The Big Bipartisan Deal That's About to Save Us From the Fiscal Cliff (Maybe)

The fiscal cliff bargain is coming into focus and it starts with a blockbuster trade. Republicans are ready to place their sacred cow, tax rates for the rich, on the altar for sacrifice. In exchange, Democrats are ready to place their sacred cow, benefits for the elderly, on the altar, as well. Sacrifices all around. There is a Mayan joke here, somewhere.

The deal to avoid automatic tax increases and spending cuts in early 2013 was never going to please everybody. A little screaming was inevitable. It seems only fair, six weeks after the Democrats' decisive victories in the Senate and White House, that Republicans be asked to scream a bit louder about the final compromise. And we're on track for just that. Boehner has opened to the door to higher tax rates above $1 million. Democrats wanted higher tax rates above $250,000. Most of the difference can be bridged with limited deductions for the richest 2 percent or so. In return, Democrats are seriously considering a proposal to slow the growth of Social Security benefits by switching to a different measure of inflation (full explainer here).

Basically, this is a progressive tax increase in exchange for a progressive benefit cut. That's not a bad deal for Democrats. It might even be a good trade.

Liberals would prefer to get their tax increases without giving up anything on entitlements. Second to that fantasy, changing the way we measure inflation is probably the least bad entitlement reform acceptable. It protects the poor more than moving the retirement age for Social Security or Medicare, and it changes Social Security payments very, very slowly. [Update: To protect the very poor who live very long, the solution is simple: Low-income SS rebates, which the administration is already seeking.]

Here's how it would work. Seniors would get the same initial Social Security benefit that they are projected to receive today. But under the new proposal, the checks would grow slower, pegged to a more conservative measure of inflation. That sounds like it would hit low- and high-income recipients equally. But the richer half of the country that reaches the age of 65 can expect to live more than five years longer than the poorer half. Since older recipients will see the bigger cut over time, it's fair to say that slowing the growth of Social Security benefits is a barely progressive, but clearly progressive, cut.

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The switch to a new "chained" consumer price index would cut Social Security benefits, by about $100 billion over 10 years. It would also raise taxes by about $60 billion. Under a slower-growing measure of inflation, more households would move into higher brackets, taxing their top dollars at higher rates. Measuring the distribution of tax changes under chained-CPI is a bit controversial, but Marc Goldwein and Adam Rosenberg calculated that "more than 40 percent of the additional revenues generated by the chained CPI would come from the top quintile."

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Trading a clearly progressive tax hike for a marginally progressive spending cut should be an acceptable exchange. But it is not yet a *good deal.* Ezra Klein reports that unemployment benefits and a dash of extra infrastructure spending is forthcoming. Good news. But I'm miffed that the White House is reportedly giving up on the payroll tax cut, which is great stimulus, and the debt ceiling, which is an awful gimmick that has been used to squeeze further cuts from the White House.