Dems’ Deal: Entitlement Cuts for Tax Increases
Policy + Politics

Dems’ Deal: Entitlement Cuts for Tax Increases

iStockphoto/The Fiscal Times

CHARLOTTE, N.C. – If President Obama wins a second term, what’s the likelihood that Democrats and Republicans will compromise on fiscal issues? The GOP will likely control one and possibly both houses of Congress,

The short-term danger is the so-called fiscal cliff, which hits on January 1st when all the Bush-era tax breaks expire.  That’s when the federal budget automatically shrinks by more than $100 billion over the course of the year, or 2.7 percent of Obama’s current 2012 budget. Economists estimate those twin blows would subtract more than $400 billion from the economy next year and trigger a new recession.

The broader issue – dealing with the a national debt that just climbed over $16 trillion -- about the size of the overall economy – requires adopting a long-term deficit reduction plan that rekindles confidence in businesses and consumers without undermining a still fragile economic recovery.

The Democratic Party’s top economic thinkers and leaders at this convention offered a cautiously optimistic view Thursday morning that compromise on both issues will be possible after the election. In the best-of-all-possible worlds, the fiscal cliff and long-term deficit reduction will be linked. They spoke at a panel sponsored by Bloomberg News and the Peter G. Peterson Foundation. (The Fiscal Times, an independent business venture, is also funded by Peter G. Peterson, but is not affiliated with his foundation.)

Any grand compromise will require the GOP moving off its steadfast opposition to higher taxes, the Democrats said. “You have to have the fundamental compromise that you’re going to have significant revenues from those who can afford to pay along with changes in entitlements,” said Gene Sperling, chief of the president’s economic advisors council. “If you have that fundamental compromise, there are many ways to deal with it.”

The most frequent attack on President Obama’s management of the trillion dollar deficits that marred his first four years in office is that he failed to embrace the Simpson-Bowles deficit reduction plan released in December 2010. Critics say he also failed to offer a credible alternative over the next two years when conservative Republicans controlled the House of Representatives.

Not true, Sperling said, at least on the second charge. During 2011, the president moved to the right of the Bowles-Simpson $4 trillion deficit reduction package, which included $1.50 in budget cuts for every $1 in tax increases. Obama in his last budget proposed about $2 in budget cuts for every $1 in tax increases, which the president would impose on the nation’s most well-off families.

“What’s already been done is well over $1 trillion in spending cuts,” Sperling said. “We’re on a path for domestic spending that will be at its lowest level since the Eisenhower administration.”

Illinois Senator Dick Durbin, who voted in favor of the Bowles-Simpson package, said the first order of business in discussing a long-term budget solution would be to determine if that $1 trillion was a down payment on the original deficit commission goals. “Is this a $4 trillion exercise or a $5 trillion exercise? I think a $4 trillion number sends a sound solid signal that you’re serious,” he said.

He suggested that during the lame duck session Congress could adopt a six-month budget fix that “paid for” about $50 billion in deficit reduction and lifted the debt ceiling, which is due to expire in March. That would give Congress time to come up with a long-term deficit reduction plan “with hard deadlines” that deals with revenue-raising tax reform and entitlement changes.

“I’d make it two months,” chimed in former Treasury Secretary Robert Rubin, who expressed fears that a six-month scenario would simply turn into another round of kicking the can down the road until after the next election.  Of course, Rubin would also raise about $1 in new revenue for every $1 in budget cuts, which is politically unrealistic as long as Republicans have anything to say about it.

Rubin suggested you could raise that much revenue by raising the top tax bracket back to 39.5 percent while eliminating about $100 billion a year in tax expenditures.  One way to do that would be to adopt a proposal in the Obama administration’s last budget that capped tax deductions for things like home mortgage interest payments and charitable contributions if they exceeded 28 percent of taxable income. That could hit not just the top 2 percent of families but a broader swath of upper-middle-class households.

Bill Daley, the president’s former chief of staff, pegged the chances of going over the fiscal cliff at just 10 percent. “There are serious players on both sides who understand this,” he said. “If we get this deal, there’s a good chance we’ll get the economic growth we need.”

Cooler heads will prevail after the election, agreed John Podesta, President Bill Clinton’s former chief-of-staff. “The outcome is unacceptable to both sides. We finally have an opportunity to break the deadlock,” he said.

But what happens if the Republicans win the White House and both houses of Congress? “All bets are off,” Durbin said.

Democrats on Capitol Hill and the departing Obama administration will probably allow the country to go over the fiscal cliff while leaving the new Republican Congress and administration to sort through the issues. During the campaign, Romney has vowed to prevent any tax increases; to lower tax rates by closing unspecified loopholes; to sharply increase defense spending; and to restore $716 billion to Medicare, which extended its hospital trust fund by eight years.

Given those promises, “I don’t know how they get there,” Durbin said. “They’re going to have to abandon some things that they’ve been preaching for the last few months.”