After another weekend of deadlock in Washington’s debt-ceiling talks, a rift over raising taxes has policy experts warning that lawmakers could miss a rare opportunity to begin balancing revenues and spending.
Lifting the debt ceiling will be necessary to avoid economic calamity, and Republican leaders insist that an increase can only pass Congress if it is tied to significant spending cuts. However, fiscal watchdogs and lawmakers from both parties have painted the clash as an opportunity to make a significant step toward shifting the country off its unsustainable fiscal path.
Congressional leaders are gathering at the White House again Monday to discuss a debt-reduction deal, but House Republicans are rejecting a grand bargain in favor of a deal with much smaller savings that focuses exclusively on spending.
Negotiators in the bipartisan talks led by Vice President Joe Biden reportedly developed a package of measures that would reduce deficits by $2.5 trillion over the next decade—a sizeable down payment, if not a complete solution. The plan called for painful concessions from both sides: cuts in mandatory and discretionary spending as well as in health care entitlements, and a package of populist tax increases proposed by Democrats that target profitable corporations and high earners. Republicans rejected all of those tax changes, and Democrats are now refusing to lop hundreds of billions from health care entitlements if they can’t get any tax increases.
“I don’t think you’re going to get a penny of Medicare and Medicaid cuts unless there’s revenue,” says Jim Kessler of Third Way, a centrist Democratic group. “If you don’t have revenue, it’s truly a mini-deal.”
The mini-deal—a possibility raised by some lawmakers, including Sen. John Cornyn, R-Texas—would be a package of spending cuts in the range of $600 billion to $800 billion over 10 years and an agreement on a modest debt-ceiling increase that would give negotiators another six months or so to work on a more ambitious plan. But experts say that could be the worst of both worlds fiscally: a basket of low-hanging fruit that doesn’t bring a real solution any closer and makes the next round of talks even harder by leaving negotiators with only the most difficult issues to discuss.
“When normal people wake up and say, ‘We’ve been fighting about this for months, you’re willing to hold the whole country hostage over it, and the deal that you got doesn’t fix the problem?’ That doesn’t resonate well,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan advocacy group.
MacGuineas hopes for an agreement on the scale of proposals by Obama’s fiscal commission, which aimed to reduce deficits by $4 trillion over the next decade. Most observers, however, don’t think there is enough consensus or time to agree on a plan before Treasury runs out of cash on August 2.
But even $2.5 trillion in deficit reduction over 10 years would be historic. The budget deal passed by President George H.W. Bush and a Democratic Congress in 1991 netted $482 billion in savings over 10 years by cutting spending by $265 billion and increasing taxes by $168 billion. In 1993, President Clinton’s Democrats appeased the bond markets with $433 billion in savings over five years by combining spending cuts and tax increases. In 1997, Clinton brokered a deal with then-House Speaker Newt Gingrich to cut the deficit by $180 billion over five years.
For Republicans, the price of spending cuts and deficit savings in the Biden talks, which would eclipse prior efforts, could be a roughly 1-to-4 ratio of tax increases to spending cuts. Some conservatives, including New York Times columnist David Brooks, see it as a bargain.
“The risks of the offer falling apart include some variety of default, and that could have mega-costs,” says Tyler Cowen, a libertarian-leaning economist at George Mason University who wrote a blog post encouraging Republicans to make an agreement. “The current deal outlined by media reports … is better than one might have expected,” Cowen says.
Alan Viard, an economist at the conservative American Enterprise Institute, argues that Republicans should take the deal if the spending cuts are not gimmicks. “The longer we wait to address the fiscal imbalance, the bigger the component will be on the revenue side,” Viard warns. The more urgent and desperate the fiscal situation becomes, he predicts, the more likely lawmakers will be to rely on fast-acting tools such as tax hikes.
Democratic negotiators’ grab bag of revenue options, designed for political appeal but divorced from broader conversations over how to fix the tax code, have attracted criticism from the party’s progressive base. While Democrats’ plans would make the tax code more efficient, they lack the ambition of the forward-leaning ideas about tax reform that analysts on all sides are long overdue.
“It would have been helpful to have Democrats in Congress who drew some lines on the revenue side,” says Michael Ettlinger, an economic expert at the liberal Center for American Progress. He contends that the public is not yet well-informed about the magnitude of spending cuts under discussion, and that a closer balance between spending cuts and tax increases—even if achieved incrementally—would produce smarter decisions.
Some Democrats, like Sen. Chuck Schumer, D-N.Y., argue that Republicans are deliberately trying to sabotage the economy for electoral gain in 2012. If that is true, it would be short-sighted. If the GOP’s ideological opposition to even marginal tax increases gives Democrats no opportunity to save face to justify major cuts in entitlements, they are likely to end up with no bargain—and, perhaps, more trouble than they bargained for.
“They’re going to be left to reform entitlements without raising revenues all by themselves? That’s not a political winner,” MacGuineas says. “Whoever comes out with this responsibility after the election shouldn’t want it without the other party there.”
This article appears in the July 9, 2011 edition of National Journal Magazine.