Tuesday, January 1, 2013

Lucy, a football & Charlie Brown

As Washington absorbs the details of the deal agreed to that averts the manufactured "fiscal cliff," an Escher-esque feeling came over me. You see, once upon a time, I thought that the President negotiating with Republicans was best understood as Lucy (Republicans) holding the football (compromise) promising Charlie Brown (President) that this time, they SWORE, would not pull the ball away at the last minute. But now, I realize D.C. in the Era of Obama is an Escher within an Escher, a painting whose head swallows its tail, forever, because while the GOP dangles compromise only to pull it at the last minute, Lucy (President) holds the football (firm commitments) in front of Charlie Brown (Democrats) before caving, and every time the President swears he means what he says, he inevitably caves, and always for things that are temporary in exchange for things that are permanent, guaranteeing the cycle will continue.

You might remember the one campaign promise President Obama made this year, that he would allow the "Bush tax cuts" to expire on income above $200,000 for individuals and $250,000 for couples at the end of this year. He reiterated this point over and over again and continued banging the drum after he won a 51-47, 332 electoral vote, no-doubt-about-it mandate. And yet, here we are, waiting for the signing ceremony where he permanently codifies the Bush-era tax rates not at $200,000/$250,000, which would have only affected a mere 2% of workers, but at $400,000/$450,000, which will impact just 1.4%. If you're scoring at home, that is 4.6 extra tax cents on the dollar one earns beginning at $400,000 if you're single and $450,000 if you're married. In other words, barely a pinch for people at the high end. 

If that was not bad enough, Obama offered another enormous sop to Republicans by agreeing to an estate tax that is only triggered on estates above $5 million and at a tax rate at 40%, impacting about one-fifth of one percent (.2%) of estates. This rate would also be permanent and represents an enormous boon to the wealthy when one considers that as recently as 2000, the threshold for the estate tax was $675,000 with a maximum tax rate of 55%, and even then, only 2% of estates were impacted. The new rate is a higher threshold and a lower tax rate than existed even after both were tweaked under the 2001 Bush tax cuts, which ultimately topped out at a $3.5 million threshold and 45%. 

Lastly, the President agreed to permanently cap the tax paid on capital gains and dividends at 15% for those earning less than $400,000/$450,000 while raising the tax modestly to 20% for those above that financial threshold. Again, permanent extension of these rates is an enormous boon to the wealthy, who otherwise would have paid the same rate on this income as they do on regular income (39.6%). Ironically, having campaigned against a man whose modest tax burden (about 14%) was a focal point of the President's criticism, capitulating on this point is particularly ironic. While it is possible that the President's oft-cited example of Warren Buffet may now pay close to, or even a bit more, in taxes than his secretary, this is a far cry from asking the wealthy to pay their "fair share," particularly since they disproportionately benefit from this lower rate. 

In short, Obama is cementing in our tax code the permanent protection from tax hikes for people well outside what anyone would define as "middle class." While some (including me) questioned why the $250,000 floor was opted for in the first place, raising that floor another $200,000 is a joke, especially since doing nothing would have given the President the opportunity to completely reshuffle the tax deck with a new Congress with a smaller GOP majority in the House and a larger Democratic majority in the Senate. Moreover, having run against Exhibit A for the inequity in how we tax investment income (Mitt Romney, a man who earned $20 million in 2010 and paid slightly less than 14% in taxes), the capital gain and dividend give away is inexcusable. In exchange for these permanent changes, the GOP yet again agreed to temporary changes on unemployment (one year) and a grab bag of other tax cuts, including the child tax credit, earned income tax credit and college credit, for five years, while the payroll tax cut will disappear, resulting in a tax increase for everyone, regardless. 

And while the concessions Obama received are not nothing, they are not much when he's agreed to permanently extend the laundry list of tax cuts referenced above. Moreover, not only did he go back on his pledge to not allow tax cuts to remain in place for those at the $200,000/$250,000 level, but he also capitulated in his attempt to wrest the debt ceiling away from the GOP - starting out by saying it had to be taken off the table altogether, then asking for a 2 year extension, then 1 year, and ultimately, no extension, guaranteeing Republicans will attempt to use it as leverage a mere 60 days from now. Further, by agreeing to a 2 month delay in the so-called sequestration, he has simply kicked the can down the road for yet another "hostage taking" by the Republicans in Congress. 

Supporters of the President had argued that his prior concessions, both at the end of 2010 and with the 2011 debt ceiling deal were some form of 'three dimensional chess' whereby Republicans, faced with the dual threat of increased taxes and massive defense cuts, would be brought to heel by a resurgent (and re-elected) President. What has occurred instead is the President folding another winning hand, being bluffed out of a pot by a weakened opponent, even though all polling indicated the public strongly supported his position and he had sounded oh so firm in his rhetoric about where tax rates should be. In the balance, he has perversely redefined "middle class" all the way up to those earning nearly a half million dollars a year while receiving some temporary patches to things that were once routinely extended by Congress. 

More harmful (and disheartening) is the Lucy with the football aspect of the President's negotiating tactics to his base. It is not for nothing that this negotiation, as well as the now-guaranteed fight over the debt ceiling is taking place when the President's supporters could be most powerfully mobilized in the wake of his re-election. Instead, the most passionate voices in the President's favor are again deflated at his adoption of policies that are well past halfway to the Republican point of view. The President has twice been saved from making bad long-term deals by Speaker Boehner, first in 2011 when Boehner walked away from a deal that would have raised the Medicare eligibility age and implemented "chained CPI" for Social Security, and again just a week or so ago when he bailed out on a deal that would have included the chained CPI option but did not raise the Medicare eligibility age. Unfortunately, in the President's zeal to show his reasonableness he is souring the very people who he could deploy to help him make his case and instead continues to trade permanent changes for temporary ones. A losing formula no matter how you spin it. 

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