When a known liar is accused of attempted rape, should he serve on the Supreme Court?

Fiscal Cliff Deal

Late last night (or rather, early this morning) the Senate passed a White House-negotiated deal to avert and postpone, respectively, key parts of the fiscal cliff. The 89-8 vote (opposed by Democrats Michael Bennet of Colorado, Thomas R. Carper of Delaware, and Tom Harkin of Iowa, and by Republicans Chuck Grassley of Iowa, Mike Lee of Utah, Rand Paul of Kentucky, Marco Rubio of Florida, and Richard C. Shelby of Alabama (with absences from Mark Kirk of Illinois, Frank Lautenberg of New Jersey, and Jim DeMint of South Carolina, who's on his way out to head the Heritage Foundation) sends the legislation to the House where Speaker John Boehner has been huddling with his leadership team about how and when to bring the bill to the House floor.

There's been some discussion that the House might amend and send it back to the Senate, but my money is on the House grudgingly taking up the Senate package as-is (perhaps with some kind of procedural mechanism that helps shield Republican House members) and clearing it for the president.  Much as I predicted that Boehner didn't have the votes to pass Plan B -- the incentives for the individual members of his conference, many of whom will face primaries for voting yes on any deal that "raises" taxes, mean that most will oppose anything brought to the floor -- I predict that he doesn't have the votes to amend, particularly because Democrats would be (mostly) unified in opposition to any amendment that made the package worse.

So if that's the case, then the deal that the Senate passed is likely the deal we're going to end up with. There's been some opposition from the Left -- groups like the AFL-CIO and the Progressive Change Campaign Committee have urged Democrats to oppose -- but it has been, by no means, unanimous -- for instance, the largest labor union in the country, the National Education Association, informed House members that it would be favorably scoring a yes vote on the deal.  If House Democrats largely line up behind the President, then tax law will look like this*:

*Subject to me being able to finish going through the legislative text itself.


Income Tax Rates: According to the White House fact sheet, the deal permanently "restores the 39.6 percent rate for high-income households, as in the 1990s: The top rate would return to 39.6 percent for singles with incomes above $400,000 and married couples with incomes above $450,000."  There's a lot of ambiguity in that statement and in the various press reports -- maybe because a lot of journalists don't understand tax rates themselves.  The political battle this election has been over whether the top two tax rates would return from their 2012 levels of 33% to 36% and from 35% to 39.6%, and for whom. This fact sheet bullet sounds like individuals making more than $400,000 would be paying at the top tax rate of 39.6%, which makes me wonder if the penultimate bracket, the 33% vs 36% one is staying put at 33% or if individuals making below $400,000 but above $182,600 will also see tax rate increases.

As you can see from the chart below comparing 2012, the no-deal automatic return to pre-Bush law, and the Senate deal, the 33% vs. 36% rate in the penultimate bracket makes a big difference in terms of how tax rates are going to rise (or not) on the income that falls within that bracket.

2012			2013 – no deal			2013 – Senate deal
	Single	Married Filing Jointly		Single	Married Filing Jointly		Single	Married Filing Jointly
33.00%	$178,650 to $388,350	$217,450 to $388,350	36.00%	$182,600 to $397,000	$222,300 to $397,000	36.00%	?	?
35.00%	$388,351.00	$388,351.00	39.60%	$397,000.00	$397,000.00	39.60%	?	?

Stay tuned for further details, I guess.

[As a reminder, the way income tax brackets work is that each tax rate only affects the income within that bracket. A single man making $400,000 in 2012 isn't taxed at 35% on the full $400k. He's only taxed at 35% on the portion of that income (in 2012, it would $11,649) that falls within the income cut-off for that bracket. That's why during the campaign, the President could say that under his plan everyone would be  getting a tax cut on the first $X amount of their income.]


Limitations on Income Tax Exemptions and Deductions: Under the Senate deal, two pre-Bush tax code provisions that capped the amount of personal exemptions and itemized deductions that the wealthy could take ("PEP," for the Personal Exemption Phaseout, and "Pease," for the original author of the phaseout for itemized deductions) are making a comeback. The mechanics of both are complicated but the end result is to limit how much the wealthy can use creative accounting to reduce their tax liability. Under the deal, PEP and Pease limitations are back for individuals making over $250,000 and married couples filing jointly making over $300,000.  This is good news for anyone interested in a progressive tax code or tax fairness.  (It's worth noting that while much of the focus on Boehner's still-born Plan B was on its reinstatement of higher rates on incomes over $1 million, Plan B still killed PEP and Pease making for a pretty hefty windfall on incomes over $1 million. PEP and Pease aren't sexy, but they help make the tax code fairer.)


Payroll Tax Rates:
o   Social Security: With Democrats divided on extending the 2011-2012 2% payroll tax cut for workers (the cut overwhelmingly helped middle-income workers by giving them more back in each paycheck but potentially threatened the long-term viability of the Social Security Trust Fund), there was never a serious push to include it in the deal. That means that starting today, deal or no deal, Social Security payroll taxes for workers return to 6.2% (from a temporary low of 4.2%) taxed only the first ~$110,100 of ordinary income.
o   Medicare: Under current law, wages and salaries are taxed at 1.45% without an income cap. As a result  of healthcare reform ("Obamacare"), an additional Medicare payroll tax surcharge of .9% is taxed on income above $200,000 individuals / $250,000 married couples filing jointly.


Investment Income Rates: In 2012, capital gains and dividends earned by high-income earners are taxed at 15% (it's 0% for middle-class earners).  In 2013, absent a deal, rates were set to return to 20% for capital gains and 39.6% for dividends.  Under the Senate deal, capital gains and dividends are set at 20% for households making more than $400,000 / $450,000.  As a result of healthcare reform ("Obamacare"), an additional surcharge of 3.8% is taxed on capital gains and dividend income earned by high-income earners only to help fund Medicare.  The healthcare law sets the threshold for the surcharge at $200,000 / $250,000, but the Senate deal appears to raise those rates to match the $400,000 / $450,000 threshold. (I describe in better detail how the surcharge would work HERE.)

At some point in the future I hope to finally have time to write out why, from an economic pure policy perspective, tax rates on investment income should equal tax rates on ordinary income (that is, income derived from working) according to both economic theory about the government picking winners and losers and according to the data we see from actual policy changes.  But for the moment just trust me that it's a good thing that the deal ensures an increase in investment rates: the deal ensures that underlying investment and ordinary rates raise at the same rate, while healthcare reform ensures closer parity between than has existed since the '80s.


Estate Tax: Thanks to the schedule laid out by the Bush tax cuts, estate tax levels changed nearly every year until they disappeared altogether in 2010, only to come back higher than ever in 2011. Love the estate tax or hate it, that's crappy policy, full stop. A short-term extension at the end of 2010 set the estate tax levels for 2011 and 2012 at: an exemption on the first ~$5 million of an estate’s value per spouse, tagged to inflation, with a rate of 35% on the value that exceeded that level (so an estate owned by a couple worth $11 million pays 35% on $1 million, i.e. the amount that exceeds their combined $5 million per spouse exemption.)  In 2013, without a deal, those levels were set to return to a $1 million total exemption with a 55% rate.  Democrats had pushed for an exemption of $3.5 million with a rate of 45%. The Senate deal sets the levels at ~$5 million per person with a rate of  40%.

Considering that I fully expected a continuation of 2012 levels ($5 million per spouse/35% rate), I'm actually pretty happy with the deal. The higher exemption of $5 million per spouse protects family businesses and farms from having to be broken up to pay the tax, while the higher rate ensures that the estates we always intended to tax -- the Romneys, the Hiltons -- should have a higher tax liability and a harder time shirking their responsibilities. (For the ultra wealthy, a difference of $1.5 million in exemption levels doesn't matter nearly as much as an increase of 5 points in their rate, but for true family businesses, that $1.5 million in exemption level could be make or break.)


Other Provisions.  The Deal:

• Permanently patches the alternative minimum tax (AMT) so that a '60s era law intended to stop ultrawealthy tax cheats doesn't hit middle-class workers thanks to inflation.
• Provides for a 1-year extension of emergency unemployment benefits through the end of 2013
• Provides for 5-year extensions of the Earned Income Tax Credit, Recovery Act-expanded child tax credit, and college attendance credit
• Provides for a 1-year extension of the "doc fix" through 2013 to prevent Medicare providers from taking a 27% cut in their reimbursements (which might lead them to drop their Medicare patients, thereby reducing patient choice for senior medical care)
• Provides for a 2-year extension through 2013 of (some?) tax extenders, including the currently-expired R&D credit necessary for incenting American research and development
• Postpones the $109 billion in spending cuts (the "sequester") for 2 months through equal amounts of spending cuts and revenue increases: the deal cuts $6 billion each from the discretionary spending caps for 2013 and 2014 (divided equally between defense and non-defense spending) and raises $12 billion in new revenue through allowing people to more easily switch from traditional to Roth-style retirement accounts.  (As far as "revenue-raising" goes, that seems pretty weak, while the spending cuts are real, but there's a symbolic victory here which Democrats have been touting, as reported by CQ:

  A person familiar with the negotiations called the final agreement a victory for Democrats and the White House who insisted on an offset that included revenues.
  The use of revenues to partially offset the automatic spending cuts is sure to upset some Republicans, who have already labeled the proposal a spending increase. They argue that since the sequester would cut $109 billion in spending in 2013, replacing any portion of it with tax increases has the effect of increasing spending while raising taxes.
  Sen. Bob Corker, R-Tenn., called the Democratic proposal to offset the sequester with revenues “beyond belief.”
  “The goal of the Budget Control Act was to do a dollar for dollar,” matching spending cuts to debt limit increase, said Sen. Lindsey Graham, R-S.C.
  The two-month sequester delay is designed to give Congress more time to figure out a substitute for across the board cuts, which would slice $55 billion from defense, about $39 billion from domestic discretionary spending and $16 billion from mandatory spending programs during the remaining nine months of fiscal 2013.

So What Does This Mean?

Over all, I think it's a decent deal for Democrats, with a handful of big unknowns.  The White House is arguing that it would mean the most progressive tax code in decades, which is probably true, and certainly truer than allowing a return to all of the Clinton-era tax rates, since those rates would have really hurt working- and middle-class families still struggling with the effects of the Great Recession.  Even still, the lapse of the payroll tax cut (love it or hate it) is going to mean a noticeable decrease in take-home pay for those same families, a decrease they haven't experienced since President Obama enacted the Make Work Pay tax cut (the payroll tax cut's predecessor) as part of the Recovery Act stimulus package in February 2009.  Their income taxes might not be going up, but the taxes on their income will thanks to the payroll tax return, a distinction I'm not sure most people will make.

But I don't want to close out the tax discussion on a sour note because I think over all the tax components signal a big win for progressives. From a policy perspective, and maybe from a symbolic one, too, rates matter far more than exemption levels, whether we're talking about incomes over $450,000 vs $200,000 or estates valued at more than $5 million vs. $3.5 million.  Rates are where the money is, #1, and, #2, as Senate Finance Chairman Max Baucus noted, raising rates still leaves lots of room for later reforms that close loopholes.

I personally was worried that we'd 1) give too much ground on investment tax rates (which should rise to be closer to ordinary tax rates, not be cut further relative to ordinary income rates as Republicans have long proposed, but which are popularly misunderstood as being important to encouraging business growth--although they're not--making raising rates a harder pitch in a down economy); 2) go for too-high of levels on income (Leader Pelosi herself had once proposed a $1 million threshold, instead of $250,000, both because it seemed more politically possible at the time and because people making incomes between $250,000 and $1 million disproportionately live in cities, and cities are overwhelmingly represented by Democrats, meaning that the $250,000 threshold was always a tough one for even some progressive Dems); or 3) that the Senate would never stomach higher rates on estates (even the Democratically-controlled Senate of 2009-2010 blanched at what House Democrats wanted).  Instead, I'm pretty pleased with where we ended up on all three.

Furthermore, these changes are to permanent law. Nothing is ever really permanent in tax policy -- as the last two decades have proven -- but by ensuring that most of these provisions have no sunset, we put gridlock to work for us.  Tax rates for the middle class are set and can't be held hostage to tax rates for the ultra-wealthy.  We've set good precedents on Republicans voting to raise rates.  And if Republicans want to change tax rates in the future, they have to give on other priorities.

The big unknowns are, of course, related to the debt limit. Progressives fighting the deal (like the PCCC) have quoted Republicans like Rep. Tom Cole saying that the deal "denie[s] [the President] I think his most important piece of leverage in any negotiation going forward."  First, keep in mind that Republicans have to save face here. But second, I don't necessarily agree. The debt limit (and the sequester) matter far more to corporate America than the expiration of the Bush tax cuts on the middle class ever did.  (Yes, their customers and workers would be affected, but ensuring that a viable American middle-class is able to buy their products doesn't seem to have been a concern for awhile now, and if their own tax rates were going up regardless, I'm not sure how much most CEOs truly cared.)  If -- and it's a big if -- the President has learned his lesson from the 2011 debt limit that you can't negotiate with terrorists without emboldening them to take hostages again and again, and if is he able to convey that determination to corporate America, I think you'll see Republicans under a lot more pressure this time around to deal with the debt limit. Yes, it's going to require some gamesmanship -- and the self-interested if begrudging participation -- of corporate America, but call me cautiously optimistic.