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THE NEXT DEBT CEILING AND BALANCED BUDGET AMENDMENT DEBATES: DOING THEM RIGHT. MAKING THEM REAL – Part 2 (A Truly “Balanced” Approach)

August 14, 2011

The recent battle over raising the debt ceiling succeeded in bringing the dangers of our exploding national debt front and center, but it did not change the terms of the debate itself.  The media and political class still chatter about “spending cuts” when all they really mean are “reduced spending increases.”  Thus, for all the talk about setting a precedent requiring future ceiling increases to be matched by equal cuts in spending, the only real precedent is for matching future increases with promises of smaller spending increases, which may or may not be kept.  

Before we can have a real debate about the national debt, we need to talk with a common language.  Without a consensus on the meaning of key phrases like “spending cuts” and “tax increases” (not to be confused with “revenue increases”), and what makes a deficit reduction plan “balanced,” the parties will continue to talk past each other and mischaracterize their opponents’ position.

This is why the Republicans would have been right to reject President Obama’s proposal for a “balanced” deal with $800 million in higher taxes even if the President had not moved the goal posts by demanding $400 billion in higher taxes after Speaker Boehner was apparently willing to concede an $800 billion tax increase.  The problem here is one of inconsistent baselines. 

When the President offered his “balanced” approach, he was talking about tax increases over the current year revenue baseline.   At the same time, he was only willing to consider spending cuts from future year baselines.  Since current law ensures that future spending baselines are automatically higher, the so-called “spending cuts” would merely have reduced the size of these automatic increases.

A truly “balanced” approach would have proposed spending cuts from the current year baseline in exchange for revenue increases also from the current year baseline.  To use concrete numbers, according to the Congressional Budget Office, spending for fiscal year 2011 will reach about $3.70 trillion, while revenue for 2011 will only total $2.2 trillion, leaving an expected deficit of $1.5 trillion.  A “balanced” deficit reduction plan would have cut spending and raised revenue in similar amounts from the same current year baseline.  A “balanced” plan to actually balance the budget would have proposed cutting spending by $750 billion, while raising $750 billion in revenue to achieve a balanced 2012 budget of $2.95 trillion.

Of course it is not politically realistic to balance the budget in a single year, but unless you start from the same baseline you can never negotiate a realistic plan.  With the same baseline, you do not even need a “balanced” approach (as I have defined it) to eliminate deficit spending. You can do it without spending cuts or tax increases by keeping spending under the current $3.7 trillion baseline and letting revenues rise based on recent projections of economic growth.  Such an approach would balance the federal budget in six or seven years.  Still too little, but far better than anything the President or Republican leadership has proposed.

 Democrats argue that the no deal is possible as along as Republicans are bound to the “Taxpayer Protection Pledge” sponsored by Americans for Tax Reform (ATR).  If President Obama had been serious, however, about wanting Republicans to break this Tax Pledge, he would have offered spending cuts for higher tax revenues from the same baseline.  If these additional revenues had come from higher marginal rates, Republicans would still have been wise to reject the offer as economically destructive and more class warfare.  But if the President had offered spending cuts from the current year baseline of $3.7 trillion in exchange for additional revenues from a simplified code and expanded tax base, then Republicans would have been ill-advised to turn down such an offer, especially if the Bush tax cuts had also been made permanent.

Yes, such a deal would have violated the ATR pledge against “any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates,” but it would also have chipped away at what is or should be the primary goal of the Tax Pledge, namely, to shrink the size and scope of the Federal Government.  If Speaker Boehner ever wants to consider a future deal with increased tax revenues, then he should ask the ATR for a revision in the Tax Pledge, to wit:

            “I, _________________, pledge to the taxpayers of _____________, and to the American people that I will:

            “ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

            “TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates or by cutting entitlement or discretionary spending from the current fiscal year baseline.”

Of course, there is about as much chance that President Obama will offer a truly “balanced” deal as there is that the media will stop referring to spending increases as “spending cuts.”  What Tea Party Republicans can do to change the debate, however, is to start thinking about how the debt ceiling should be used next time around without relying on the same type of economic brinksmanship that we saw in the last debate.

Such brinksmanship may have finally forced the Washington establishment to take the Tea Party seriously, but it achieved very little of substance, while releasing a torrent of calumny that portrayed the Tea Party as arrogant and insensitive to economic reality.  What Republicans should realize, however, is that the reason why Democrats could raise the specter of economic chaos during the debt ceiling standoff was not intransigence on the Republican side, but the absence of any payment priority plan if the debt ceiling were not raised.

While opponents of raising the debt ceiling were correct that the U.S. Treasury always had revenue sufficient to avoid default on the national debt itself, they were far too sanguine about the possible effects on the economy and our financial markets from uncertainty over what was not going to be paid – not to mention the likelihood of a virulent political reaction if government benefit checks had been delayed or cancelled.

Of course the absence of a payment priority plan was not the fault of the Tea Party.  The President has the primary responsibility to put one in place, both because he has the resources at Treasury and OMB to do so, and because no other political actor can set these priorities at a granular budget level.  While Congress set a few general priorities, it would be impractical to expect Congress to make priority decisions among thousands of budget items, particularly when political power is divided among the parties and dispersed throughout numerous committees. Indeed, the Senate has been unable to pass a budget resolution of any type in two years.

The absence of a payment priority plan should be the focus of political debate over any future increases of the debt ceiling.  What a payment priority plan might look like and how opponents of the future increases should press for one will be addressed in the next three posts.

 Copyright © 2011 Anthony W. Hawks. All rights reserved.

Rev. 08/14/11

2 Responses to “THE NEXT DEBT CEILING AND BALANCED BUDGET AMENDMENT DEBATES: DOING THEM RIGHT. MAKING THEM REAL – Part 2 (A Truly “Balanced” Approach)”

  1. August 15, 2011 at 2:39 pm, Skeet M. Singleton said:

    Andy,

    Your essays are excellent. They clearly and succinctly explain what’s going on in Washington.

    Thank you,

    Skeet

    Reply

  2. November 19, 2011 at 12:46 am, THE BALANCED BUDGET AMENDMENT, REPUBLICAN TAXES, AND FUNDING SMALLER GOVERNMENT « Making Amends said:

    […] In this regard, I am sympathetic to the Toomey proposal, but would go one step further.  The Toomey proposal apparently remains fluid and is not tied to a specific amount of spending cuts, but suppose it was contingent on, say, on $340 billion in spending cuts from the current FY 2011 baseline of $3.8 trillion.  This would not only reduce the deficit, but actually result in a smaller government.  It is one thing to oppose tax hikes aimed at financing bigger government, but quite another to oppose tax increases that fund smaller government.  The ATR Tax Pledge quite properly prohibits the former, but if it also prohibits the latter, then it is counter-productive and needs to be revised, as I previously suggested here. […]

    Reply

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