The Next Act in an Unending Fiscal Drama: A Really Big Fiscal Deal

In his Washington Post column on January 4, Matt Miller suggested one way to prevent the continuation of politically toxic and substantively unsatisfying showdowns on fiscal issues for the next several years. He called it “cap and swap.” The essence of his proposal was to cap the growth of the big entitlement programs as a way of assuaging Republican concerns about unlimited and out-of-control spending but to introduce a new tax—such as a tax on value-added, on energy, or on financial transactions—to help prevent the evisceration of all of the programs (infrastructure, education, programs for less advantaged families and their children) needed to promote growth and opportunity.

Miller’s idea is a good one. A few years ago a bipartisan group of fiscal experts proposed something similar. Our report, issued jointly by Brookings and the Heritage Foundation, was called “Taking Back our Fiscal Future.” At the heart of the report, which was widely criticized by the Left at the time, was the idea of taking the major entitlement programs off of “auto-pilot” and instead limiting their growth to something more affordable. Another related option, outlined in an oped I wrote for the Christian Science Monitor, would be to cap overall spending as a percentage of GDP along the lines called for by Bowles-Simpson, but to adjust that ratio for changes in demographic trends (the aging of the population) and the growth of health care costs per person allowed for in the Affordable Care Act. With clear limits on spending (scoreable by the Congressional Budget Office) forcing further cost-saving reforms in health care and Social Security, Republicans might be willing to tolerate a new tax that could over time partially substitute for what they perceive to be “job-destroying” personal and corporate income taxes. Yes, there would be many details that need to be fleshed out, including how to enforce such caps and how to reduce health care costs so that the cap doesn’t end up shifting costs to individuals, but let’s at least broaden the conversation before we once again enter the fray.

Republicans should be pleased with the recent cliff deal. Democrats were backed into a corner and don’t have many arrows left in their quiver as they prepare to fight the upcoming battle over the debt ceiling. They got a small, symbolic increase in tax rates for 0.7 percent of the population in return for making the low rates enacted by President Bush permanent. These rates, coming on top of over $1 trillion in spending cuts already enacted in 2011, will not support the kind of government we now have.

New strategies are needed to preserve the government’s ability to do what only government can do. Individuals can’t build roads and schools, respond to disasters, secure our embassies abroad, deal with immigration, provide the basic safety net taken for granted in other advanced countries, or set the rules that prevent business or individual wrong-doing.

The good news is that there is enough money in the entitlement programs—health care in particular—to preserve these and other important functions of government, but only if we can find a politically feasible way to get better value for our health care dollars and restructure taxes to encourage saving, energy efficiency, and higher productivity.