Debt Talks Break Two Taboos—Taxes and Medicare
Policy + Politics

Debt Talks Break Two Taboos—Taxes and Medicare


As lawmakers and the Obama administration resume deficit reduction talks this week, two politically taboo issues have come into sharper focus—Medicare funding cuts and tax revenue raisers.

Democrats oppose proposals that include substantial cuts to Medicare or other entitlement programs, especially in the wake of a  Democratic victory in a House special election last month in a heavily Republican Western New York district. Many political experts viewed it as a referendum on a highly controversial Republican plan designed by House Budget Committee Chairman Paul Ryan, R-Wis., to convert Medicare to a subsidized voucher program.

At the same time, Republicans have said that anything smacking of tax increases is off the negotiating table, claiming that the debt problem is a result of runaway spending, not taxes. But as the bipartisan group of House and Senate members led by Vice President Joe Biden reconvenes Thursday, talks are expected to move to tax issues. Jon Kyl, R-Ariz., a member of the Biden negotiating team, said that Republicans would oppose any effort to raise tax rates to help reduce the deficit, but might consider rewriting portions of the tax code and eliminating certain tax breaks to stimulate investment.

“Raising revenues is a great idea and the way you raise revenues is by encouraging economic growth, Kyle told The Fiscal Times. “You encourage economic growth by reducing tax rates, not raising them.”

Lawmakers have been negotiating a deficit reduction package to increase the national debt ceiling, which stands at $14.3 trillion. The government reached its statutory legal limit on borrowing last month. The Treasury says Congress needs to raise the debt ceiling by August 2 or the U.S. will default on its loans for the first time in history. If the government breaches the debt limit, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have warned it would trigger an economic catastrophe.

Republicans, and a handful of Democrats, have called for $2 trillion in cuts to projected spending over ten years, budget controls that would amount to additional trillions in savings.    Although Biden said last month that the talks are on target to reach an agreement of more than $1 trillion in spending cuts, Kyl suggested that Senate and House Republicans were in synch in seeking as much as $2.5 trillion in cuts over the coming decade.

The anti-tax orthodoxy is so deeply ingrained in the GOP that all but 13 of 288 GOP lawmakers in Congress have signed a formal pledge with Americans for Tax Reform not to raise taxes. Grover Norquist, the head of the anti-tax group, has admonished three Senate Republicans who suggested a tax option for helping to reduce the debt by slashing credits and deductions worth an estimated $1 trillion a year.

One of the Republicans, Sen. Tom Coburn, R-Okla., recently dropped out of the so called “Gang of Six” negotiating team after tangling with Norquist. Asked this week whether tax revenues of any sort were “off the table” because of pressure from Norquist’s group, Coburn told The Fiscal Times, “I think when the votes come you’ll be surprised how many people make the best decision for the country, and won’t pay any attention to the lobbyists,” including Norquist.

Despite Coburn’s absence, the “Gang of Six” has moved forward on a deficit reduction plan that includes $4.7 trillion in deficit reductions over 10 years—a figure that could increase with the possibility of economic growth. That’s more than the $4.4 trillion of cuts House Republicans approved earlier this month and exceeds the $4 trillion President Obama proposed over 12 years. The two Senators leading the effort, Saxby Chambliss, R-Ga., and Mark Warner, D-Va., said on Wednesday that the Gang’s framework uses the presidential fiscal commission proposal as a guide, and their unfinished long-term plan is not tied to the current controversy over raising the debt ceiling.

Chambliss and Warner were optimistic that they would produce a proposal soon, due to the urgency of the nation’s deficit, but didn’t provide a timeline. They said they were concerned the Biden group might only be able to produce a short-term solution. “I don’t know how big this window is,” Warner said, at a luncheon sponsored by the Economic Club of Washington, D.C., referring to their ability to pass a long-term package.

Warner said the “Gang of Six” is looking at reductions to Medicare, the federal health insurance program for seniors, but did not discuss specific details. “There are different ways to preserve Medicare other than what Congressman Ryan proposed,” Warner said.  “I think that our approach, what we have been saying from day one, is that everything had to be on the table.”

Federal spending for Medicare is forecasted to nearly double in 10 years from $520 billion in 2010 to $1.02 trillion in 2021, according to the non-partisan Congressional Budget Office. On top of that, Medicare enrollment has ballooned and will reach nearly 60 million by 2021, up from approximately 45 million in 2010. There has been little development among both parties to find an agreement on Medicare. Obama's health care reform legislation passed last year is projected to reduce Medicare costs by $400 billion to $500 billion over the coming decade.

However, the Medicare cost savings effort is partly based on reducing payments to doctors. – The so called "doc fix" continues to be blocked by Congress, but some experts suggest a bipartisan compromise might surface. The estimated 10-year cost for the “doc fix,” according to the Congressional Budget Office, is approaching $300 billion.

Earlier in the week, House Majority Leader Eric Cantor, R-Va., a member of the Biden group, said in an email to colleagues that cuts to health care entitlements are now a topic of conversation in the Biden talks. “Together, we have been going through all the major spending areas of the federal budget, beginning with non-health care mandatory programs and continuing with discussion on the health care entitlement programs,” Cantor said in the email.

Alice Rivlin, former Congressional Budget Office Director during the Clinton Administration, said the success of a deficit reduction plan depends on a bipartisan group of leaders, including the president, "being scared enough that they recognize they have to put together a package that they aren't going to like."  Rivlin spoke on a panel sponsored by the University of Maryland School of Public Policy.

On Wednesday, Fitch Ratings said it will put U.S. debt on watch for downgrade in early August in the event that Congress fails to lift the federal debt limit before other stopgap measures are exhausted. Last week Moody’s Investor Services warned of a similar downgrade. Moody’s said the political gamesmanship over raising the debt ceiling has been worse than expected. If progress toward increasing the limit isn’t made by mid-July, Moody’s said it would take another step toward reducing the country’s top-of-the-line AAA rating by putting the United States under review for a possible downgrade.

Related Links:
Key Senators Seek Nearly $5 Trillion in Debt Relief (USA Today)
GOP Leader Cantor Says Debt Talks Are Moving on Health Care (The Hill)
Republicans Push Medicare Fix Biden Debt Talks (Medicare)