Why Any Debt Deal Will Need to Include Taxes

One of the major downsides to the otherwise enthralling roller-coaster ride that is the 2012 GOP primary is the way that the fight for the Republican ticket has dragged the rhetoric further and further to the right. After all, you cannot become president if you do not win the party nomination — and you cannot win your party’s nomination if you do not appeal to the base voters that turn out at the primary elections. The result is a competition to “out-conservative” each other, which may yield short-term electoral gain, but does so at the expense of cooperative politics and sound policy.

Consider this excerpt from an August 2012 GOP debate in Iowa. Fox News anchor Bret Baier asks the candidates if they would walk away from a deficit reduction deal that would cut $10 in federal spending for every $1 it raised in tax revenues. Every candidate agreed that they would.

This is, of course, absurd. There is no realistic way in which deficit reduction will ever occur solely through spending cuts alone. Think about the budget for a moment. Over 60 percent of the federal budget is mandatory spending, mainly on programs like Social Security, Medicare, and Medicaid. These are programs that, by law, provide certain benefits if you meet certain requirements, such as age or income level.

There is no wiggle room here. These payments must happen unless Congress amends the law to change benefits or eligibility requirements. It would be prudent now to recall that changes to Social Security have always been controversial among the electorate. President Roosevelt planned it that way. In 1941, he recalled:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”

Because employees pay into the Social Security system with every paycheck, they feel entitled to their own future benefits. This makes paring back benefits or raising the retirement age very unpopular politically. There is a reason why reforms to the Social Security system in 1983 were limited to an ever-so-gradual increase in the retirement age and an increase in payroll taxes. The math is simple: retirees like their Social Security benefits, and retirees reliably turn out to vote in larger numbers than younger citizens. Similar problems face the Medicare and Medicaid programs.

Interest payments on the debt are likewise mandatory, though, they are listed as a separate category from mandatory spending.

But if cutting mandatory programs (again, over 60 percent of the budget) would involve highly risky political moves, doesn’t that still leave discretionary spending of about 40 percent to carve up? Surely, we can reduce the deficit by lopping out a chunk of discretionary spending?

Not so fast. As it turns out, a lot of discretionary spending is not so discretionary after all. More than half of all discretionary spending is defense spending — a spending area that is also fraught, as politicians strive to “support the troops” and avoid being called “soft on defense.” And the nondefense portion of discretionary spending? What does that encompass?

From the Congressional Budget Office (CBO):

Seven broad budget categories accounted for more than 75 percent of the spending for nondefense discretionary activities last year [2010]. The largest of those is the category covering education, training, employment, and social services; it is followed in size by the categories for transportation, income security programs (mostly housing), and health-related research and public health. Categories with smaller amounts of discretionary spending include administration of justice (mostly for law enforcement activities), veterans benefits and services (mostly for health care), and international affairs.

It also is worthwhile to note that President Obama’s proposed nondefense discretionary spending for 2012 is about $450 billion, or around 12 percent of the federal budget. The deficit for 2011 was over $1 trillion. So, if the entire nondefense discretionary budget evaporated, it would still not have covered last year’s deficit. Nor would it cover the projected 2012 deficit of around $828 billion. If you had the entire discretionary budget (which, when you add the $868 billion in the 2012 proposed Obama budget for defense to the total for nondefense spending comes to about $1.3 trillion), you would have just covered the deficit, at least in the short term.

In the long term, you’d still have an aging population that would stress mandatory spending programs. When the baby boomers were in their working primes, taxing their large numbers enabled the government to meet entitlement payments. There were enough workers to tax to support Social Security pensions and Medicare insurance coverage. Now that those same huge numbers are retiring, there will be a shrinking pool of people to pay and a growing pool of people that will be drawing benefits.

And then, in our hypothetical, there is the fact that we just abandoned all of the government’s defensive duties, diminishing our global power and destabilizing the world as a whole. Also, with more than $1 trillion dropping out of the economy, we’ve just descended into the depths of a long depression that will send federal revenues spiraling, creating a whole new deficit problem.

Now, this hypothetical is obviously utterly unrealistic. No one (who actually understands the federal budget) is calling for the government to abandon all discretionary spending. But it nevertheless serves a purpose. It shows that the size of the deficit is comparable to an entire section of the budget. Furthermore, it shows that, as much as people talk vaguely of “cutting waste,” there is almost no part of the budget that could be touched without sparking controversy.

This is important because cuts must occur if we are to get the deficit under control. Such cuts should be timed so as not to derail economic recovery from the Great Recession (that is to say, they should not be implemented immediately) and, importantly, entitlements like Social Security and Medicare must be reformed.

The real question is a political one: how do you pass a deficit reduction package that cuts popular programs?

The Republican candidates’ unanimous rejection of a hypothetical deficit reduction package with $10 in cuts for $1 in tax increases is one way to not accomplish this goal. The reason why is, like the question posed above, inherently political.

In order to pass such legislation, one needs the president and both houses of Congress to be onboard. A simple majority would suffice in the House of Representatives, but a supermajority (two-thirds) would be needed to overcome the inevitable filibuster in the Senate. That would be virtually impossible if one side of the aisle refused to compromise, which is essentially what the Republican candidates said when they indicated they would reject any and all tax increases.

But pretend for an instant that the impossible occurs, and the Republicans land both the presidency and a filibuster-proof majority in the Senate. Also pretend that the few moderate Republicans left in the Congress (Olympia Snowe, Scott Brown, etc…) don’t jump ship. They’ve got the numbers. Do they pass this all-cuts deficit reduction package?

No.

Any economist would tell you that the Republicans don’t pass the package, even though they have the numbers. Why? They do not pass the all-cuts package for the same reason the GOP candidates are demanding an all-cuts package: incentives.

Right now, the Republican presidential candidates have a very strong incentive to call for an all-cuts package because it will help them win the primary election. As mentioned earlier, the candidates have been pushing each other further and further to the right in a race to win the presidential ticket. Calling for an all-cuts package allows them to curry favor with primary voters and gives them cover from opponents that would otherwise attack them for not ruling out tax increases.

However, passing such a package is not in our hypothetical Republican Congress’ interests because it would be widely unpopular and would energize the opposition. Unlike the presidential candidates, such a package would actually hurt their electoral prospects.

Democrats, of course, would vote in lockstep against this package, making the issue a partisan one. Democrats across the country would campaign against the hard-hearted Republican deficit reduction that was weak on defense (cuts to defense spending), harsh on both the poor and the middle class (cuts to the social safety net and Medicare), a burden to the elderly (cuts to Social Security and Medicare), but also went easy on the rich (lack of tax increases).

Voters across the country, seeing their Social Security checks shrink, their insurance coverage dropped, their unemployment evaporate, would turn their Republican representatives out of office in record numbers at the next election. And if it is one thing that political parties loathe, it is losing power.

But how would including tax increases in deficit reduction legislation prevent any of this?

Well, first of all, it makes the legislation likelier to pass than an all-cuts package — the latter having absolutely no chance at becoming law. It has a better shot because it provides a platform for cooperation and compromise. The Democrats may have to swallow painful spending cuts, but at least they in turn get to temper some of them with tax increases. The Republicans may have to suffer tax increases, but they also get their desired spending cuts.

With members of both parties onboard, the legislation has a better chance of making it to the president’s desk. Additionally, it can be presented as bipartisan, robbing either party of the ability to use it against the other in future elections. Individuals and primary challengers may still use this narrative in specific elections, but the overall narrative will be very different with bipartisan cover. It is also much easier to take the dive when you are joined by both your allies and opponents.

There would still be much opposition in the electorate, but it would be more manageable. A compromise package could call for ‘shared sacrifice’ from every American.

History also provides a good guide. As the Economist notes:

Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.

So yes, deficit reduction legislation should probably rely more on spending cuts than tax increases — but both are essential parts of any successful package. This will probably not come as a surprise to the American people, as numerous polls have shown that they recognize the need for including tax increases in a deficit reduction package.

But, you might ask, why focus so much on how the GOP candidates responded at some primary debate in Iowa? Once they got into office, things would change. Everyone knows presidents never keep their promises anyway!

Not so.

Studies of the topic have shown that presidents generally try to keep their promises. And on the subject of taxes, any Republican president would likely be fearful of repeating George H.W. Bush’s mistake in choosing fiscal responsibility over ideology. The elder Bush infamously agreed to raise taxes in order to cut the deficit, despite promising he would do no such thing in the 1988 election. At the next election, Bush faced a primary challenger (Pat Buchanan) that emphasized Bush’s broken promise and went on to have a surprisingly strong showing early on in the primary season. Bush, of course, went on to face Bill Clinton who, like Buchanan, threw Bush’s 1988 promise back at him. “Read my lips: no new taxes,” Bush’s broken promise, went on to become a solemn warning to politicians of all stripes (and a Wikipedia page, too!).  Bill Clinton went on to take the presidency.

The irony here is that the very candidates who have staked their campaigns on fiscal responsibility are unlikely to successfully cut the deficit, should any of them take the White House.

Perhaps they should take a page from President Reagan’s book. Sure, Reagan passed the largest tax cuts in American history. But he also, when faced with gaping deficits and a Democratic Congress, reached across the aisle, compromised, and, yes, raised taxes.



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