Monday, November 21, 2011

Super Failure

The so-called Super Committee on Deficit Reduction failed to agree on a package of $1.2 trillion in deficit reductions over the next 10 years.  This means that automatic reductions in spending will now be triggered in discretionary programs and defense beginning in 2013.  To illustrate how minimal these reductions really are in the context of overall spending, see the chart below.  Bear in mind this is also the same level of deficit reduction the Super Committee couldn't reach consensus on.  The bottom line is that federal spending was projected to increase by $1.7 trillion between 2013 and 2021.  It will now increase by only $1.6 trillion.

I spoke with a member of the Super Committee last August shortly before the group began their work and I shared my views on how I thought the Republicans on the Committee should approach the deliberations.  Now that the work of the Committee has concluded without success, I will share the recommendations I made. 

I  believe that a major opportunity was lost with the failed efforts of the Super Committee.  It was not unexpected but I believe that the Republicans could do a much better job of framing the issues for the average voter (rather than appearing to merely be protecting the rich) and in forcing the Democrats' hand to putting some significant spending reductions on the table.

Failure to achieve a grand bargain now has also put the entire Bush tax cuts at risk as they expire at the end of this year.  There would now seem to be very little chance that anything will be done in this regard until after the election in a lame duck session (much like what occurred in 2010).  This will also delay the opporunity for any real tax refrom until 2013 or later.

Here it is what I offered to the Super Committee and I offer again with the hope that somehow, someone, somewhere can get something done in Washington.  By the way, President Obama, where are you ?  Where is your plan?  Keith Hennessey counts up five deficit reduction opportunties that President Obama has now missed.

·         Make it known that the Republicans are interested in a budget deal that vastly exceeds the $1.5 trillion legislative requirement.  $4-$5 trillion would seem to be a reasonable goal.
·         The Republicans should also state that they will only consider revenue increases in conjunction with a “grand bargain” approaching this level of deficit reduction together with a tax reform package that would lower marginal rates and broaden the tax base.  Most importantly, the Republicans should state their desire is for a “simpler and fairer” tax system.   Most particularly, people want less complexity in their lives today and a simple tax system has great potential appeal.
·         The initial tax reform package would need to be “revenue neutral” to the current Tax Code of 2011. As part of any deal, this tax reform should be passed in 2012 to be effective January 1, 2013 coincident with the expiration of the Bush tax cuts. Taking care of this now mitigates against the risk of the Bush tax cuts expiring on schedule at the end of 2012.
·         Spending cuts must be at least 5 times any potential revenue increase in any “grand bargain”.  Lower ratios of spending cuts to revenue increases generally have not been successful in other countries in correcting fiscal imbalances. This research should be mentioned over and over to define what a “balanced approach” is.  Otherwise, the Democrats will define “balanced” to be equal parts of spending cuts and tax increases.
·         Republicans should also stop referencing dollar amounts when it comes to budget cuts.  They should always be stated as percentages of spending over the 10 year budget cycle.  Saying you are looking to reduce projected spending by 10% over the next 10 years is much easier for voters to understand than saying you are going to cut $4 trillion.  It also appears to be very reasonable in scope (which it is). This is critical in marketing any deficit reduction to voters and to defend against potential attacks by Democrats.  People need context to understand difficult issues with big numbers.  Framing as a % of total projected spending over the 10 year budget period is the way to do this effectively.
·         Any revenue increases agreed to would have to be contingent on spending cuts coming first.  This could involve increasing the marginal rates on the new broader based tax system after it was implemented.  This could be structured as an across the board increase on all rates proportionally.  Or it could be tilted to the top rate bracket if necessary to get a deal with the Democrats. I would always explain this by stating that we agree with President Obama that “we need to eat our peas first”.  Revenue increases are the dessert you get if you do the tough stuff first.  I would further explain that this is the Republican definition of a balanced meal or menu to address our problems.
·         I know that stating that there should be any agreement to a revenue increase is an anathema to most Republican voters.  However, I continue to believe that it is not the tax increase per se that people are worried about.  They know all too well that tax increases get signed into law but the spending cuts never materialize as advertised.  Therefore, any revenue increases must be contingent based on the actual spending cuts taking place. I have not spoken to one person that would not agree to some tax increase if they were assured that it would actually help solve the problem. That is why there has to be an iron clad mechanism that insures the spending cuts are “in the bank” before revenue increases take effect.   
·         In any event, the “tax increases” in the package I am recommending may never be assessed and realized if the economy rebounds and if tax reform and lower marginal rates realize their full potential.  I recommend that any revenue package should have a ceiling that limits revenues to no more than 18.5% of GDP (see below).
·         If the economy does not recover soon, the pressure to raise taxes (especially on the wealthy) will grow even stronger.  Revenues as a % of GDP at less than 16% are not enough to sustain even the most minimal governmental obligations.
·         There is no other way that I know of to build a bridge to a possible deal than with this contingent tax approach.  It may not completely satisfy the hard line Tea Party member but it will be viewed as reasonable by most Americans.  Most importantly, it will put the onus on the Democrats to take the lead on suggesting spending cuts.  It also provides breathing room for our economy to recover before any tax increases could take effect.
·         An additional requirement for any revenue increases is that they must not take federal receipts as a % of GDP over a maximum limit of 18.5%.  It should be explained to voters that this limit is actually higher than the long term historical average for revenues of 18.2% as another example of the reasonable nature of the Republican approach to deficit reduction. If revenues in any year exceed this amount, the excess must be refunded pro-rata to those who paid it or used exclusively to retire the federal debt.
In summary, I would describe this to the American people as a plan similar to what their mother would do.   A balanced meal is being offered with everything on the table.   However, we have to eat our peas first.  Tax increases are like the dessert.  You get them if you eat your peas first.  Your mother knows that if you eat your dessert first you quickly lose your appetite for the peas.  We cannot afford to keep eating the dessert first.  We need to get leaner first to have room for dessert later.

If you are a fiscal conservative, would you support this plan?

No comments:

Post a Comment