The Beginning of the Endgame?

 Let’s Make a Deal:

A New Series

There were a couple of developments on the budget this week, coming out of the House Republican camp (pardon the pun – as will be explained in a moment).  First, House Speaker John Boehner (R-OH) announced that when the nation’s debt subject to limit (that’s the technical term) reaches its limit late this year or early next, he will again demand that any legislation to raise the limit be accompanied by spending cuts of at least the same amount as the increase.  Democrats, including Treasury Secretary Timothy Geithner, the unfortunate keeper of the debt, decried this as the scheduling of Train Wreck II, following on the long-running debacle of last year.  Though there is no particular technical connection between the amount of a debt limit increase and the amount of spending reduction going forward – the debt is history, and future spending is, well, the future – this line in the sand has caught on with some observers.  Democrats question whether round after round of spending cuts with no revenue increases is sufficiently “balanced,” and question why Republicans demand more spending cuts at the same time as they argue to repeal the most recent round of spending cuts that they demanded for the last increase in the debt limit.  With the nation’s financial standing on the line in a game of chicken over default, the next encounter with the debt limit could be at least as consequential as the last.

The second announcement came from House Ways & Means Committee Chair Dave Camp (R-MI) (sorry about that pun), saying that he planned to start this year a process to reform the income tax law.  The plan would be to set up a “fast track” procedure, as has been implemented for trade promotion authority, to move an ultimate agreement through the Congress without danger of a Senate filibuster.

“Reform,” of course, is in the eye of the beholder; but there is broad consensus that the U.S. income tax is seriously deficient, and could be improved enormously through the textbook means of broadening the tax base and reducing the tax rates.  (CED’s tax reform proposal is available here.)  Research has indicated that the individual income tax base could be broadened sufficiently to allow significant rate reduction with revenue left over to reduce the budget deficit – speaking to Speaker Boehner’s concern.  The corporate income tax is a different case; a squeaky-clean corporate tax base with a corporate tax rate equal to the likely top-bracket reformed income tax rate would be about revenue-neutral, not a money-maker.  However, that corporate rate reduction would help to make the United States more competitive internationally as a place to conduct corporate operations and hire workers.

There are some sticky wickets on this pitch, however.  One is the issue of budget scoring.  Republicans insisted in the budget debates last year that tax proposals make use of “dynamic scoring,” under which lower tax rates are expected to yield more economic output and therefore higher revenues.  The same claim was made in 1981 and 2001, but tax revenues suffered and the budget deficit soared each time.  In 1993, the dynamic-scoring argument was used in reverse to claim that the deficit-reduction legislation of that year (which raised the top-bracket tax rate) would backfire, and result in recession and a higher deficit.  Instead, it was the economy and tax revenue that soared, and the nation enjoyed its first budget surpluses since 1969.  It is conceivable that all three of those natural experiments were confounded by uncontrollable and unexpected developments, but some might argue that the regularity of those results may have gone beyond coincidence.

A second question about Chairman Camp’s announcement is that it makes no mention of other components of a comprehensive budget deficit reduction program.  Although in theory some might try to fix each individual component of the budget in sequence, that is not how past major budget deficit reduction efforts have worked.  As much as people decry huge bills in the Congress, when big deals are being cut between the two parties, success requires that all of the points of dispute be settled simultaneously.  Otherwise, if one side makes concessions in the first bill in a series, it might never receive its compensation in a later bill.  For this reason, every major deficit reduction bill has been an “omnibus.”

In this instance, House Republicans conceivably could press for a bill that raised very little revenue and had correspondingly low tax rates for their constituencies.  Then, in subsequent deficit reduction legislation, it would be necessary to cut spending more, which would be a disadvantage to Democrats.

But control of the Congress is divided, and so Senate Democrats would be unlikely to sign on to any process that gave tax legislation a privileged place.  Therefore, the Camp announcement does not herald a stand-alone breakthrough for tax reform.  What it might suggest is a possible deal for an expedited process on deficit reduction broadly.  Democrats could counter by throwing the rest of the budget into Chairman Camp’s pot and seeking a streamlined parliamentary process for the entire deal.

That would require Democrats to put the major spending programs on the table.  They might refuse to go so far, and if they did demur, they might well look like they were not willing to participate in what could be a constructive exercise.  Only time will tell.

But Chairman Camp’s announcement does serve as a reminder:  Real deficit reduction, fixing the debt crisis once and for all, will be essentially a two-part deal.  Tax reform and Medicare reform will be the main elements.  Once those two are settled, every other part will fall into place.  Republicans must agree to a significant revenue increase, measured with conventional, “static,” budget scoring.  Democrats must agree to a fundamental restructuring of Medicare that would allow private plans to compete with the traditional fee-for-service program.  Without those mutual concessions, the overall budget problem will not be solved.

This suggests a new series of posts.  Over the coming weeks, with some interruptions for other topics, we will explain why deficit reduction will boil down to a two-part invention, why the two political parties both are dragging their feet, and how a deal could be structured if they got off the dime.  Some parts of the story will seem to indict the Republicans; others will seem to challenge the Democrats.  But the bottom line will cut across political parties:  If control of government is divided next year, so that neither party can try to change the budget unilaterally, it may finally become apparent that it would be impossible to wait for the next election; it will be time to cut a deal.  If that should happen before the financial markets lay waste to the United States of America, future generations may count themselves fortunate.  More to follow.

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