How Both Sides Wound Up Losing Budget Battle
A grand fiscal bargain, with perhaps $2 trillion more in deficit reduction over 10 years -- more than a quarter of which would be additional revenue and much of the rest obtained through well-crafted, significant cutbacks in big- ticket entitlements -- could have been a win-win for Republicans and Democrats.
Along with ending the tax cuts passed under President George W. Bush, this would have earned lawmakers public approbation for working together and given investor and business confidence a boost.
The corollary is the small-bore deal cobbled together to avoid the so-called fiscal cliff, which may be a lose-lose for both sides. Defying political physics, the White House and congressional Republicans emerged politically weaker and facing more trouble ahead.
President Barack Obama, who Republicans acknowledged had all the leverage in the latest round, could have hung tough and persevered with one goal: the bigger deal. Indisputably, Democrats got much more than Republicans. Yet even with this unusual leverage -- without a deal, taxes would have increased for everyone -- the Democrats only got about 60 percent of what House Speaker John Boehner had once been willing to give on taxes.
Republicans reinforced their image as protectors of the privileged. In the House, which they control, they displayed dysfunction remarkable even by Washington standards. With bigger fights ahead over the debt ceiling and indiscriminate across- the-board spending cuts, the problems outweigh the possibilities for both sides.
The estate tax epitomizes this state of affairs. It is assessed on less than 1 percent of the richest estates. Michael Graetz, a former Treasury official in the George H.W. Bush administration who has written a book on the subject, says that with huge deficits and worsening income inequality, “it is amazing that our political system cannot maintain an estate tax that contributes less than 1 percent of federal revenues from those Americans best able to afford it.”
Former Treasury Secretary Larry Summers once observed, “There is no case other than selfishness” for cutting the estate tax.
There are legitimate debates about the effect on economic growth of tax rates on capital gains, dividends or corporate income. It’s tough to find a serious economist who makes that case for the estate tax; years ago, the conservative economist Irwin Stelzer described a low tax as “affirmative action” for wealthy heirs.
Still, reducing or eliminating the estate tax was a top priority for Republicans in this latest round. The White House essentially caved to a measure that will cost about $100 billion over 10 years and will benefit fewer than 5,000 wealthy estates.
In the 2010 year-end tax-cut deal, the Obama administration insisted on extending the refundable tax credits for the poor; resistant Republicans said they would go along only if the White House accepted two years of lower estate-tax rates. Agreed. This time, however, the refundable credits for the poor were only extended temporarily, while the more generous estate-tax provision is permanent.
The political appeal here is to reward big campaign contributors; that matters to Democrats as well as Republicans. When Vice President Joe Biden, in the private bargaining, argued for a tougher provision, the Senate Republican leader, Mitch McConnell, asked that it be put to a vote. The vice president knew that Democrats such as Senators Max Baucus of Montana and Mary Landrieu of Louisiana would side with the rich heirs.
Lawmakers are braced for a tougher battle in the next two months over the debt ceiling and across-the-board spending cuts that neither side likes. Republicans contend that, unlike the fiscal cliff -- -- the tax increases and spending cuts that had been set to take effect in 2013 --- this time they have the leverage to force the president to accept big spending cuts, particularly of big-ticket entitlements.
House Republicans insist on the “Boehner rule,” that any increase in the debt ceiling be matched by a comparable reduction in spending. That isn’t realistic: The debt ceiling will have to be increased by almost $2 trillion over the next two years, and spending cuts of that order would be politically and economically disastrous. The speaker’s ability to maneuver may be limited, though. On the fiscal deal, his own majority leader and whip deserted him, as did seven current committee chairmen and almost two-thirds of his caucus.
Tougher still is the substance. House Republicans are all for big spending cuts, though other than some easy ones, such as going after programs for the poor, they duck specifics. They are fierce deficit hawks in principle, yet when specific Medicare or Social Security cuts are raised they turn into pacifists.
And the president, who wouldn’t play for keeps when he had the leverage, vows this time will be different. He won’t negotiate over the debt ceiling; that would be tantamount, he proclaims, to negotiating with terrorists.
Obama demands that any spending cuts be accompanied by revenue increases. He correctly notes that there already has been more than twice as much in spending cuts as in tax increases and that any subsequent action that involves only cuts would run counter to the recommendations of bipartisan panels such as the 2010 commission headed by former Republican Senator Alan K. Simpson and Erskine Bowles, a former White House chief of staff under Bill Clinton. Republicans dismiss that as a nonstarter.
The bottom lines: The White House believes Republican leaders privately realize that holding the nation’s full faith and credit hostage to cutting popular programs is a loser. Congressional Republicans dismiss Obama’s lines in the sand, saying he invariably backs down and that any economic fallout ultimately hurts his presidency.
Both points are persuasive.
(Albert R. Hunt is a Bloomberg View columnist. The opinions expressed are his own.)
To contact the editor responsible for this column: Max Berley at email@example.com.