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Fiscal Cliff Deal Redefines What It Means to Be “Rich”

Daily Ticker

To listen to the moaning of some Republicans in the House of Representatives, you could be forgiven for thinking that the Republicans are losing the fiscal battle in Washington.

Actually, they're winning.

To see this, you just need to step back and look at the tax deal and the country's fiscal trends from a broader perspective.

Yesterday, the government voted to extend almost all of the Bush Tax Cuts permanently.

Not temporarily, as a stimulus measure.

Permanently.

Ever since the Bush Tax Cuts were first enacted in 2001, one goal of the Republican party has been to "make the Bush Tax Cuts permanent."

For most of the last decade, this goal has seemed like an extremist view: Making the Bush Tax Cuts permanent would drastically reduce the federal government's revenue. It would also increase inequality and balloon the national debt and deficit--so how could we possibly justify doing that?

And yet now, suddenly, almost all of the Bush Tax Cuts are permanent.

And the definition of "rich" in America has been significantly increased: The only Americans subject to a minor increase in income taxes will be households making more than $450,000 a year.

The Republicans also got another good deal for America's investor and owner class, making the Bush dividend tax cut permanent. This saves a lot of money in tax bills for America's wealthier investors.

And the tax deal even socked it to the working class.

How?

By not extending the payroll tax cut.

This payroll tax cut added an extra $2,000 a year in the pockets of everyone who works for their money. The payroll tax hits everyone who earns wages, including the richest Americans, but it's a highly "regressive" tax: It takes a much bigger percentage of the income of those who earn less than $110,000 a year than it does from the richest Americans.

So the Republicans have won a battle there, too.

It's true that the Republicans have not yet won much ground on the other front that the party claims to be fighting on--namely spending cuts on programs that primarily benefit low-income and middle-income Americans (food stamps, Medicare, Medicaid, Social Security, unemployment insurance, and so forth).

But the key word there is "yet."

Yesterday's deal focused only on taxes. The next government fight will be about spending cuts and the debt ceiling, and the Republicans are already mobilizing to hold the country hostage and demand entitlement cuts in exchange for not forcing the U.S. to default. And it seems reasonable to assume that, no matter how crazy and irresponsible this behavior is, the Republicans will probably extort some spending-cut concessions in exchange for agreeing to allow the United States Of America to honor its commitments.

And then there's the big picture, which is also important. The Republicans are winning there, too.

To listen to Republicans tell it, you would think that the country's tax burden is suddenly astronomically high, that U.S. citizens are being forced to fork over more money to the government than ever before.

The truth is the opposite.

As Ben White of Politico observes, thanks to the Reagan revolution and the Bush Tax Cuts (almost all of which have now been permanently extended), the federal government is collecting a much lower percent of GDP as tax revenue than it has for most of the past 50 years.

Specifically, as the chart below shows, the federal government is now collecting 17% of GDP as tax revenue, versus an average of about 19% in the past few decades.

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One of the broad strategies of those who want to reduce the size of the federal government is a plan called "Starve the beast."

The goal of that plan is to continue to reduce federal government revenue to the point where the government simply has no choice but to cut spending, because deficits have just gotten too large and unsustainable to ignore.

Our deficits are not yet (quite) too large and unsustainable to ignore, but if we continue on the current path for a few more years, they'll get there.

So what the chart above is telling you is that the Republicans are doing an excellent job of bringing about Phase 1 of "Starving the beast."

So ignore what you're hearing out of Washington.

The Republicans may not have gotten everything they wanted out of the Fiscal Cliff deal, but they got almost everything.

And when it comes to the broader fiscal battle, the Republicans are winning: The federal government's tax revenues are at the lowest level as a percent of GDP in the past several decades.

The Republicans, in other words, are well on their way to starving the beast.

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