The Deficit: GOP Must Give In on Taxes, Democrats on Spending

The basic principle on which negotiations to reduce the nation’s towering debt should be based is “Everything on the Table.” Even so, powerful forces are trying to keep three major parts of the budget off the table. The refusal by Republicans to increase tax revenue and by Democrats to reduce spending on Medicare are major obstacles to a deal that must be overcome. Another potential source of deficit reduction that receives less attention is spending on means-tested programs. Here is the case for including all three in a grand bargain to reduce the deficit.

Although nearly all Republicans in the House and Senate have signed a pledge not to increase taxes, there are cracks in the dike holding back Republican support for tax increases. The first was the agreement of Senators Coburn and Crapo to increase tax revenue as part of the Simpson-Bowles Commission’s deficit reduction plan last year. A second crack was the agreement by Speaker Boehner to increase revenues by $800 billion over ten years as part of another grand bargain on the deficit negotiated last summer between the Speaker, President Obama, and their staffs. We will never know whether Boehner could have convinced his House Republican caucus to go along with the tax increases because the deal blew up prematurely. But it seems likely that the Speaker, the most powerful Republican in the nation’s capital, could still be attracted to a comprehensive deal in which most of the deficit reduction was entitlement cuts but that included increased tax revenue. A third crack is the three Republican Senators who signed onto the plan released by the Senate’s Gang of Six last summer calling for around $2 trillion over ten years in tax increases.

Cracks in the Republican tax wall are encouraging because the case for Republicans reversing their position on taxes is very strong. First, that elected officials would pledge never to increase taxes is not an action conducive to Democratic government. The nation’s current deficit plight shows why. Based on a review of over 200 years of financial crises in 44 countries, the economists Carmen Reinhart and Kenneth Rogoff conclude that a public debt of 90 percent of GDP or greater could shave 1 percent or more off the growth of GDP. We will reach the dreaded 90 percent level by around 2020 and much higher levels after that. An even greater problem is the threat of financial catastrophe brought about by loss of investor confidence. Standing on the edge of a financial precipice should bring some understanding of the foolishness of pledging never to increase taxes no matter what.

Another compelling reason for Republicans to abandon the no tax pledge is that their party is not without guilt in creating the policies that caused federal spending and debt to grow like kudzu. Republican initiative in enacting the Medicare drug benefit, yet another entitlement for the elderly, that now costs more than $67 billion a year and rising, is an example of Republican profligacy. In addition, Republicans have a long history of support for federal spending, especially during the administration of George W. Bush. The most fundamental issue is that the federal government, with major support from Republicans until recently, has made long-term spending commitments that are certain to grow in the future. According to the Congressional Budget Office, future federal revenues will average 18.5 percent of GDP. But with health costs rising and 10,000 Baby Boomers retiring every day, federal spending will rise from 23.4 percent of GDP this year to 31.1 percent in 2030, 42.8 percent in 2050, and 75.9 percent in 2085 if current policies are continued. Federal revenue of somewhat over 18 percent of GDP cannot support spending of nearly 76 percent of GDP – or even 31 percent of GDP for very long.

Finally, Democratic government requires compromise. In the past, federal policymakers have agreed on many major deals with large budget impacts, all of which were based on compromises between the two parties. The 1983 deal on Social Security, the 1986 tax reforms, and the 1990 and 1997 budget deals found Republicans and Democrats addressing major national problems by the age-old Democratic method of give and take. Most Americans elect their representatives to come to Washington to solve problems, not to achieve a record of ideological purity.

If Republicans must agree to higher taxes, Democrats must agree to less spending on entitlements, especially Medicare. The leading cause of growing federal spending is Medicare, so much so that stabilizing federal debt as a percentage of GDP is unthinkable without much greater control of Medicare spending. Under budget scoring rules, it will probably be necessary for congress to put a cap on the growth of Medicare spending that would actually control the growth of spending, regardless of the potential success of any particular reform in the Medicare program itself such as premium support or an advisory board that proposes cost-saving changes. Such a cap will impose new costs on consumers, but consumer awareness of cost is one of the forces that will drive the Medicare market to control price increases.

Following the everything-on-the-table principle, a third source of spending constraint is that there should be at least some savings from means-tested programs. Previous comprehensive plans to reduce the deficit, including the Gramm-Rudman-Hollings plan of 1985, the Bowles-Simpson Commission report last year, and even the debt-ceiling law, provided at least partial protection to means-tested programs. Providing some protection to reductions in means-tested programs makes sense, but insulating these programs from all spending controls does not. An important reason is that is seems doubtful whether Republicans would agree to any deal that does not include reduction in means-tested spending.

Many Republicans have noted how much spending on means-tested programs has increased, not just in recent years but over the nearly half-century since President Lyndon Johnson declared war on poverty in the mid-1960s. Consider, for example, the ten biggest means-tested programs. According to the Congressional Research Service, total spending on these programs was $626 billion in 2011 as compared with less than $20 billion in 1962. Given that spending on the ten biggest means-tested programs was about 75 percent of total federal means-tested spending, total federal spending on all means-tested programs was about $835 billion in 2011. In view of both the immense size of means-tested spending and its rapid increase, leaving all means-tested spending off the table will require other parts of the budget to take bigger hits. Means-tested spending is important, but so are other parts of the budget.

Another argument for including cuts in means-tested spending is that the politics of deficit reduction will be positively impacted if the guiding principle is that no part of the budget is immune from cuts. Facing a crisis of the proportions that the nation’s deficit has assumed requires sacrifice from all Americans. It seems reasonable to me to have cuts in means-tested programs that are smaller than cuts in other programs on a percentage basis, but at least some cuts are necessary to build momentum behind the battle cry that all parts of the budget must contribute to deficit reduction.

If the federal government operated small and stagnant means-tested programs, or if spending on means-tested programs had been cut in recent years, it would be more difficult to support further cuts. But the opposite is the case. Spending on these programs increased by more than 30 percent in just the three years between 2008 and 2011. Policymakers and advocates for social programs should begin now to develop ways that means-tested programs could be cut in the least harmful ways.

The day of Going Big on the deficit is approaching. When it comes, tax increases, Medicare cuts, and modest reductions in means-tested spending will be part of the bargain between Democrats and Republicans. Everything must be on the table and in play to produce the level of deficit reduction that the nation needs to secure its financial future and to prevent shifting the deficit burden to future generations.