The Great Debate

Will Republicans buck anti-tax orthodoxy and strike a budget deal? Since election night, they have begun to utter the dreaded “r-word” (revenue). But they have insisted that those revenues come from reducing loopholes — not increasing rates.

Many argue that this stance reflects the power of Grover Norquist and his no-new-taxes pledge. Yet the pledge forbids not only raising rates but also raising revenue by reducing deductions. So why are such reductions O.K. while President Barack Obama’s call for higher marginal rates is not?

Perhaps because the president’s plan would ask far more from the wealthiest Americans. By insisting that rate increases are off the table, Republicans are retreating to a time-honored position: protecting the richest of the rich at the expense of not just the middle class but also affluent households below the top reaches of the income ladder.

To be sure, a deduction cap can be designed to get new revenues mostly from the super-rich. But there just aren’t enough loopholes at the very top to raise big money, especially if the tax break for charitable deductions is spared, as many Republicans (and Democrats) will likely demand.

To get anything close to the president’s target of $1.6 trillion in new revenues over 10 years, the bulk of the money raised by capping tax breaks has to come from those below the very top.

Washington negotiations to avert the “fiscal cliff” now include the role that tax increases could play in addressing the federal budget deficit. Serious cracks are appearing in the Republican lawmakers’ anti-tax firewall, as fewer new GOP legislators are signing Grover Norquist’s pledge and some high-profile signatories are questioning it.

Norquist is urging policymakers to look to the states for inspiration in crafting federal budget reform. But his claim that states want to eliminate key sources of revenue is out of step with reality — and with the broader history of tax reform at the state level.

Throughout American history, in fact, popular support for higher revenues to fund key public services has been more common than today’s anti-tax advocates realize. State legislators and governors have long relied on new revenue to fund crucial public services.

The focus in Washington has now shifted to the fiscal cliff, with the White House and Congress, particularly the House Republicans, staking out negotiating positions on the expiring Bush tax cuts and the looming budget sequester.

The White House’s firm opening salvo—and House Speaker John Boehner’s grudging admission that he is “open” to a budget deal that contains new revenue—have been much discussed. With six in 10 Americans expressing support for higher taxes in exit polls on Nov. 6, President Barack Obama’s position is a strong one.

It’s important to remember, however, that the public came out on Election Day in support of more than Obama’s tax stance. Exit polls and public-opinion surveys show that the president’s mandate goes far beyond taxes and the fiscal cliff.

However the U.S. presidential election turns out, the trifecta of the Bush tax cut expiration, the debt limit ceiling on the horizon once again, and the Congressionally mandated sequesters – cuts in domestic spending – will force the president and Congress to wrestle with fiscal issues either in a lame duck session after the election or in early 2013. The decisions they make will have profound impacts on America’s fiscal future.

For many observers, the central question on the table is about entitlement programs: What will be done with them? Growth in entitlement spending associated with our aging population and its rising health care costs is the major factor in overall federal spending growth. But the capacity of near-term policy changes to have large impacts on that spending is less than many would suppose. The rising ratio of retirees to workers means that Social Security benefits at current levels will not be sustainable without some kind of tax increase. Sooner or later, revenue will have to rise or else outlays will have to be curtailed. While it is surely better to act sooner, the reality is that, out of necessity, action on entitlements is inevitable.

While almost everyone agrees on the desirability of containing federal health care spending, this is likely to be more difficult than we'd like to believe. Certainly beneficiaries can bear more of the cost of their government insurance than others, and there are steps like malpractice reform and the further encouragement of preventive medicine that should be taken. Yet without intrusions into the private health care system that are unlikely to be politically acceptable, there are severe limits on what can be done. Otherwise the result will be unacceptable cuts in the availability of care for the clients of federal programs. Given all the uncertainties associated with new technologies, changing lifestyles, and ongoing changes in the private system, health care reform will and should be a continuing project.