The American Taxpayer Relief Act of 2012, unsatisfactory as it is to all concerned, is nonetheless a genuine compromise between the Obama administration and the Republicans in Congress. A policy-induced recession may have been avoided, but there has been little or no progress toward greater responsibility on the spending front. Worse, the possibility of a default by the United States government in March persists.
Most of the temporary tax reductions enacted by the George W. Bush administration have now been made permanent, but the Republicans did not obtain much of the expenditure cuts they had demanded, especially on “entitlements,” that is, on certain health-care, retirement and social programs.
The relative lack of attention to the payroll tax, both from the White House and the Republicans, is notable. The Republicans fought to prevent income-tax increases for earners of high incomes, with considerable success. There was much less interest in the reversal of one stimulative measure; Congress let payroll tax rise back from 4.2 per cent to 6.2 per cent. That will tend to reduce aggregate demand, at a time of slow growth, and diminish the after-tax income of earners of salaries and wages: most of the middle class, in any realistic sense.
The Obama administration, for its part, was evidently content to add back in that two-percentage-point difference, in order to protect the solvency of the Social Security Trust Fund – though that entitlement-providing fund exists only notionally.
Under the sound and fury, and the partisan bitterness, lurks some degree of consensus.
Perhaps the only redeeming element of this episode is that the Senate has shown itself capable of arriving at a broad-based agreeement. The House of Representatives was not quite willing to fly in the face of a large majority of the Senate. It remains to be seen whether the American political system can handle the next such crisis, in March, on the so-called debt ceiling.