The budget battles ahead

Reuters

Vice President Joe Biden arrives to meet with House Democrats about a solution for the "fiscal cliff" on Capitol Hill in Washington, D.C., on Jan. 1, 2013.

Article Highlights

  • Part of the problem for Democrats is that the Bush-era tax cuts are very meaningful for most moderate-income families.

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  • The main criticism of the cliff deal is that it secured a tax hike that wasn’t paired with any spending restraint.

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  • A better course for the year begins with the realization that the GOP’s priority is to resist any further tax increases.

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  • Regarding the debt limit, Republicans must take a practical approach.

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Two months after the president handily won a second term and the Democrats increased their numbers in both the House and Senate, GOP congressional leaders were in no position to negotiate a good “fiscal cliff” resolution. So it’s not at all surprising that what emerged from the Biden–McConnell negotiations has satisfied almost no one, and certainly not many conservatives.

That being said, the January 1 tax deal needs to be put into proper perspective. The media are fixated on what is being called an Obama victory: He forced the GOP into retreat on the top income-tax rate. Yes, that was certainly a win for the president, something that was all but inevitable after November 6. But, despite what the president (and his apologists in the media) say, the top individual income-tax rate is not the sum and substance of the Bush-era tax policy. The benefits of the tax cuts enacted in 2001 and 2003 went overwhelmingly to the American middle class, not high-income households, as the tables summarizing the deal from the Joint Tax Committee and the Congressional Budget Office have made clear. Compared with what would have happened if the Bush-era tax schedule had been allowed to expire entirely, the deal is a net $3.6 trillion ten-year tax cut.

This is no small matter. For a dozen years, most Democrats resisted these tax cuts. Indeed, most Democrats voted against them (see here and here). They wanted more revenue to pay for the expansive government they have been building for half a century. But now, with this agreement, Democrats have signed onto a permanent lowering of the tax burden for the vast majority of American households. And it’s hard to imagine a realistic scenario emerging any time soon that would allow Democrats to reverse course and impose higher income taxes on these households.

Part of the problem for Democrats is that the Bush-era tax cuts are far more meaningful for most moderate-income families than anything ever done by the Obama administration. According to the Tax Policy Center, the Bush-era rates reduced the tax burden on households with incomes between $50,000 and $75,000 per year by $1,400 annually. For households with incomes between $75,000 and $100,000, the tax cut is worth about $2,250 each year. The president and his party fancy themselves the great protectors of the American middle class; certainly their campaign rhetoric in 2012 reflected this grandiose self-image. The irony is that, to put money where their mouths are, they were forced to become champions of George W. Bush’s tax policy. Rich, indeed.

The main criticism, and an accurate one, of the fiscal-cliff agreement is that it secured a tax hike for the president that was not paired with any spending restraint whatsoever. The bill includes spending increases (an extension of unemployment compensation and another one-year undoing of the scheduled cut in Medicare physician fees), but not nearly enough cuts to offset them. Nothing has been done to address the real problem in the nation’s finances: the ballooning costs of entitlement programs.

Some conservatives have taken heart in the fact that the agreement did not raise the debt limit, setting the stage for a more successful budgetary confrontation in another 60 days or so, when federal borrowing is expected to bump up against the current statutory ceiling. The argument is that raising the debt limit is so unpopular with the public that Republicans will have substantial leverage to extract meaningful spending cuts from the president. Unfortunately, this is more wishful thinking than a sound assessment of the political landscape.

The problem begins with the threat itself. It is perfectly appropriate to use the occasion of a debt-limit debate to force as much serious action as possible on deficit reduction. But that’s not the same thing as being willing to resist a debt-limit increase to the point of risking substantial economic turmoil. There’s no sense of proportion in such tactics, and voters would rightly blame the GOP for the chaos that would result if the U.S. Treasury ran short of the funds necessary to service existing debt and pay for the federal spending that has already been approved. The truth is that the federal government will be borrowing trillions of dollars for the foreseeable future under any budget plan, including the budget passed by House Republicans in 2012. The debt limit is going up, one way or another. The only question is how the debt limit is raised and whether it is coupled with any meaningful narrowing of future deficits.  The GOP needs to position itself as the party of responsible governance and fiscal discipline. That can be done, but not with absolutist declarations that are bound to fail.

The second problem has to do with the kind of spending restraint that’s really needed at this point. To get the nation’s fiscal house in order, Congress and the president must agree to far-reaching reform of the major entitlement programs — namely, Social Security, Medicare, and Medicaid. That means, among other things, moving toward a premium-support model in Medicare, block grants for Medicaid, and reductions in Social Security benefits for future retirees with high incomes and substantial private assets. Does anyone believe the GOP can force the president and Senate Democrats to accept these kinds of reforms in a debt-limit showdown two months from now? It’s not possible, and therefore shouldn’t be tried. If it is tried, it will result in another retreat by the GOP that will further weaken the party’s position.

Moreover, if the GOP makes the debt-limit fight a showdown over fundamental entitlement reform, the president will successfully put on the agenda another round of tax hikes in “grand bargain” fashion.

The media will of course play along and echo the argument that, if entitlement cuts are on the table, it’s only “fair” that the rich pay more too — again. The danger is that the GOP, by escalating the stakes, could find itself in another retreat on taxes, which would be truly disastrous for the party.

A better course for the year ahead begins with the realization that the party’s top priority is to resist at all costs any further tax increases. That’s far more important than, during the debt-limit debate, drawing lines in the sand that will quite predictably be crossed. The president got his tax hike on the rich in the fiscal-cliff deal. The GOP must make it absolutely clear that that’s it. No more tax hikes. Period.

Regarding the debt limit, Republicans must take a practical approach. That starts by declaring in clear terms that the party will support debt-limit increases to ensure that bills are paid and outstanding debt is serviced. If that means passing a series of small increases in the debt limit, so be it. That’s far better than staging a showdown Republicans will lose.

At the same time, the GOP needs to articulate real entitlement reforms, advance them in the legislative process, and stand behind them for the next two years. That should mean, for one, advancing reforms to Medicare that fall short of premium support but nonetheless represent real progress toward advancing consumer incentives in the program. On Medicaid, the GOP could work with the nation’s 30 Republican governors to push for reforms that give the federal government more budgetary predictability and the states far more control over the program.

Will these be readily accepted by the administration? No. But they are sound and defensible reforms that would address the undeniable problem of growing entitlement spending. And they would demonstrate that the GOP is capable of practical and serious governance.

It is possible that the deal that was struck last week will be the last major piece of budgetary legislation passed during the Obama era. It’s hard to see serious tax reform advancing at this point, and certainly the kind of entitlement reforms that are commensurate with the size of the problem won’t be enacted. If that is indeed the case, then history will not look kindly on the Obama presidency. Future generations of Americans will live less prosperously because of the massive debt and deficits of these years. And President Obama will rightly shoulder most of the blame for this colossal failure of leadership.

 James C. Capretta is a fellow at the Ethics and Public Policy Center and a visiting scholar at the American Enterprise Institute.

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