November 27, 2012
Make no mistake: Political optics are the driving force behind much of the talks between the Obama administration and congressional Republicans over the year-end fiscal crisis. The goal is to have a deal that looks responsible to the public and the markets, even if it relies on a few budgetary tricks to cut the deficit.
After an initial wave of optimism following House Speaker John Boehner’s declaration that Republicans were open to discussing revenue increases for the first time in decades, the harsh reality of working out a “grand bargain” has begun to set in.
The two parties are trying to find a way to avoid falling off the fiscal cliff at the end of the year and incurring nearly $600 billion worth of automatic tax increases and spending cuts that would reduce the deficit but send the economy into a tailspin. Shaving $4 trillion off a decade’s worth of deficits means making compromises that go against party ideologies: limits to entitlement spending for Democrats and taxing wealthier Americans for the GOP.
Both sides want to appear reasonable and open to a deal, yet in no way inflict serious pain on their political and philosophical bases.
“A lot of this is not wanting to be blamed for failure and not wanting to appear to your core constituency that you have broken a promise – either to not raise taxes or to cut entitlements in unacceptable ways,” said Robert Reischauer, a former director of the Congressional Budget Office. “It’s going to be a very careful dance where the two parties want to keep their distance, but at the same time want to be viewed by the audience as graceful and viewed by the [negotiating] partner as not stepping on toes.”
Here are five ways the two sides can finesse the toughest issues and find common ground:
• Resorting to a “tax bubble” instead of raising top rates – Republicans are wedded to keeping the top marginal tax rate at 35 percent, while Democrats favor letting it revert to the pre-2001 level of 39.6 percent.
There’s a simple way to split that difference—scrap the progressive income tax scale and settle on a flat rate that applies to all income earned by wealthier Americans. The Obama administration has opened the door to this possibility, according to The New York Times.
For example, the government can tax the entire salary earned by those making more than a certain level – say $400,000 or more – at the “bubble” rate of 35 percent instead of allowing parts of their income to be taxed at the lower marginal rates. In that way, Republicans can say they held the line on the top marginal tax rate, while the Treasury would rake in billions more in revenue. This is an unlikely plan since people earning between $250,000 and $400,000 would pay an additional $23,000 in taxes beyond the marginal tax rate of 39 percent.
The other avenue for achieving this result involves putting a cap on itemized deductions—an idea loosely floated during the campaign by Republican presidential nominee Mitt Romney. Sen. Bob Corker, R-Tenn., has suggested a $50,000 cap, which would effectively target high-income earners.
• Playing baseline games -- All deficit reduction plans go out a decade—letting policymakers manipulate the baseline assumptions in small ways that add up to big savings.
Any “grand bargain” struck by the two sides must reduce the size of projected deficits by about $4 trillion over ten years. But it’s really the starting point and baseline that determines how much in cuts is needed in order to control growth of the $16.2 trillion national debt.
This is where, according to the Washington Post Fact Checker, Obama is proving to be a master of gimmicks. For instance, the administration argues that it should be able to use $1.5 trillion spending cuts reached as part of the 2011 debt ceiling deal as new cuts because those cuts have yet to take place. The president also wants to claim winding down the wars in Iraq and Afghanistan for an additional $800 billion in savings. Republicans and some independent budget experts claim that Obama is double-counting, taking credit for deficit reduction that is already baked into policy.
• Tinkering with Inflation – One way to lower the deficit is to refine the Consumer Price Index, a government inflation measure that determines how much entitlement payments increase every year.
Lawmakers could move to what’s called “chained” CPI. That essentially assumes people turn to less expensive products when prices rise. The chained CPI has averaged about 0.3 percentage points less per year than existing measures. Obama first put forth this idea in trying to reach a “grand bargain” with House Speaker John Boehner last year.
Applied to Social Security and civil service pensions among other spending, chained CPI would save $168 billion over 10 years, according to a paper by The Moment of Truth Project, which is headed by the co-chairs of the president’s bipartisan commission on fiscal reform, Republican Alan Simpson and Democrat Erskine Bowles. But liberal lawmakers and seniors’ advocacy groups including the AARP have denounced chained CPI as a spending cut.
• Embracing “dynamic scoring” -- Republicans, of course, have their own gimmicks, and one that Obama derided during his White House news conference earlier this month is the argument that a simpler tax code with lower rates and fewer deductions spurs vibrant economic growth that adds hundreds of billions of dollars in new revenues.
But that theory – dating back to Reagan’s “supply-side” economics of the 1980s – doesn’t hold up. Economists and former congressional staffers say the historical record shows that the tax cuts almost never pay for themselves, let alone reduce the deficit.
The policy gets sold as reducing the deficit by what’s called dynamic scoring – that is, economic models that give upbeat estimates of how tax cuts affect the behavior of businesses, investors and consumers. It’s an open secret that this type of budgetary scoring is notoriously inaccurate. Any plan relying on it could increase anxieties about government efforts to rein-in the deficit and sidestep the fiscal cliff.
Still, don’t be surprised if a final deal includes some sop to the concept of dynamic scoring – such as instructions to the non-partisan Congressional Budget Office or the Joint Committee on Taxation on calculating the effects of changes in the tax code or spending policies.
• Allowing a Sequester Redux – The first thing to remember about budget enforcement is that was the very device that got us into the current mess over the fiscal cliff. The deal negotiated by Obama and the Republicans in 2011 to raise the debt ceiling called for automatic, across the board spending cuts -- or a sequester -- unless members of a special House-Senate super committee could agree among themselves on long term cuts in the deficit totaling $1.2 trillion.
When the super committee failed to reach an accord late last year, the debt ceiling law called for the first installment of those deep cuts in defense and domestic programs to take effect Jan. 2, 2013. In the past, these spending cut “triggers” have given lawmakers an easy way out of having to make hard budget cutting choices themselves. But Obama and congressional leaders had buyer’s remorse for signing off on the latest sequester, fearing a sudden downturn in the economy and massive layoffs in the defense industry, and are scrambling to find a way to defuse the automatic cuts from taking effect.
Ironically, many of the deficit hawks who promoted sequestration last year – including the co-chairmen of the former National Commission on Fiscal Responsibility, want it included to enforce any grand bargain struck by the administration and Congress this time around.
“Though we won’t be able to enact the entire plan in the few legislative weeks before year’s end, policymakers could agree in the lame-duck session on the basic framework of the deal. Congress could enact a “down payment” of savings from spending and revenue policies, along with a process for achieving the remaining savings by July 4, with enforcement mechanisms to ensure that the promised savings are achieved,” Erskine Bowles, the Democratic co-chairman of the commission, wrote in the Washington Post shortly after the election.