Budget Deals and Tax Increases

Centrist and liberal columnists are lamenting the lack of tax increases in the debt deal. But the hollowness of the deal itself provides a good justification for Republicans to oppose all tax increases in such bipartisan deals.

The federal debt crisis is being caused by spending increases, not revenue shortfalls. When the economy recovers, revenues will rise to the normal level of about 18 percent of GDP, even with all current tax cuts in place. It is spending that is projected to rise to abnormal levels, as I discussed in my recent Senate testimony.

However, let’s say a fiscal conservative in Congress was willing to swap, say, $1 of tax increases for $3 of spending cuts in a deficit-reduction deal. Most likely, the tax increases would turn out to be real and damaging, but the spending cuts would probably be phony or overstated, as the deal just passed illustrates.

In the debt-limit deal, discretionary spending rises over time. It isn’t cut.  Economist Larry Summers seems to agree that the cuts in the deal aren’t real:

Despite claims of spending reductions in the range of $1 trillion, the agreements reached so far are likely to have little impact on actual spending over the next decade. The deal confirms the very low levels of spending already negotiated for 2011 and 2012 and caps 2013 spending about where most would have expected this Congress to end up. Beyond that, outcomes are anyone’s guess — Congress votes on discretionary spending annually, and the current Congress cannot effectively constrain future actions. True, there are caps and sequester threats in the debt deal, but these are virtually certain to be reformulated in 2013.

Deficit deals during the Reagan and Bush I years typically promised the public more spending cuts than tax increases. But the tax increases stuck, while the spending cuts were either smoke-and-mirrors or they didn’t last.

Consider the big budget deal in 1990, the one where Bush I infamously reneged on his “read my lips” promise. Bush claimed that the deal delivered two and a half dollars of spending cuts for each dollar of tax increases. But the cuts to defense in the deal were against an inflated baseline, and nondefense spending increased 15 percent in the two years following the deal.

Looking ahead to the special congressional committee that will report in November, I don’t see any incentive for a fiscal conservative to agree to tax increases. Democrats will call for a “balanced” plan, but that makes no sense because the cause of the government’s problems is not balanced. In addition, the idea that giving in a bit on taxes in order to leverage larger spending cuts has not worked in the past, as noted.

I’d like to be an optimist about spending cuts in a November deal, but most current political leaders show no interest in real cuts. Leaders in both parties continue to be positively allergic to naming any actual programs that they want to cut. Indeed, in the Washington Post today, Treasury Secretary Tim Geithner calls for more federal spending, not less. He wants more for “education and innovation.” He wants to “strengthen” Medicare. He decries the “extreme agenda” of policymakers who want to “dismantle” programs for the elderly and less fortunate. And he wants “short-term measures to strengthen the economy,” by which he means spending on infrastructure and unemployment subsidies.

Good grief. Geithner’s op-ed reflects the administration’s intransigence in defending the bloated welfare state, not any willingness to make serious budget reforms.