Tag: debt limit

Deconstructing the Revenue Side of the Debt-Ceiling Deal: Yes, There’s a Real Threat of Higher Taxes

Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).

But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).

And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.

Here’s what Republicans like:

The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.

Here’s what Democrats like:

There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”

This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.

But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.

Debt Debate a Reminder of What Government Is

If it is true that a failure to increase the debt limit on August 2nd has the potential to bring about economic Armageddon, shouldn’t we be asking ourselves if it’s a good idea to allow the political class in Washington to continue collectively play God with our lives? After all, these people are fallible human beings.

In a similar vein, Sheldon Richman reminds us of what government really is in a new column on the issue of federal debt. I like Richman’s statement because one need not be a hardcore libertarian to appreciate the message:

Government is not some higher super-competent entity like the man pretending to be the Wizard of Oz wanted the people to think he was. It’s a coercive organization of limited, flawed, and essentially ignorant men and women who, having been anointed in an election after campaigns hawking snake oil, are presumptuous enough to think they are capable of making wise decisions on our behalf.

Having worked in both federal and state government, I know from first-hand experience that there’s no wizard behind the curtain. My gut tells me that some of the pundits and analysts who display an almost child-like belief in the capabilities of government might think differently had they spent time behind the curtain.

It is my hope that the circus-like atmosphere in Washington over raising the debt ceiling will cause more Americans to question why so much power and money has been placed in the hands of imperfect (to put it politely) men and women. Therefore, while I think the odds that Republicans and Democrats will strike a deal to substantively cut spending are somewhere around zero, perhaps the sordid spectacle will generate more popular support for downsizing the federal government.

Budget Plans: Gang of Six and Senator Coburn

The “Gang of Six” senators has released an outline of budget reforms that would supposedly reduce deficits by $3.7 trillion over 10 years. Revenues would rise by at least $1 trillion, while spending would be theoretically trimmed by various procedural mechanisms. The plan promises to “strengthen the safety net,” “maintain investments,” and “maintain the basic structure” of Medicare and Medicaid, which doesn’t sound very reform-minded to me.

The Gang of Six plan is a grander version of Sen. Mitch McConnell’s recent debt-limit proposal, which was aimed at putting off any spending cuts. The Gang outline has a few specific cuts, but the document mainly consists of promises to restrain spending and raise taxes in the future.

I’m surprised that Sen. Tom Coburn supports the Gang plan because his office has just released a massive study chock-full of specific spending-cut ideas. The Gang plan is all about avoiding specifics, while Coburn’s plan has 621 pages of details.

Coburn’s “Back in Black” plan would reduce deficits by $9 trillion over the next decade. The plan includes some tax increases, but the core of the document is a line-by-line analysis of every department’s budget, with lists of programs to cut and terminate. The plan includes a wealth of useful information that will aid policymakers interested in cutting spending for years to come.

So congratulations to Roland, Joelle, and the whole Coburn team for their late nights spent pouring through the budget, and for their great job documenting their findings with more than 3,000 endnotes.

Every Senate and House office should perform a similar exercise of proposing specific cuts. The government faces a debt crisis, yet only Coburn, Sen. Rand Paul, and perhaps a few others in Congress have put any effort into identifying unneeded programs.

Look on the official websites of most members of Congress and you will see discussions in support of spending on education, seniors, energy, research, highways and many other activities. When members are in front of TV cameras, they sound like they take the debt crisis seriously, but most congressional websites reveal a different mindset where federal spending is always wonderful and helpful to society.

Coburn’s staff tells me that about a dozen staffers chipped in on its Back in Black effort in recent months. If other House and Senate offices went through such an exercise, it would help members clarify their positions about the role of government and help them think about spending trade-offs.

My summer homework assignment for every congressional office is to go through a Coburn/Paul-style budget downsizing exercise. That could lead to more serious spending debates and more concrete proposals than the generally meaningless bullets points issued by the Gang of Six.

‘Cut, Cap and Balance,’ the Debt Ceiling and Federal Spending

Cato Institute scholars Daniel J. Mitchell and Chris Edwards evaluate the plans offered by Republicans for lowering federal spending using a so-called “Cut, Cap and Balance” proposal that would make small cuts to federal spending in the short run, cap federal spending, and balance the federal budget using a tax-limited balanced budget amendment to the Constitution.

Debt-Limit Deal: $500 Billion Cut Option

Charles Krauthammer is absolutely right that Republicans must call President Obama’s bluff on the debt-limit vote. I suggested that the House GOP pass $2 trillion in cuts tied to a $2 trillion debt increase, thus handing the matter over to the Senate and the president and refusing to budge.

Krauthammer has the same idea, but with $500 billion in cuts and a $500 billion debt increase. That would certainly be better than Senator McConnell’s chicken-out plan, and it would have the advantage of being so modest in size that I think it would ultimately get large support in the Senate from moderates.

The cuts–small “trims” really–could be taken right from Obama’s own Fiscal Commission report. The table below illustrates how modest and limited are the reforms needed to hit $500 billion in savings over 10 years. Indeed, the data from the commission only covers a nine-year period and includes just some of the proposed entitlement savings.

Obama Fiscal Commission Entitlement Trims $Billions
Trim Health Care Subsidies
Reduce subsidies for medical education $60
Expand Medicare cost sharing $110
Enact tort reform $17
Reduce Medicaid tax gaming $44
Reform Tricare $38
Trim Social Security Growth
Increase benefits by chained CPI $89
Trim Growth in Other Entitlements
Increase other entitlements by chained CPI $43
Reform federal retirement benefits $73
Reduce farm subsidies $10
Reduce student loan interest subsidies $43
Total Trims, 2012-2020 $527

It would be blindingly obvious to most voters that Obama would be responsible for a debt default if he couldn’t bring himself to sign such modest cuts that were proposed by his own fiscal commission. Then, when the government runs up against the debt limit again five months from now, the GOP should have another package of cuts ready to be passed. This next time they could perhaps focus on discretionary program terminations, some of which I’ve proposed here.

I Hope I’m Wrong, But Here’s Why Republicans Will Lose the Debt-Limit Fight

There are three reasons why I’m not very hopeful about the outcome of the debt-limit battle.

1. There is no unity in the GOP camp.

Republicans have been all over the map during this fight. Some of them want a balanced budget amendment. Some want a one-for-one deal of $2 trillion of spending cuts in exchange for a $2 trillion increase in the debt limit. Others want some sort of spending cap, akin to Senator Corker’s CAP Act. Some want to mix all these ideas together in a cut-cap-balance package. Others want Obamacare repeal.  And the latest proposal is Sen. McConnell’s proposal to let Obama unilaterally raise the debt limit.

These are mostly good ideas, but the failure to coalesce around one proposal – preferably one that is easy to understand – has made the Republican position difficult to define, defend, or advance.

2. The fear of demagoguery is high.

As I explained months ago, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are trying to spook financial markets with hyperbolic warnings about a risk of default. This is blatant dishonesty and demagoguery, but Republicans are nervous that this tactic might be successful if there is a high-stakes showdown as the government’s borrowing authority runs out.

For those with short memories, this is what happened with TARP back in 2008. The initial bailout proposal was rejected, leading to short-run market gyrations, and many Republicans panicked and switched their votes to yes.

3. Republicans don’t control the Senate or the White House.

I’m stating the obvious, of course, but people seem to forget that any debt limit increase will need to get through the Senate and get signed by Obama.

Imagine you are Harry Reid or Barack Obama. Is there any reason why you would acquiesce to Republican demands? Yes, you need to at least pretend to care about big government, wasteful spending, and red ink, but why not hold firm and then strike a deal based on make-believe spending cuts? That’s exactly what happened during the “government-shutdown” debate earlier this year.

This post, incidentally, is not an attack on Republicans. I’m very willing to attack GOPers when they do the wrong thing, but I’m not sure they deserve to get hammered in this case.

Simply stated, I don’t think there’s a winning strategy, so I don’t see any point in going nuclear.

If nothing else, at least Republicans resisted the siren song of tax increases, which is not a trivial achievement since Democrats clearly were hoping to trick GOPers into giving up one of their strongest political positions.

McConnell’s Cave-In and Boehner’s Opportunity

Senate Minority Leader Mitch McConnell has offered the president a way to raise the debt ceiling by $2.5 trillion without having to cut spending. The WaPo reports that “McConnell’s strategy makes no provision for spending cuts to be enacted.”

This appears to be an epic cave-in and completely at odds with McConnell’s own pronouncements in recent months that major budget reforms must be tied to any debt-limit increase.

House Republicans should obviously reject McConnell’s surrender, and they should do what they should have done months ago. They should put together a package of $2 trillion in real spending cuts taken straight from the Obama fiscal commission report and pass it through the House tied to a debt-limit increase of $2 trillion. Then they shouldn’t budge unless the White House and/or the Senate produce their own $2 trillion packages of real spending cuts, which could be the basis of negotiating a final spending-cut deal.

For those who say that House tea party members won’t vote for a debt increase, I’d say that $2 trillion in spending cuts looks a lot better than the alternative of having Democrats and liberal Republicans doing an end-run around them with McConnell’s no-cut plan.

For those who say that House members are scared of voting for specific spending cuts, I’d say that they’ve already done it by passing the Paul Ryan budget plan. I’d also say that you can’t claim to be the party of spending cuts without voting for spending cuts.

Obama’s Fiscal Commission handed Republicans ready-made spending cuts on a silver platter—Republicans will never get better political cover for insisting on spending cuts than now.