It is showdown time. Will anybody blink? I continue to believe the Republicans have the high ground on this issue but the political winds are changing and one side or the other is going to get it right. I will repeat again what I wrote in April.
Opposing all tax increases is the only way that any Republican has been able to stay politically viable. If you even hint that you would consider a tax increase, your political future is over. However, I don't see how that strategy can continue under current circumstances if Republicans want to become the governing party for the long term. I also don't see how the Democrats can be viable if they do not come forward with plans for real spending cuts. The future is going to belong to the party that shows that it has a practical plan to dig us out. Which party can uphold their principles and also be practical?
I think the Republicans would be well served to agree to a tax increase in the upcoming debt ceiling discussions, if and only if, federal outlays are firstreduced to no more than 20% of GDP (we are now over 24% of GDP). Tax increases would be in play but would only be triggered if the spending cuts come first. If a tax increase was required, taxes as a % of revenues could not exceed 18% in total (which is the long term historical average over the last 30 years). See the chart below from the Heritage Foundation's Chart Book:
In fiscal 2010, federal revenues were only about 15% but they are expected to recover with the economy. The current OMB estimate for next year is that revenues as a % of GDP will be 16.6% of GDP. Therefore, spending cuts of of at least 4% of GDP would be needed first in order to trigger any tax increase on the back end. There would need to be $3 or $4 dollars of spending cuts in advance for every $1 of tax increase using this approach.
Does this strategy sound familiar? I learned it from my mother. I could not have my dessert until I ate my vegetables. I could not play baseball until I did my homework. I could not watch television until I cleaned my room. The taxpayers should not put a dime into any budget deal until the spending cuts are in the bank. However, if you look at the chart above it is clear there is a revenue problem in addition to a spending problem. Facts are facts. I am convinced that the taxpayers (including that 1% at the top who pay 40% of all the income taxes collected) would support this deal if they believed that they would not get stabbed in the back as they have so many times before.
Now is the time for the Republicans to lead us out of the mess. However, to do this they must be realistic and reasonable. This plan is both and would be difficult for the Democrats to defend against. With this plan in play I would be very comfortable in having a showdown on the debt limit. The Democrats want tax increases. They can have them but they can't have their dessert first. Let the Democrats be the ones to take us over the cliff if they want to. They would have a tough time explaining their position to the American people. I want the Republicans to maintain the high ground and I want them to be in a position to win it all in 2012. To do that they have to show that they are both practical and principled. They have to also show that they can be trusted. This is their chance to do it. It is the time to go all in but only if they have a totally defensible position.
Interestingly, President Obama said this week that it is time to eat some peas. My sentiments exactly. However, it is President Obama who needs to pick up the fork. He is in this problem of his own doing and he has been put in this place by one of the ingenious features in the U.S. Constitution.
The terms of the House of Representatives were specifically established at only 2 years because our Founding Fathers never wanted the federal government to get too far removed from the will of the people. The enormous landslide in favor of Republicans in last year's election was meant to send a message just as they envisioned that the people wanted another direction. Second, the Constitution went further and in Article I, Section 7 states that all bills for raising revenue shall originate in the House. This was also written to increase accountability to the people when it came to tax increases.
The bottom line is this. President Obama and the Democrats had the ball all to themselves for 2 years and they fumbled it. The people had the chance to make a change and they made a clear choice for a stronger defense against spending and taxes by their votes in last year's House races. That is the playing field right now. The Constitution is pretty clear. He needs the House to agree to tax increases and it is not going to happen because of the Constitution. He's supposed to be the quarterback, not the punter. I have even called a play for him and the Republicans. Time to eat some peas!
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