The broad outlines of the deal are simple. Obama’s $250,000 threshold for tax rate hikes was moved to $400,000, with the deduction and credit phase-outs beginning at $250,000 ($300,000 for married couples). The tax rate on capital gains and dividend income over $400,000 for individuals and $450,000 for couples would go from 15 percent to 20 percent (still keeping a significant differentiation between regular and capital gains income, to the chagrin no doubt of Warren Buffett’s secretary). McConnell also managed to snag some estate tax relief, with the rate set at 40 percent, exempting the first $5 million for individual estates and $10 million for family estates. Bizarrely, neither side provided relief to the most regressive tax; the 2 percent payroll tax break will expire.
This is what compromise looks like. On the sequester, the GOP lived to fight another day. While it is replaced for two months by a split of spending cuts and tax hikes, the “taxes” are a GOP win. A senior GOP adviser explained that “they agreed to implement a tax policy we’ve been trying to get done for years that would count as the ‘revenue’ side.” He explained: “This provision would allow participants in a 401(k)-type defined contribution plan to roll over those assets into a Roth version of those plans. Unlike traditional defined contribution retirement plans, Roth plans have the advantage of allowing the plan participant to pay taxes now so the assets can grow tax-free and payments are tax-free upon disbursement in retirement. The conversion is a taxable event. Because of the significant tax benefits of Roth plans, many people are expected to choose to convert their plans to Roth plans. This choice results in new tax revenue today and a significant tax break in the future.” Beyond the two months, in the context of the debt-ceiling fight, the GOP can try to pressure Obama to pursue, finally, a meaningful spending-cut plan and devise a substitute to the remaining 10 months of sequester cuts.
The vote once again shows that right-wing bullies like the Heritage Action Fund that threatened to “score” the vote (i.e., give lawmakers a demerit and set them up for primary challenges) are powerless in the face of real-world choices. It was this very group that no doubt made the final deal worse by nixing the $1 million threshold in the House, thereby taking the House out of the mix. My, the throw-them-out crowd will need to primary nearly the entire Senate conference (all but five of those voting approved the plan). Good luck with that one.
There was certainly a disappointing no vote and some unseemly chest puffing from Sen. Marco Rubio (R-Fla.), who declared, “I just couldn’t vote for it. I ran, just two years ago, on the idea that I wanted to be part of solving the long-term problems this country faces. Time and again, we’re given choices here that don’t involve that.” (Is he any different than others who stepped up to the plate?) His written statement was a model of confusion, praising McConnell for making the best of a bad situation but complaining, “Of course, many Americans will be relieved in the short term that their taxes won’t go up. However in the long run, they will be hurt when employers pass on to them one of the largest tax hikes in decades.”
Multiple inquiries to his office were not returned. Did he favor then raising taxes on everyone? Letting the devastating defense cuts go forward? Apparently, his advisers have convinced him that irresponsibility is the road to the White House. It is not the first time that he has chosen to play to the right-wing peanut gallery, showing a troublesome timidity in the face of future primary votes. He is not a risk-taker, and those interested in real immigration reform (which requires offending some in the base) should look to more stout-hearted legislators.
Now the “fiscal cliff” deal will go to the House, where grandstanding will abound. Presumably a combination of House Democrats and Republicans can be rounded up to pass the bill.