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What's in the Deal? Your Fiscal Cliff Checklist

The “fiscal cliff” debate continued on Sunday, producing a great deal of drama but not much in the way of visible progress. First negotiations broke down, evidently because Senate Minority Leader Mitch McConnell was demanding a deal include a cut to Social Security benefits. The Democrats, who had previously offered such a concession only as part of a much larger deal on taxes and spending, were refusing. Then the talks resumed, almost as quickly as they had stalled, because McConnell and the Republicans agreed to drop that demand. As of late evening Sunday, the two parties were still talking, with Vice President Joe Biden, at McConnell’s request, getting personally involved in the negotiations.

The goal was to produce a deal before 11 a.m. on Monday, when the Senate reconvenes. Supposedly that would be enough time to pass a bill and, if not get it through the House as well, then at least send a signal to the markets that progress was near. Throughout the day, aides from both parties were alternatively optimistic and pessimistic about the prospects of reaching an agreement before New Year’s. The predictions seemed to depend on which aides you asked and, in some cases, in what mood you happened to catch them.

The importance of reaching a deal by 11:59:59 p.m. on Monday remains unclear, at least to me. The most immediate and severe consequence of going past January 1 without action is the expiration of the federal government’s emergency unemployment insurance program, which provides checks to jobless workers once they exhaust their state benefits. But that’s already happening: The last week to file for claims was the one ending this past Friday, December 29. Renewing that program is among President Obama’s top demands and, most likely, the Republicans will agree to it. But, at this point, workers will probably have to collect early January benefits retroactively, even if Congress and Obama act quickly.

The other effects of “going over the cliff” or “going past the curb” or “going down the slope”—choose your own metaphor—are likely to take at least a little more time. It’s not a good reason to delay action. But it’s a good reason to hold out for a better deal, even if that means holding out past January 1.

But what constitutes a better deal?

At some point in the next few days or hours, maybe even by the time you are reading this, Democrats and Republicans will announce they have reached some kind of agreement. What follows is a checklist of what might conceivably be in the deal, so you can decide for yourselves what you think of it:

Taxes on Wages: The Bush tax cuts of 2001 and 2003, which President Obama and the Republicans agreed to extend in late 2010, are expiring. The debate now is over which parts of the tax cuts to renew. But that debate is a lot more complicated than you’ve probably heard. Republicans have basically conceded that rates on higher incomes must go up. But what constitutes “higher incomes”? Annual household income of $250,000? $400,000? $500,000? Or $1 million? And will rates go all the way back to what they were during the Clinton era, or to some lower rate?

Dividend, Capital Gain, and Estate Taxes: Wage taxes are only the beginning of the story. Democrats want higher tax rates on dividends and capital gains, too, as well as higher taxes on estates. Republicans are against all of these things. Here, too, the details make a big difference. If taxes on investment income go up, do they go up for all investment income—or just investment income above a certain threshold? If taxes on estates go up, how big must the estates be to qualify? And then what’s the rate? Jared Bernstein has the details on investment taxes, Suzy Khimm on the estate tax, if you want to get into the actual numbers.

Ultimately, the best way to assess a deal on taxes is to consider all of the possible tax changes as one big change—and then think about the total revenue they’d generate. Obama started out asking for $1.6 trillion; his most recent offer to House Speaker Boehner, two weeks ago, sought just $1.2 trillion. What does the new deal generate? And in exchange for what?

The Refundables: These should be getting a lot more attention than they are. In 2009, the federal government expanded the Earned Income Tax Credit, which basically boosts wages for the working poor; it expanded the Child Tax Credit, which gives working people extra money to pay for their children’s needs; and it created the American Opportunity Tax Credit, which helps people pay for college tuitions. Extending all of these, as President Obama has sought to do, would plow $250 billion into mostly lower- and middle-income families that could use the help.

Once upon a time, conservatives hailed programs like these because they rewarded people who were trying to help themselves, by working or going to school. Now conservatives bash them, because, supposedly, they are creating a class of people dependent on government. Republicans haven’t made a big stink about them in the fiscal cliff debate, but that doesn’t mean they’re ready to endorse them without demanding something in return.

Payroll Tax Holiday and Unemployment Insurance: In 2009, also as part of the Recovery Act, President Obama and the Democrats created the “Making Work Pay” tax credit, to boost growth and help people pay their bills, at least until the economy had recovered. When Republicans balked at extending the program past 2010, when it was set to expire, Obama proposed replacing it with a temporary reduction in payroll taxes. The Republicans agreed and, for the last two years, payroll taxes have been 4.2 percent, rather than 6.2 percent.

Now that tax break is about to expire, along with the extended jobless benefits mentioned above. Obama pushed hard to renew the payroll tax holiday, citing both its benefit to families and the positive impact most economists say it has had on growth. But Republicans don’t like the idea, because they don’t generally like temporary tax cuts. And even many of Obama’s congressional allies are ambivalent, because they fear doing so would jeopardize the finances of Social Security, which the payroll tax funds. The failure to make a bigger deal about this is, as Matthew Yglesias noted some time ago, positively mystifying.

In past negotiations, the White House has proved masterful at winning unexpected, last-minute victories that escape public notice. And it’s always possible administration negotiators will do it again, if not by winning renewal of a payroll tax holiday then at least by finding substitute. But most insiders think the cause is hopeless, which means every American who gets a paycheck will see it shrink a little bit in January.

Infrastructure: On paper, the case for borrowing money for infrastructure projects is about as strong as its ever been. Not only does the economy still need stimulus, but low interest rates make the cost of borrowing unbelievably cheap. And that’s not to mention the fact the nation’s infrastructure is in desperate need of repair. Imagine how much better the northeast would have weathered Hurricane Sandy if, say, the power grid were more up-to-date.

President Obama has sought infrastructure money in this fiscal deal. Then again, he’s been seeking infrastructure money ever since 2011. Will Republicans agree to it? Once upon a time, they too saw the value of public works. Now, they’ll agree to it only in exchange for other concessions.

The Doc Fix and the AMT: This is the least interesting part of the negotiation, because it happens every year. The "doc fix" refers to a scheduled reductions in Medicare physician payments that results from a an ill-conceived reform in the late 1990s. It would significantly reduce physician incomes, so much that many doctors would probably stop seeing Medicare payments. "AMT" is the Alternative Minimum Tax, a failsafe tax designed to make sure wealthy taxpayers don't get out of paying taxes. But it doesn't work very well and, if unadjusted, would actually raise taxes on a lot of middle class people. Every year, Congress and the president agree to postpone the doc fix and raise the AMT income threshold. But doing so reduces government revenue, so there's always the question of whether—and how—to offset that revenue loss.

Sequester: It’s actually called a “sequestration.” And it’s actually two sequestrations, not one, as Richard Kogan of the Center on Budget and Policy Priorities has pointed out. Both grew out of the 2011 debt ceiling deal, which produced the Budget Control Act, which called upon Congress and the president to make spending cuts that they never did. Now those spending cuts are set to happen. Overall, Republicans seem to dislike the cuts more than Democrats do, because they take a bigger chunk out of defense spending. But both parties are determined to avoid those cuts and it’s likely they will do just that. The questions are how and when.

Cuts to Discretionary Spending. Originally, when Obama and Boehner were negotiating a sweeping deal, the idea was to replace the sequester(s) with substantial cuts to spending. In the proposal Obama sent to Boehner two weeks ago, the deal would have included cuts to discretionary spending, something Republicans have been demanding. The cuts were not huge, but, thanks to previous agreements, discretionary spending is already set to hit postwar lows. And although discretionary spending gest a lot less attention than entitlement spending, it’s awfully important. It’s almost everything the government does, from food inspections to environmental protection to Head Start—as well as defense spending. One key to watch: Are cuts to discretionary spending divided equally between non-defense and defense spending, as Obama was urging?

Entitlement Spending. This is the big victory Republicans want, although they want the cuts without taking too much responsibility for them, since cuts to spending are popular but cuts to Medicare and Medicaid and Social Security are extremely unpopular. Obama in 2011 agreed provisionally to an increase in the eligibility age for Medicare; he took it off the table once Republicans refused to make further concessions. This year’s debate unfolded similarly: He provisionally agreed to a reduction in Social Security benefits, through a readjustment in the program’s inflation formula, but said it could only be part of a bigger deal. In the last week or so, attention has turned to a smaller deal—and Social Security is back off the table.

The Debt Ceiling: In this “smaller” deal, Obama and Congress might agree to leave the sequester in place, or to extend it for only a short time—in the hopes of taking it up in the next big fiscal debate. And that brings us to the debt ceiling.

You remember the debt ceiling. That’s the official limit on government borrowing. Prior to 2011, Congress would raise the debt ceiling without making a serious fuss about it, because he nation’s financial credibility depended upon it. In 2011, congressional Republicans broke with that tradition. They refused to raise the debt ceiling until President Obama and the Democrats signed off on severe spending cuts. It was a form of economic extortion—and, by and large, it worked. Obama and the Democrats agreed to cut spending.

Sometime in the next few weeks, probably late February, the government will hit its borrowing limit again. And this time, Obama has vowed, he’s not negotiating. For that reason, he hoped that Republicans would include an increase in the debt ceiling as part of the deal he was negotiating with Boehner. Now that seems unlikely. In fact, the most disturbing (if least surprising) development of the last few days is the apparent determination of Republicans to force another debt ceiling showdown.

Obama seems pretty serious about not negotiating and Republicans seem pretty determined to hold the debt ceiling hostage again. Yes, that means we may end up going through another drama like this all over again soon—only that the consequences of going through that deadline without action could be real.