Tax Hikes Worthless Without Entitlement Reform

Tax Hikes Worthless Without Entitlement Reform

REUTERS/Larry Downing/The Fiscal Times

Just this week Americans received another warning shot across the bow: in October the federal deficit for one month rose to $120 billion, higher than expected, up from $98 billion a year ago. Simply put, spending is still rising faster than revenues which also rose $20 billion from the year before. Even as President Obama boasted during his campaign that he had cut spending.

While triumphant Democrats approach the coming budget negotiations with new-found vigor, Republicans need to remember that they hold two trump cards – the truth and the House. Americans may want the rich to pay more in taxes, but they also want lower deficits, which we will not have unless we tackle entitlement reform.

Here’s the problem: Democrats don’t want entitlement reform.  President Obama ominously kicked off the fiscal cliff skirmish by first meeting with the intransigent Left –  unions and other liberal backers -- who firmly oppose measures that would put Medicare, Medicaid and Social Security on a sounder footing. Their dug-in position demands higher taxes for the wealthy as the sole resolution of our budget woes. They must know that the tax hike they so stridently call for will only raise some $82 billion a year. That figure – the source of such hysteria – won’t come close to plugging our budget hole. It wouldn’t even cover October.

Democrats resist this truth: that the trillion-dollar-plus deficits of the past four years and the ramp-up in spending are not entirely the result of the recession. An analysis by economist Ed Dolan notes that the “Structural Primary Budget deficit” of the U.S. – which tosses out revenue and spending triggered by cyclical ups and downs (like unemployment benefits) is worse than any other OECD country but Japan. That includes Greece and Italy. That means that our structural problems are among the most severe on earth – problems that will not go away because the economy recovers. 

This was, of course, the essential message from the Simpson-Bowles Fiscal Commission. They reported that “even after the economy recovers, federal spending is projected to increase faster than revenues….On our current course, deficits will remain high throughout the rest of this decade and beyond, and debt will spiral ever higher, reaching 90 percent of GDP in 2020.”

Simpson-Bowles suggested raising taxes and reducing spending largely through adjustments to Social Security, Medicare and Medicaid. Republicans and Democrats agree that a combination of higher revenues and lower spending is the way forward, but the latter resist changes to our entitlements programs, which are essential to cutting outlays. When AFL-CIO President Richard Trumka trumpets that Democrats oppose “any cuts to Social Security, Medicare or Medicaid benefits” he is de facto sabotaging our fiscal future.

Democrats argue that Social Security is separately funded; the program is viewed as self-sustaining. That is no longer true, due to a temporary reduction in payroll taxes meant to boost the economy, and thanks also to inexorable demographic change. The Simpson-Bowles group made this simple case: in 1950 there were 16 workers paying in for each beneficiary. Today there are three; by 2025 the figure will be 2.3.

The 2012 report from the trustees for Social Security and Medicare included this ominous warning: “Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period.” The deterioration in Social Security’s prospects comes down to this; the annual cost of benefits will take 17% of workers’ taxable earnings in 2035, up from 11.3 percent in 2007.  

Those who refuse to “mess with” Social Security have a plan- to eventually apply a means test for benefits. The Left expects to make the program whole by reducing or eliminating benefits for upper-income Americans, who will also be asked to pay higher taxes into the system. This was part of the Simpson-Bowles solution, but it was balanced by gradually increasing the retirement age. Union leaders oppose any change to the retirement age; they are happier slapping upper-income Americans with yet another tax hike.

In his reelection campaign, President Obama convinced a weary country that he could be trusted with our fiscal future. In his convention speech he promised to “reach an agreement based on the principles of my bipartisan debt commission.”  He also crowed about his plan that would “cut the deficit by $4 trillion.”

Mr. Obama’s supposed “$4 trillion plan” was widely panned as including budget gimmicks that, among other things, treat $1.6 trillion of already-enacted cuts as future savings. The Committee for a Responsible Federal Budget said Obama’s plan “falls well short of the $4 trillion in savings.”

James Pethokoukis of the American Enterprise Institute describes the plan as including roughly “$1.735 trillion in tax hikes — and just $230 billion in spending cuts, the vast majority of which are cuts to health care provider reimbursements of dubious long-term value.” Mr. Obama’s plan may have won over voters, but it doesn’t solve our budget crisis. For that, the country will hope that determined Republicans will accept higher tax revenues in return for serious entitlements reform.

The authors of the Simpson-Bowles Commission said it best: “By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035.” The GOP may have lost the election; let us hope they have not lost the will to put the country on a sustainable path forward.