By Tim Montgomerie
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"According to the International Monetary Fund, meeting America’s long-term obligations will require an immediate and permanent 35 percent increase in all taxes and a 35 percent cut in all benefits."
– David Brooks in the New York Times
WHAT HAPPENED YESTERDAY…
Last night the US Senate voted overwhelmingly for a package (tax details here) that involved $620 billion of higher taxes on wealthier Americans (OVER TEN YEARS) and just $15 billion in net spending cuts. David Brooks is unimpressed:
"The proposal is not a balance of taxes and spending cuts. It doesn’t involve a single hard decision. It does little to control spending. It abandons all of the entitlement reform ideas that have been thrown around. It locks in low tax rates on families making less than around $450,000; it is simply impossible to avert catastrophe unless tax increases go below that line."
The tax hikes/ spending cuts ratio means the deal was a pretty clear victory for President Obama but in conceding Republicans have averted massive cuts in defence spending and also have avoided looking like they were willing to impose a tax rise on all Americans in order to avoid a tax hike on richer Americans – which would have happened if a deal was not struck. The deal is still subject to a vote in the House of Representatives where many Republicans will probably vote to reject the deal that was brokered by Vice President Biden and Senate Minority leader Mitch McConnell (Jennifer Rubin describes these two men as the only two individuals in Washington capable of deal-making).
“I just couldn’t vote for it,” Rubio told reporters. “I ran, just two years ago, on the idea that I wanted to be part of solving the long-term problems this country faces. Time and again, we’re given choices here that don’t involve that.” “The real fiscal cliff is still there,” he said. “We’ll be back here again. In March, we’ll have a showdown like this all over again.”
Senator Rand Paul also voted against the deal and argued that the hikes on Americans earning over $400,000 to $450,000 per year might not yield extra revenues:
“You may not get any more revenue,” the Kentucky Republican said. “You may not get any more economic growth. But you can say, ‘I stuck it to the rich people.’” …We the Republican Party, the party of limited government and low taxation, should have no part in this,” he said. “We should have no finger prints on this and we should in no way support anything that raises taxes because it’s bad economic policy.”
For Irwin Stelzer at The Weekly Standard the abiding sense is that Washington's dysfunctionality persists.
The deal is only a temporary sticking plaster. Higher taxes on richer Americans won't come to close to solving America's fiscal challenges. Even Democrats seem reluctant to reverse the Bush era tax cuts insofar as they benefited middle America but they are equally scared of the entitlement reforms necessary to deliver a sustainable size of government. Over the next two months legislators will have to agree spending reductions. Or will they miss yet another deadline? America's politicians appear as unwilling to face up to fiscal realities as the leaders of the Eurozone. Britain could have set the gold standard for economic reform at this time but, as we learnt yesterday, George Osborne is set to borrow £212bn MORE by 2015 than he predicted in 2010. Unhappy times for western democracy – who are increasingly and precariously dependent upon the goodwill of creditors in non-democracies like China.