Sunday, August 14, 2011

A Balanced Meal

The composition of the Super Committee to deal with our mounting budget problems are now known.  The work of this group to develop $1.5 trillion in deficit reduction must be completed by November 28 with the approval of the Congress required by December 23 in order to avoid $1.2 trillion in cuts split evenly between domestic programs and defense.

We likely are heading for another impasse as the Democrats insist on tax increases on the "rich" and the Republicans insist on spending cuts that are much more substantial than the Democrats appear willing to consider. How do you bridge these differences?

I have written before that I am a reasonable man.  I also was not born yesterday.  Therefore, I have stated that I would not be adverse to some modest revenue increases in a grand bargain.  However, I would insist on at least 6 times the spending cuts as any revenue increases.  I would also insist that the spending cuts come first.  Any revenue increases would be deferred until the spending cuts were "in the bank".  To use President Obama's own language, "We need to eat our peas first".  Revenue increases are the dessert that you only get if you do the tough stuff first.  That is my definition of a balanced meal.

This is about the proportion of spending cuts to tax increases that has been successful in other countries that solved large deficit spending problems.  Lower ratios of spending cuts to tax increases have generally been unsuccessful in correcting large fiscal imbalances.

In addition, if the revenue increases involved elimination of any of the Bush tax cuts for the "rich" then the spending cuts could not involve any means testing of Social Security or Medicare for these groups.  We need to get away from the class warfare.  Higher income taxpayers should not have to pay higher taxes and also have their Social Security and Medicare cut at the same time.  They have paid into these programs which were designed to serve all Americans.  They were not established as welfare programs.  We should be careful about turning them into welfare.

If I were negotiating with the Democrats I would also offer another alternative.  If the reasonable offer above is not acceptable, I would also offer a 4:1 spending to revenue increase deal.  However, this deal would require that all revenue increases be across the board proportionally on all brackets and open the door for means-testing for Social Security and Medicare.  Everyone would have to sacrifice.  Of course, since the rich pay the most in taxes they would end paying the most in any tax increase anyway.  The Democrats never want to say this.  However, we would move away from the class warfare that the Democrats like to play.

This strategy would be designed to put the Democrats in the position of having to come up with a spending reduction plan.  They can soak the rich and we can get more substantial deficit reduction.  Or they can protect some spending but they will be responsible for a tax increase on everyone.  If they want balance then they should start looking at both sides of the equation honestly.  We all should.

Why is there value in this approach?

I'll explain in my next post.  Check back.

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