Need to Know: Budget

Getting Past ‘No’

If Republicans stand firm against any and all tax increases, they could miss the chance for their biggest victory yet on spending cuts.

WASHINGTON, DC - APRIL 13:  (L to R) House Majority Leader Eric Cantor (R-VA), House Speaker John Boehner (R-OH), U.S. Sen. Jon Kyl (R-AZ) and Senate Minority Leader Mitch McConnell (R-KY) speak to reporters about meeting with U.S. President Barack Obama over the deficit debate at the U.S. Capitol on April 13, 2011 in Washington, DC. Obama is scheduled to make a major budget address this afternoon.   (Photo by Jonathan Ernst/Getty Images) *** Local Caption *** Eric Cantor;Mitch McConnell;Jon Kyl;John Boehner
National Journal
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Tim Fernholz
July 7, 2011, 12:18 p.m.

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.”

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