Democrats maneuvered themselves into making the Bush tax cuts permanent, putting Medicare and Social Security at risk in the long run
Decades from now, January 1, 2013 will be remembered as the day that sealed the fate of Medicare--as well as Medicaid, food stamps, and perhaps even Social Security.
The tax bill passed by Congress this weekend rolls back the Bush tax cuts for income above $450,000 for households but makes them permanent below that threshold. Somewhere, George W. Bush is smiling ... if he realizes that he won.
There are two frames in which to view the current battle over the "fiscal cliff." One is short-term: limiting the damage to an already weak economy. The other is long-term: determining the overall shape of the federal government for decades to come.
In the short term, Democrats should be largely happy with the compromise hammered out by Joe Biden and Mitch McConnell. They got more or less what Obama wanted (except that households between $250,000 and $450,000 will be protected just like the "middle class"), including extended unemployment benefits. Since the vast majority of the Bush tax cuts (in dollar terms) are not going away, the biggest negative shock to the economy should be averted.
From the perspective of future historians, though, W. won. Sure, the deal doesn't include any explicit cuts to the social insurance or safety net programs that are dear to Democrats' hearts. But somehow the party of Franklin Roosevelt and Lyndon Johnson forgot that spending has to be paid for.
The ability of the federal government to protect its citizens against the risks of old age and disability is determined by its tax revenue. Yes, the government can get by for a decade or two by running deficits and financing them through the bond market. But we will not be able to pay for increasing Social Security, Medicare, and Medicaid outlays solely with borrowed money forever. In the long run, these programs can only be sustained in their current form if we pay the taxes necessary to sustain them.
The primary purpose of the Bush tax cuts was to defund the federal government. Because they were the Bush tax cuts, they did so in a way that overwhelmingly favored the rich, notably by cutting taxes on investment income and on estates. But their more important effect was to slash tax revenues and increase deficits.
President Bush didn't have votes to make his tax cuts permanent. So now President Obama solved that problem for him. Yes, Obama has made the overall package somewhat more progressive, by restoring late Clinton-era tax rates for the very, very rich. (What else do you call households that make more than $450,000 per year, after exemptions and deductions?) But while the Bush tax cuts would have cost the federal government $4.5 trillion over the next decade, the Obama tax cuts of 2013 will instead cost the government $3.6 trillion. (Both figures exclude associated interest costs.) In other words, the tax "increases" on the rich are only restoring 20 percent of the government revenues that Bush took away.
Most importantly, those tax cuts are now permanent. This isn't just a temporary stimulus measure; this is for keeps. And given the current political dynamic, where concern about the national debt has been translated by conservative Republicans into a prohibition against tax increases, raising taxes will be virtually impossible in the foreseeable future.
The bizarre thing is that Democrats maneuvered themselves into the position of becoming the champions of making the Bush tax cuts permanent. Of course the Republicans wanted to make them all permanent, but they didn't have the votes or the White House. The president and his party could have pushed for a temporary extension for economic reasons--and if the economy was their top priority, they should at least have tried to extend the payroll tax cut, which would have provided the most bang for the buck. Instead, they locked in the lower tax levels that conservatives have been dreaming about for decades.
Low tax levels mean large deficits, a growing national debt, and increasing pressure to cut "entitlement programs"--meaning first and foremost Social Security, Medicare, and Medicaid. (Think about this: If we had not run huge deficits as a result of the financial crisis, would Paul Ryan's plan to turn Medicare into a voucher program have been received as anything but a fringe idea?) The Republican veto against tax increases means that either these programs will be scaled back, or the debt will escalate to the point of fiscal crisis--and then these programs will be slashed.
For decades, conservatives have been trying to "starve the beast"--choke off the federal government's revenue stream so that rising deficits would force Congress to cut spending. They just got a big help.