Pre-Holiday Ride on the Fiscal Slopes
I’m ensconced in the relative comfort of the ‘rents home for the holidays, but let’s just lay this down as a marker for the austerity bomb negotiations to come.
As I wrote previously, Democrats and Republicans have operated on separate tracks so far in the early stages, writing soothing press releases and assuring folks of progress on a stopgap agreement before the end of the year, while actually saying two different things. The framework of a deal consists of a “down payment” of some kind to prove mettle on deficit reduction, combined with so-called binding targets on tax reform and social insurance programs. But what makes up that down payment? For Democrats, it’s letting the Bush-era tax rates above $250,000 expire. For Republicans, it’s just a basket of spending cuts, enough to cancel out the sequester cuts for a period of time, perhaps six months.
The emerging deal could be a combination of both:
Here’s how it could work: The top-income tax cuts expire, as Obama wants. Those cuts only raise about $80 billion in 2013, so they’re a “down payment” on reform. And their cost is that the Democrats identify roughly $80 billion in spending cuts that can be passed into law now — so Republicans also get a “down payment” on the bigger deal. And all this happens in the context of a framework for a larger deal, which includes the promise of tax reform in 2013.
There will have to be more than that, of course. In particular, Republicans will need to feel that Democrats, now that they’ve pocketed the Bush tax cuts, have some incentive to come to the table for the final deal. So we’re going to be discussing triggers and sequesters and other kinds of penalties again. But that’s an easier discussion. In the past, every one of these deficit negotiations has fallen apart over the issue of taxes. If Republicans are no longer inclined to fight to the death over the Bush tax cuts for income over $250,000 — and many in their coalition aren’t — this could go surprisingly smoothly.
What this doesn’t make clear is whether the expiration of those top marginal tax rates is a one-year proposition or a more permanent one. It would appear the latter, but the focus on the one-year cost is confusing (the ten-year cost is close to $1 trillion, when you add in savings on debt service). But basically, this combines the tax change and the spending cuts. And the suggestion here is that the new sequester, the new cliff if you will, would probably be tilted far more toward Republicans, with safety net cuts sure to be included to force a solution. So the idea here is that Democrats give up their leverage for 4.6 percentage points on the top marginal income tax rate.
I wouldn’t draw up the legislation just yet, however. John Boehner today told his local paper that repeal of Obamacare should be on the table in the talks. That’s probably more rhetoric than reality, but it shows the difficulty it will take in threading the needle for a deal. For all the talk of comity, no actual language has been exchanged, and the pace has been incredibly languid. Michael Bennet and Lamar Alexander have even created an emergency proposal in case talks break down. If this deal was done, you wouldn’t need such a contingency. Actually that deal sounds pretty much like the framework we see above, with a down payment and targets for deficit reduction in 2013. The difference would be no expiration of the high-end tax cuts, making this a real concession from Bennet, not a compromise.
Of course, nobody is questioning why we’re holding to this artificial deficit reduction construct at all. As Jed Graham explains, over the last three years, the US has reduced the federal budget deficit more rapidly than at any time since World War II. This is an artifact of a relatively stronger economy leading to the reduction of spending on automatic stabilizers like unemployment and food stamps, as well as stimulus programs running out. But fiscal policy at the federal level has taken away from growth since mid-2010, and it’s poised to drag much, much more with implementation of these austerity measures. With borrowing costs so low, there’s no logical reason for this except to please elites, who really want lower tax rates and a smaller safety net and think that fearmongering on the deficit could provide a gateway to that goal.
Are we going to see a deal struck? If anything, it will have that framework, with most of the details saved for next year. I don’t see Democrats having the stomach to let everything expire and return in January with renewed leverage. They appear determined to bargain that away.