I don't have anything especially distinctive to add, relative to others in the commentariat, on the deal that's just been reached. Taking as given the impossibility of addressing the long-term fiscal situation, both because the voters wouldn't stand for it and because the Republicans are not (in my view) a responsible or serious group that one can deal with, it could certainly have been worse.
The biggest problem, as others have noted, is that Obama appears to be a once-in-a-generation lame and inept bargainer, who can take even a strong hand and not get all that much, because he is so predictably ready to fold. But again this is not mainly an issue about the New Year's Eve deal itself, which is more or less defensible as a one-off solution. Rather, it's about the debt ceiling crisis to come in a few weeks.
That is the one that really counts. I think the Administration should play that, not merely as hard as they are saying they will now, but about 20 levels harder. I would not just refuse to negotiate, but would have Administration officials use words such as treason, sabotage, and terrorism. And I would use the legal recourse that many others have discussed to prevent a default from happening. Whether it's the 14th Amendment option or purely discretionary decisions on what not to spend (e.g., everything in the districts that have recalcitrant Republican representatives), I would play this very hard and have, I believe, virtual certainty of winning an overwhelming political victory. But even if Obama would do this, which I doubt, there is no way on earth that the Republican Congressional leadership could actually be persuaded that he was planning to do this. They (at least think they, and probably do) know him too well.
But that's for the future. So what about this time around? Let's run through the main features listed in the January 1 New York Times:
Income tax rates - Apart from the problem of undermining Obama's negotiating credibility, I regard raisin the point at which the 39.6 percent rate kicks in from $250K (in previous Administration stands) to $400K, as a reasonable concession in exchange for sufficient consideration, and the question is whether he got enough. Tax rates will have to go up for the bottom 98% at some point, and I'd support greater rate increases at the high end, but that wasn't going to happen this time around anyway. In a less politically constrained environment, a much better idea would have been increasing the rate at $250K starting immediately, and restoring pre-2001 rates with just a year or two lag for countercyclical purposes, but again that wasn't going to happen, and I accept the Administration's political judgment that one couldn't really hold out for that.
Dividend and capital gains rates - These will now go up (relative to current policy) from 15 percent to 20 percent for high-income individuals. A step in the right direction distributionally, and given that there often is no effective entity-level corporate tax and that these days a lot of labor income camouflages itself as capital gain. Leaving aside structural improvements to the tax system (such as addressing entity-level corporate tax avoidance and taxing asset appreciation at death), there are good reasons why these rates should be below the top individual rate. For example, the dividend change increases the tax system's bias in favor of debt rather than equity financing. But, holding all else constant, I'd on balance be willing to go at least to 20 percent and perhaps higher.
Restoring phase-outs of personal exemptions and itemized deductions - These are stupid and overly complicated ways of creating temporarily higher rates at the top, for the former in particular just in the form of a temporary "bubble" rate. I'd rather not do it this way, but again, defensible if better changes are ruled out.
Alternative minimum tax - Permanently indexing the exemption amounts for inflation is a good thing, given the idiocy of this device.
Estate tax - Its permanence restored, the estate tax ends up with a higher rate than under current policy, but lower than under prior present law given the phaseout of the 2001 deferred repeal. I was for a while quite agnostic about the estate tax, despite its progressivity, but have become a supporter due to (a) the rise in high-end inequality and (b) emergent empirical evidence that people seem to respond less to the estate tax (such as at the work and saving margins), other than through pure tax planning to beat the system, than one would expect in a fully rational model with perfect annuity markets and purely altruistically motivated transfers. In a sense, going higher was politically moot anyway, given Democratic support for super-wealthy individuals who are leading Democratic donors.
Extending low-income tax credits from 2009 - An actual concession from the Republicans here. Not sure why, other than bad negotiating, these are only short-term extensions rather than permanent.
Payroll tax increase - The low-rate "holiday" is allowed to expire. I would have fought hard on this one for a one or two year extension, though I agree with not making the lower rate permanent. Significantly recessionary to allow it to take effect now. And the Administration could have had a great talking point had they fought on this one, concerning the Republicans' cheery indifference to tax cuts for the bottom 90% and to adverse macroeconomic effects.
Unemployment insurance - Glad to see that the benefit expansion has been extended for a year. In a tight labor market, this might have adverse employment effects, but if there is one thing that we don't have now, it's a tight labor market.
Medicare provider payments - Delaying the payment reductions for a year tells you just how serious both parties are about the long-term issue. The Republicans' dishonest 2012 presidential campaign discussion of this issue has helped make the politics worse.
Again, all this is trivial compared to the debt ceiling. If Obama doesn't win that fight by refusing to play, we will all have taken a giant step along the road to becoming a banana republic. If the default happens, with disastrous effects on the U.S. credit rating and on the U.S. and world economies, the people who are responsible will go down in history as the worst traitors and scoundrels we have had on the public stage since secession in 1861.