January 9, 2013 | Issue Brief on Economy
Congress and President Obama hurriedly agreed to a “fiscal cliff” deal on January 1, after the New Year’s Eve deadline. Given the hasty vote, a summary of what the deal did and did not do is in order.
Permanence a Victory for Taxpayers
The deal did not extend all the tax policies that made up the “Taxmageddon” portion of the fiscal cliff, but it did extend most of them. Congress kept in place the Bush-era tax policies for all families with taxable income below $450,000 and single filers with taxable income below $400,000. It also kept certain expanded tax credits—some refundable—from the 2009 stimulus and “patched” the alternative minimum tax (AMT) to keep it from raising taxes on middle-class families.
The silver lining of the deal—one that taxpayers cannot overlook—is that Congress made these policies permanent. No longer will Congress have to scramble to extend policies whose expiration would raise taxes on American families and slow the still-ailing economy. After 12 years of taxpayers’ uncertainty about what their tax rates will be, this is unquestionably an important victory. Businesses that pay their taxes through the individual tax system especially can applaud the certainty that the deal has brought them.
Permanence also means that the “current policy” and “current law” baselines are mostly the same. Wrongheaded arguments about whether extending current policy is a tax cut, and therefore needs to be “paid for” under PAYGO budgeting rules, are thankfully a thing of the past—for now.
One area where Congress beneficially departed from permanence was with the “tax extenders.” This is a group of over 50 tax-reducing policies that expire regularly. Congress usually extends all of these policies at the same time with little thought about whether individual provisions reflect sound policy. To its credit, Congress allowed a handful of the extenders to expire in this deal, even though it extended the vast majority of them for one year.
Congress should use 2013 to work through the package further, cull those remaining policies that are unsound, and make pro-growth tax changes in their place so as not to create another tax hike. If it does that, Congress should also make the policies that pass the cut permanent.
Fiscal Cliff Deal Did Not Prevent All Tax Increases
Regrettably, the permanence that the deal provided also applies to the tax policies that Congress failed to extend. By not extending these policies, the following permanent tax increases occurred:
Other Half of Balanced Plan Comes Next
One of the key components of reducing deficits and debt is stronger economic growth. Stronger growth puts more people to work and raises wages. Both raise revenue to the government without raising taxes. The fiscal cliff deal, however, raised taxes, which will slow growth. Moreover, the revenue that the tax increases will bring in is miniscule compared to the deficits the federal government is on track to amass over the next 10 years.
President Obama has said repeatedly that he wants a “balanced plan” to reduce deficits and debt, supposedly meaning a mix of higher taxes and spending reductions. The fiscal cliff deal delivered the tax increase portion but not the spending cuts. In the rapidly approaching debates on raising the debt limit, replacing the delayed sequester spending cuts, and the continuing resolution to fund the federal government for the rest of the 2013 fiscal year, Congress must demand that spending be cut to deliver on the other side of President Obama’s promised balanced approach.
—Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Curtis S. Dubay, “Taxmageddon: Massive Tax Increase Coming in 2013,” Heritage Foundation Issue Brief No. 3558, April 4, 2012, http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013.
Curtis S. Dubay, “Tax Extenders and the AMT Patch: Time to Pull the Plug on Congress’s Annual Dance,” Heritage Foundation Backgrounder No. 2654, February 16, 2012, http://www.heritage.org/research/reports/2012/02/tax-extenders-and-the-amt-patch-time-to-pull-the-plug-on-congresss-annual-dance.
Heritage calculations using the Congressional Budget Office revenue baseline. See Congressional Budget Office, “An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022,” August, 8, 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf (accessed January 4, 2013).