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Too Eager for a Fiscal Cliff Deal: Republican Leadership's $1 Trillion Tax Hike

Posted By Alison Acosta Fraser On December 17, 2012 @ 5:05 pm In Featured | Comments Disabled

The latest fiscal cliff [1] proposal by Speaker of the House John Boehner (R–OH) is infuriatingly frustrating to conservatives, again. In exchange for $1 trillion in tax hikes—including the President’s immediate tax rate hike on the wealthy—Boehner asked for just $1 trillion in spending cuts [2]. And, to sweeten the pot for the President, Boehner’s proposal reportedly includes increasing the debt limit for another year. Here are just a few reasons this latest proposal is a stinker:

  • Tax hikes are always bad. Two years ago, President Obama signed legislation preventing a similar tax hike on the grounds that the economy was too weak to take such a shock. He was right, and two years later the economy is still too weak to take such a shock. Worse, the tax hikes President Obama demands—higher income tax rates –would do the most damage to the economy next year and every year thereafter. Higher tax rates discourage all the activities that lead to a stronger economy, such as work, saving, and investment. Incentives do matter, even when they are inconvenient.
  • Taxes are not the problem, spending is. Boehner and company have and should continue to lead with firm demands for spending reductions, particularly on entitlements. Some new revenues are perfectly acceptable such as from economic growth, higher premiums in programs like Medicare, asset sales, opening the ANWR oil fields in Alaska, and offshore drilling. Boehner and crew long ago abandoned their House-passed budget and are now simply tossing out spending and tax targets, hoping the President will some day respond with something substantive. But why settle for dollar-for-dollar tax increases and spending cuts? That is tilting the “balanced approach” too far away from the real problem—too much spending. Boehner should take a page from Obama’s playbook here and repeat his objective relentlessly: Spending is the problem, so show me your spending cuts.
  • Where’s the beef? One trillion dollars in spending cuts sounds like a lot. Given that President Obama’s budget would leave the nation $9 trillion in debt more (without his tax hikes), much more spending reductions are needed. And, as the old saw goes, details matter. Is his $1 trillion cut just a big fluffy bun [3] without any real beef? Lawmakers have had the better part of a year to develop detailed policies as part of an effort to prevent the fiscal cliff, yet even as of this late date, they have provided few real guiding principles or details on spending reforms.
  • Few policy details. The only spending detail in Boehner’s latest proposal is to apply a more accurate measure of inflation for indexing Social Security benefits. That is a good step—one that will realize savings today and long into the future. But where will the remaining $800 billion in savings come from? From further government diktats like reductions in payments to health care providers [4]? Or from moving to premium support and other necessary patient-driven, market-based reforms for Medicare and Medicaid? Lawmakers could secure a meaningful down payment from sound reforms—like reducing the subsidy to upper-income seniors through selective increases in Medicare premiums, and increasing the eligibility age for both Medicare and Social Security. These policy changes, and others, have the added benefits of being bipartisan [5] and are very easy to accomplish, even before the end of the year. But we simply do not know what Boehner is proposing.
  • Giving up the debt limit. The forthcoming debt limit debate is a, if not the, supreme opportunity next year to make substantive changes to spending, particularly entitlements. Congress instituted the debt limit to force lawmakers—and the public—to evaluate and explicitly affirm that federal budget policy is sound and sustainable. And in times like these, when policy is neither sound nor sustainable, Congress should use the occasion of reaching the debt limit to force major policy changes to bring spending back into line. Yet the latest proposal would relinquish this opportunity for another year.

Grand Deal Perils to Avoid

Beyond unacceptable tax increases, there are many perils of a grand bargain. Beyond the usual budgetary shenanigans, lawmakers and the public should insist on details up front.

Lawmakers should not fall for anything short of substantive changes spelled out in any legislation they vote on. They must avoid gimmicks such as assigning savings targets to various committees for action some time down the road. Remember, that is one reason we are here today—the spectacular failure of the “super committee” spawned the “untenable” sequestration cuts in the first place, and the Senate failed to reach agreement with the House on preventing tax increases.

Past grand bargains failed to produce spending cuts [6], but the tax hikes still occurred, and deficits went up. The latest proposals by both sides do not seem to stray far from this model.

Clock Ticking

The nation is watching a standoff. As the clock ticks away toward the end of the year, it is clearer and clearer that Boehner’s seemingly desperate quest to solve the fiscal cliff through progressively capitulating on core conservative principles has yielded no concessions from the President and likely never will. Obama maintains he was returned to office to hike taxes on the wealthy. But Boehner and the House majority were returned to office to cut spending without raising taxes. The right things to do on the fiscal cliff [7] have been ruled unacceptable by the White House.

The basic choices left are to give in to the President’s demands of hiking taxes and further weakening an already weak economy, or to go over the cliff—and further weaken the economy. So the two sides should reject both of these bad choices, take a breather, and pass a simple extension of all current policy—all tax policy, all spending policy without sequestration cuts—until the end of March.

Why March? Because that is when the legislation funding the government expires, and it is near the time when the government will exhaust its capacity to circumvent the existing debt limit. This strategy means we avoid the cliff and the harm that would come from it. It also means Washington kicks the can again. But it keeps the pressure on to negotiate in good faith and to come up with a resolution, because some legislation will have to pass by the end of March to keep the government in operation.

Policymakers have intentionally and with careful forethought put us in this terrible position by creating the fiscal cliff themselves. Kicking the can a few months down the road is not a good solution. But, sadly, it is better than the only available alternatives.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/12/17/too-eager-for-a-fiscal-cliff-deal-republican-leaderships-1-trillion-tax-hike/

URLs in this post:

[1] fiscal cliff: http://www.heritage.org/issues/economy/fiscal-cliff

[2] just $1 trillion in spending cuts: http://www.washingtonpost.com/business/economy/boehner-offers-to-take-debt-limit-off-the-table/2012/12/16/8b369b7e-47c6-11e2-b6f0-e851e741d196_story.html?hpid=z5

[3] big fluffy bun: http://www.youtube.com/watch?v=Ug75diEyiA0

[4] government diktats like reductions in payments to health care providers: http://blog.heritage.org../../../../../2012/12/13/medicare-cuts-vs-medicare-reform/

[5] benefits of being bipartisan: http://www.heritage.org/research/reports/2012/11/six-bipartisan-entitlement-reforms-to-solve-the-real-fiscal-crisis-only-presidential-leadership-is-needed

[6] failed to produce spending cuts: http://www.heritage.org/research/reports/2012/12/the-fiscal-cliff-and-the-perils-of-grand-budget-deals

[7] right things to do on the fiscal cliff: http://www.heritage.org/research/reports/2012/11/fiscal-cliff-what-congress-should-do

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