicans waited to see what the Senate served up. Democrats successfully changed the terms of a compromise involving spending reforms and tax hikes into a debate over how many higher-income Americans would see tax increases. With slogans like “living to fight another day,” Republican Senators led by Mitch McConnell, along with many historically-principled conservatives, backed the legislation.

  The resulting “compromise” supported by a large majority of Senators has no meaningful spending cuts. In fact, the automatic spending cuts that were to take place have been delayed for two months, and the act authorizes more than $300 billion in new spending over the next decade, according to the Congressional Budget Office. 

  There are positive aspects of the legislation. First, it permanently extends the so-called Bush tax cuts for most Americans except those individuals making more than $400,000 and couples making more than $450,000 per year. People with higher incomes will see higher marginal tax rates, increased taxes on capital gains and dividends, and limitations on exemptions and deductions.

  Other provisions include a permanent fix for the alternative minimum tax, a one-year delay to cuts in Medicare payments for doctors, extended unemployment benefits, and a temporary extension of certain portions of the 2008 farm bill.  

  Ironically, after all the rhetoric about protecting the middle class and creating jobs, the expiration of the payroll tax cut guarantees every worker in America will see two percent less in their paychecks. To make matters worse, Congress is increasing taxes without making any of the structural changes to ensure that Social Security will actually be around for the next generation.

  So what does all of this mean? In short, the New Year begins with tax increases, no federal spending reforms, and Republicans needing to find new negotiators… fast.

  The “fiscal cliff” showdown is the undercard to the debt ceiling’s main event. In two months when the automatic spending cuts are scheduled to take place, Republicans are banking that Democrats will be forced to concede major spending cuts to non-defense discretionary spending and entitlement reform as part of another “grand compromise” that will almost assuredly result in a vote to raise the debt limit… again.

  GOP supporters of the measure boast that supporting the legislation now without spending reductions gives them a stronger negotiating position for the debt ceiling fight. Many Republicans seem to believe that the President and his Democrat colleagues will not be able to turn the discussion into a class issue because they have already raised tax rates on the wealthy.

  Unfortunately, very recent history suggests otherwise. Democrats successfully dismantled Romney and held the Senate against formidable odds by couching Republicans as cold defenders of the wealthy. They did it again during the “fiscal cliff” compromise, and President Obama has signaled that additional revenues from wealthy Americans will be part of any future spending reforms during the debt ceiling negotiations.

  The dynamics of the next fight are clear. Republicans are reluctant to support a debt ceiling increase, they want spending and entitlement reforms, and they are deathly afraid of being blamed for shutting down government. Democrats want to increase revenues, largely reject GOP spending reductions, and are far more willing to expand the debt limit. More importantly, the spending cuts that will automatically take place without congressional action may be the high water mark for many Democrats when it comes to spending reductions.     

  For compromise to be effective, both sides need to engage in a little give and take. Right now many Republicans are giving up on their conservative principles and taking a beating from the political left for a strategy that has yet to succeed. Americans who want limited government, fiscal responsibility, and conservative leadership need to look for a better deal.  

  About the author: Cameron Smith is General Counsel and Policy Director for the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

  This article was published by the Alabama Policy Institute.

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