The ‘Fiscal Cliff’ Deal: Not a Tax Hike with No Spending Cuts
4:26 PM, Jan 4, 2013 • By JEFFREY H. ANDERSON
It has been widely reported that the recently passed “fiscal cliff” deal entails a tax hike with no corresponding spending cuts. Other reports claim that the deal imposes a 41-to-1 ratio of tax hikes to spending cuts. But neither of these claims is correct.
Compared to what would have transpired had a deal not been reached, the “fiscal cliff” deal is actually a tax cut and a spending increase. To be more exact — according to the Congressional Budget Office’s figures — it’s a tax cut of $3.6 trillion over ten years and a spending increase of $332 billion over that span.
There’s been a lot of talk about the ideal ratio of spending cuts to tax hikes in dealing with our fiscal woes. But the “fiscal cliff” deal includes about an 11-to-1 ratio of tax cuts to spending increases. This mix includes yet another extension of federal unemployment benefits, a $12 billion tax credit (for next year alone) for the eagle-killing wind farms that President Obama so loves, and a tax break for his pals (and political contributors) in Hollywood.
The only way to count the “fiscal cliff” deal as a tax hike is to count all changes in fiscal policy going forward as part of the deal, whether they would have occurred in the absence of the deal or not. In that sense, the “fiscal cliff” deal does, indeed, raise taxes — but it also cuts spending. It raises taxes on individuals and small businesses by about $600 billion over ten years. (All of these tax hikes were going to take place whether the deal was struck or not.) But it also cuts spending by about $900 billion over ten years — as all but $332 billion of the $1.2 trillion in scheduled sequester cuts are still set to kick in. (Of course, 10-year projections and $1.85 will get you a cup of coffee at Starbucks.) So, by this measure, the deal involves about a 3-to-2 ratio of spending cuts to tax hikes.
So, depending on how you want to look at it, the deal is either a tax cut paired with a spending hike, or it’s a tax hike paired with a spending cut. Either way, it’s not a tax hike with no spending cuts.
For reasons that Yuval Levin highlights, this was a reasonably good deal for Republicans and conservatives — under the circumstances. But it isn’t a solution to our $16 trillion (and rising) national debt, which has been skyrocketing in recent years due to our government’s spending $11 for every $7 that it has. Indeed, only in Washington could a deal that’s scored by the CBO as raising deficits by a cool $4 trillion over ten years be characterized as a way of avoiding our looming fiscal cliff.