Rich Make Out Like Bandits in Fiscal-Cliff Negotiations

If the stock market is a barometer on how the wealthy and powerful are feeling about their prospects, then the 1 percent has come down with a healthy dose of the Christmas spirit. In the past few weeks, the S&P 500 has rallied more than 7 percent. And why not? Staring at the fiscal cliff, which would have raised taxes on income, capital gains, dividends, and estates taxes, the wealthy had reason to fear. The moneyed class placed a huge, one-sided bet on their tribune, Mitt Romney, and on the Republicans. And they lost. Big time. In mid-November you could detect, in the precincts of Greenwich and Palm Beach, in Scottsdale and Buckhead, a grim sort of resignation.

The first several weeks of the fiscal-cliff hostage situation gave them more reason to fear. President Obama held steadfastly to the notion that taxes should go up for everybody earning more than $250,000. He continued to deploy the (successful) campaign rhetoric and argue that we shouldn’t protect tax breaks for the wealthy as we go after social programs that benefit the poor. Poll after poll has revealed that letting taxes rise on the rich is popular, even among Republicans. Meanwhile, a failure to act would significantly alter the tax code, and not in favor of the wealthy.

But the developments of this week should cause the posh to take heart. Instead of getting soaked, it looks like the rich will receive a gentle spray of spring water.

Now, any discussion about the resolution of the fiscal cliff should start with a huge caveat. It’s entirely possible that House Speaker John Boehner won’t be able to come to terms with the White House, and that House Republicans will refuse to back any deal that Boehner and Obama strike. That said, it’s looking pretty good for the rich. President Obama over the weekend made an offer to resolve the fiscal cliff. Given his history, not to mention game theory, it’s likely that a final resolution will be somewhere between President Obama’s proposal and Boehner’s proposal. And that’s good news for the 1 percent.

AFirst, Obama has defined wealthy upwards. As I’ve been arguing for years, people who make more than $250,000 a year are rich, regardless of which rarefied ZIP code they live in. That’s five times the median income in this country. But President Obama has proposed leaving the Bush tax rates where they are for everyone earning more than $400,000. That spares a decent chunk of high earners from higher taxes. It also means that people who make, say, $500,000, or $700,000—who, again, are rich by any measure—would see the lion’s share of their income spared from any tax increase.

And there’s reason to think this may not be the end. Boehner has proposed setting the new bar for “rich” at $1 million in annual income. If the resolution is somewhere in the middle, or even much closer to Obama’s figure, and the top rate kicks in at $500,000 or $600,000, than many, many rich people won’t see their income taxes go up much at all. (They will be hit, it should be noted, by payroll taxes associated with Obamacare.)

But wait, there’s more. As we know from delving into Mitt Romney’s tax returns, the really, really rich don’t rely on salaries and wages for their income. Working is for chumps. Rather, they make their money from investments, from capital gains and dividends. The Bush tax rates treat this kind of income even better than they do wage income. Capital gains and dividends are taxed at rates as low as 15 percent. Which is how Mitt Romney was able to pull down about $20 million a year while paying a 13 percent rate and not having a job for several years.

Here, again, the fiscal cliff was poised to deliver a harsh blow. Without a deal, capital gains would revert to the Clinton-era levels of 20 percent for long-term gains, while dividends would be treated as ordinary income. Which means those in the 33 percent tax bracket would pay more than twice as much in dividend taxes. But, here, too, Obama has quietly thrown a lifeline to the idle rich. According to someone with knowledge of the situation, Obama’s most recent proposal to Boehner offered to fix capital gains and dividend tax rates at about 20 percent. That’s higher than it is now, but it is significantly lower than it was for much of the 1990s.

Don’t get me wrong. The rich will certainly pay more than they are now under any fiscal-cliff resolution. The estate tax, which affects the tiniest sliver of Americans, will likely rise. Taxes associated with Obamacare will begin to bite. And if the deal paves the way for tax reform, the well-off could likely see some cherished deductions eliminated or capped. But that’s all in the future. In the short-term, if a deal is reached based on the parameters laid out by both parties, the wealthy will receive a gentle lashing with a wet noodle.

If they were smart, the moneyed class would whip out their phones, call their Republican representatives and friends, and tell them to take President Obama’s offer and run like an insider trader.