The country will go over the fiscal cliff—that became certain late Monday when the House adjourned for the day.
But a deal is definitely forming, tentatively struck between Senate Minority Leader Mitch McConnell and Vice President Joe Biden after talks between McConnell and his Democratic counterpart, Senator Harry Reid, failed. It’s rumored to be as follows: an extension of the Bush rates up to $400,000 in annual income for individuals, and households that earn more than $450,000; a one-year extension of unemployment insurance; putting off both the military and domestic sequesters for two months (though Republicans are still trying to win commensurate cuts for that delay); setting the estate tax at 40 percent for inheritances over $5 million ($10 million for couples, and there’s still negotiations over indexing the estate tax); and capital gains and dividends rates going from 15 to 20 percent. There would be no action on the debt ceiling, and no extension of the payroll tax cut. There would be a handful of stimulative tax credits.
The White House spin on the pending agreement that it’s a good deal because it finally raises rates on top earners, which has the added benefit of finally “shatter[ing] 20 years of Republican orthodoxy on taxes, undercutting a core part of the party identity,” as Politico puts it. There are also zero entitlement cuts. The rest of the White House argument can be summed up like this: stimulus. True, the administration gave in some on the threshold for tax hikes, but it was a necessary concession to win the unemployment insurance extension and the stimulative tax credits. Also, the damaging sequester cuts are put off, at least for now. In short, this leaves the economy as untouched by austerity as is reasonably possible right now.
Republicans, meanwhile, are hanging their hats on the fact that they got Obama off of the $250,000 threshold, and ultimately this deal raises only $600 billion in revenue—which is less than the $800 billion House Speaker John Boehner offered at one point during the negotiations. It rips off the Band-Aid of the expiring Bush tax rates, which the GOP was never going to be able to stop—and now that White House leverage is gone. And crucially, by putting off the sequester for two months—around the time Congress must once again fund the federal government—and by not ceding an inch on the debt ceiling, it leaves the GOP in better position to win future battles, and to get those deep entitlement cuts they so badly want.
The bottom line: the Republicans are right. Obama gave too much revenue away in exchange for extremely paltry stimulus: these tax credits are nothing compared to what Obama was originally proposing, and don’t even make up for the loss of the lapsed payroll tax cut. Meanwhile, Republicans are absolutely correct that they will now be in position to extract painful concessions from the White House down the road, particularly in a debt ceiling fight—and Treasury Secretary Timothy Geithner just notified Congress that we’ve already hit it.