Fiscal Cliff

The results of the recent goofy drama in Washington over the so called fiscal cliff should be a reason for optimism among those who favor lower taxes and smaller government. Yet many or most conservatives are  reacting with anger and gloom as though they had been routed by the leftists, focusing on the narrow and obvious and missing the more significant. Obama certainly won a tactical, political victory in that he got an increase in income taxes on  highly productive and successful people as he had demanded and promised his followers. However, that victory was inevitable from election day. It was guaranteed by Obama’s reelection and the political inanity of creating temporary tax rates during the Bush administration (and extending them as temporary in 2010). Obama was holding all the good cards.  The Republicans could give him what he said he wanted and raise taxes on some of the people or resist, do nothing, and give him a tax increase on everyone who pays income taxes, and one that he could blame on them to boot.  It was literally a case of heads he wins, tails they lose.

What many people are missing is that both the bill that was passed and the entire debate reflect a long term strategic trend favoring those of us opposed to high taxes and big government. We had the most committed leftist president in at least forty years, flush with hubris after his  reelection on a platform of punishing the successful, and the most he dared to propose was a change of a few hundred basis point in the income tax rates of about two percent of the population. He and his party did not attempt to raise general income and estate tax rates back to the levels of the 1990’s (which themselves  were lower than the rates after the first round of tax cuts under Reagan), even though they could have had those tax rates simply by sitting still and letting the clock run.

What Obama got was a bill that was  less than he demanded and that left him and the left in a weaker position going forward. Income tax rates were  raised on fewer successful people than he had proposed. The vast majority of taxpayers kept the present rates.  Estate taxes were limited by a five million dollar exemption  that was indexed to inflation. The alternative minimum tax was also  indexed to inflation. Income tax  rates were made “permanent” for everyone, meaning that in the future the politicians actually will have to vote to do so if they want to raise taxes. This took away the intrinsic advantage Obama had in this controversy and made future taxes increases harder to do and less likely to happen. Republicans conceded nothing on the debt limit or anything else that would have limited their ability to deal with spending in the future.  To call Obama’s victory pyrrhic is a gross understatement.  Now with taxes out of the way at least for a while, it is  time for a fight over spending.