For the first time since President George W. Bush began the country's long slide into debt by cutting taxes in 2001, an agreement was reached late Monday in the Senate to raise income taxes on the rich. That's what makes the deal significant: assuming it is approved by the House, it begins to reverse the ruinous pattern of dealing with Washington's fiscal problems only through spending cuts.
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Nonetheless, this deal is a weak brew that remains far too generous to the rich and fails to bring in enough revenue to deal with the nation's deep need for public investments. Given that the Bush-era tax cuts expire on Jan. 1, Republicans were forced to give ground on their philosophical opposition to higher taxes, but they made it impossible to reach a farsighted agreement that truly grappled with government's role in fostering improvements to education, transportation and manufacturing.
The deal, hammered out by the Obama administration and Senate Republican leaders, raises income taxes to Clinton-era levels on families making more than $450,000 a year and individuals making $400,000. That's a far cry from the $250,000 threshold that Mr. Obama said defined the upper range of the middle class in the campaign.
But White House officials said they had to compromise on that number to win renewal of important provisions that would otherwise have expired: unemployment insurance for three million people, tax credits for low-income working families, and a reduction in the impact of the alternative minimum tax on many middle-class families. Republicans cynically used those vital measures as bargaining chips. (What was not a point of contention was allowing the payroll tax to go back up by 2 percentage points.)
The higher income threshold isn't the only price the White House wound up paying. The estate tax on the nation's biggest inheritances is going up slightly but not nearly enough (estates of more than $5 million would be taxed at 40 percent, up from the current 35 percent) in a big and unnecessary giveaway to the very richest families. Significantly, the estate tax rate would be made permanent, while the credits for low-income families would expire in five years. Capital gains and dividend tax rates go up to 20 percent from the current 15 percent, but again, only for families making more than $450,000 a year.
The White House argues that it achieved 85 percent of its revenue goals, raising $600 billion over a decade, a third of which comes by phasing out exemptions and deductions for people with incomes greater than $250,000 a year. And Republicans achieved none of the draconian spending cuts they wanted.
But that battle is far from over. Negotiators have yet to work out a deal to stop the arbitrary spending cuts known as the sequester, which are scheduled to slash $110 billion from the defense and domestic budgets beginning this week. And Republicans are waiting for the Treasury to hit its debt limit in a few weeks, hoping to once again extort more spending cuts.
President Obama has ruled out any negotiations over the debt ceiling, and, on Monday, he vowed that revenue increases must match any further spending cuts. But as this deal shows, he often compromises at the last minute, and, in this case, it was Senate Democrats who undercut him on both the estate tax and the income tax threshold, making it hard to remain adamant.
The fiscal-cliff agreement could still be blown up by the House, which would not be out of character. But a cleareyed look at the deal's limitations shows how much Republicans have gotten for their intransigence.
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