The Budget Battles on Which His Reelection Depends

More than perhaps at any time in recent American history, questions of budgeting and the country’s financial future occupy center stage. We have seen, in recent weeks, a long-delayed deal on the 2011 federal budget that stripped $38 billion out of so-called “nondefense discretionary spending,” which includes most of the domestic programs Republicans love to hate (aid to the poor, environmental protection) and accounts for 12 percent of the roughly $3.5 trillion budget. The government came within one hour of shutting down, and this evidently led to some giddiness in the White House, which produced, on April 9, a perplexing video from President Obama in which he almost seemed to boast about the “largest annual spending cut in our history.”

Then, actually, right in the midst of that drama, came the manifesto—“The Path to Prosperity,” he called it—of Paul Ryan, the Wisconsin Republican who chairs the House Budget Committee. Ryan claimed that he would cut $5.8 trillion in spending over the next decade from current projections by the executive branch’s Office of Management and Budget (OMB). Ryan forced the hand of Obama, who had been exasperatingly silent on the whole budget mess except for his brief video. On April 13 Obama announced his own scheme to wrench $4 trillion in savings out of the budget over twelve years.

The urgency is justified—to an extent. The OMB estimates a budget deficit of $1.65 trillion this year, or 10.9 percent of Gross Domestic Product, more than double what it was before the Great Recession starting in 2007. The country’s debt is now $14.3 trillion, and will go up soon. Publicly held debt is at 72 percent of GDP, having averaged about 40 percent during the previous ten years. And spending on entitlements, particularly Medicare, will rise dramatically as Baby Boomers retire. While the alarms raised in Washington by people who thunder that entitlements especially must be examined can be hyperbolic, it is certainly the case that the long-term fiscal picture needs to be addressed.

The question is how. Everyone talks about cutting. Washington is awash in numbers of various kinds, but here are two, both from the Center on Budget and Policy Priorities (CBPP), a liberal policy analysis group whose work is respected across ideological lines, that seem especially relevant. I have not seen them paired together, but when they are, they describe for me better than any other numbers why we’re in the fix we’re in, what needs to be done—and why the budget battles coming this fall and next year will determine not only whether Barack Obama can get himself reelected but whether the American welfare state that was built in the twentieth century will survive.

In 2008, the “Center on Budget,” as Washingtonians call it, released a report finding that keeping George W. Bush’s tax cuts intact through 2018 would cost $4.4 trillion. (Particularly controversial is the Bush tax cut lowering the top marginal rate from 39.6 percent to 35 percent.) Then, in early April, the group estimated that Paul Ryan’s new plan, the one that all but four Republicans in the House of Representatives voted on April 15 to make their party’s official negotiating position, would not really cut the $5.8 trillion that Ryan boasted about. About a trillion of that, CBPP’s Jim Horney explained to The Washington Post’s E.J. Dionne, comes from savings in Iraq and Afghanistan that are slated to happen anyway, and $500 billion or so come from reduced interest payments and not actual budget cuts. So Ryan’s true cuts, says Horney, amount to $4.3 trillion through 2021.

Put the numbers side by side. The Bush tax cuts, if maintained, will cost $4.4 trillion. Ryan proposes to reduce spending by $4.3 trillion over a similar period. “In a way, all of this debate, all of this ‘bravery,’ is largely about paying for the Bush tax cuts,” says the economist Lawrence Mishel of the liberal Economic Policy Institute.

That overstates matters. Obviously, the United States has hemorrhaged tax revenue because of the recession. And it has spent more because of it, too, on the 2009 stimulus, for example. And the coming mass retirement of Baby Boomers does require some action on entitlement reform. But there is something to Mishel’s claim. The New York Times columnist David Leonhardt wrote in April that if the President and Congress were somehow to let the Bush tax cuts expire for all taxpayers at the end of 2012 (which would happen if they simply did nothing), 75 percent of the deficit problem would be addressed over the next five years.¹

Now that’s not likely to happen: as is well known, the President wants to keep the Bush rates for most taxpayers, while raising them for the top 2 percent. But the comparison dramatizes what I believe the fight over the deficit will come down to sooner or later. Democrats and liberals inveigh against Ryan’s cuts to Medicare and Medicaid. They are draconian to be sure—estimated by the Congressional Budget Office to force senior citizens in 2030 to pay an average of 68 percent of their health care costs, as opposed to 25 percent now. Democrats will probably gain substantial political mileage by attacking them—and it helps the Democrats’ case considerably that not a single House Democrat, not the bluest of the remaining Blue Dogs, voted with the GOP on that April 15 budget vote, which would have given the Republicans partisan cover. So Democrats should draw attention to what amounts to an enormous shift of costs onto the elderly and the poor.

But eventually, the conflict will be about taxes. By historical standards, Obama’s insistence, when he presented his deficit reduction plan at George Washington University on April 13, that he will press to reinstate the Clinton-era personal income tax rate of 39.6 percent on households earning above $250,000 (roughly the top 2 percent), is small-scale stuff. But such is the alignment of the parties today—the Democrats occupying a spot once held by moderate Republicans, as the Republicans attempt to build their Galtian-Roarkian Valhalla—that the battle will be immense. The question rarely tested since 1984, when Walter Mondale promised a tax increase in his speech at that year’s Democratic convention and suffered a historic landslide defeat, will be faced squarely: Can the Democrats raise a tax, even on the top 2 percent, and win?

Obama’s April 13 speech was an odd performance in that, in the face of proposing his own brew of very deep cuts, he issued the most full-throated appeals for government and the common good one has heard from an American president in many a year, perhaps going all the way back to Lyndon Johnson:

We believe that in order to preserve our own freedoms and pursue our own happiness, we can’t just think about ourselves. We have to think about the country that made those liberties possible. We have to think about our fellow citizens with whom we share a community….

We recognize that no matter how responsibly we live our lives, hard times or bad luck, a crippling illness or a layoff, may strike any one of us. “There but for the grace of God go I,” we say to ourselves, and so we contribute to programs like Medicare and Social Security, which guarantee us health care and a measure of basic income after a lifetime of hard work; unemployment insurance, which protects us against unexpected job loss; and Medicaid, which provides care for millions of seniors in nursing homes, poor children, and those with disabilities. We are a better country because of these commitments. I’ll go further—we would not be a great country without those commitments.

Remarkable words for a man we’ve come to know as inordinately cautious. So too were his eviscerations of the Ryan plan:

Worst of all, this is a vision that says even though America can’t afford to invest in education or clean energy; even though we can’t afford to care for seniors and poor children, we can somehow afford more than $1 trillion in new tax breaks for the wealthy. Think about it. In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a two-hundred-thousand-dollar tax cut that’s paid for by asking thirty-three seniors to each pay six thousand dollars more in health costs? That’s not right, and it’s not going to happen as long as I’m President.

Obama might have added that the top 1 percent of US households own over 33 percent of privately held wealth. Moreover, many noted ruefully that the stirring words were spoken in support of an administration plan that certainly has conservative elements. It would cut deeply into what Obama called “non-security discretionary spending” (different from “nondefense discretionary spending” in that his formulation includes some categories of national security spending done outside the Department of Defense). Whereas his deficit reduction commission (“Bowles-Simpson”) proposed an equal balance between nonsecurity and security cuts, the President seeks “to cut nonsecurity spending by about twice as much,” according to Ethan Pollack, a staff member for the commission—from roughly $800 billion to $400 billion. Obama’s plan does preserve Medicare and Medicaid as we know them, but he proposes to lower the cap on Medicare’s permitted growth, from GDP plus 1 percent to GDP plus 0.5 percent, which, along with other health care savings like giving Medicare more leverage to negotiate cheaper drug prices, would supposedly come to another roughly half-trillion dollars.

The Republicans could have responded to the President’s speech by criticizing any number of points, and they did in fact reject his desire to preserve Medicare and Medicaid in their current form. But their overwhelming criticism had to do with taxes. Indeed even before Obama spoke, House Speaker John Boehner issued a statement saying in part:

However, if the President begins the discussion by saying we must increase taxes on the American people—as his budget does—my response will be clear: tax increases are unacceptable and are a nonstarter.

House Majority Leader Eric Cantor and Senate Minority Leader Mitch McConnell said much the same.

Hatred of taxes is not merely Republican policy. It is Republican theology. It goes back, in more or less current form, to 1978 and the right-wing populist uprising against property taxes in California led by the industrialist Howard Jarvis—the “Revolt of the Haves,” as the economics journalist Robert Kuttner dubbed it for a book he wrote on that year’s Proposition 13 fight. Then came Ronald Reagan. The great conservative hero did, in fact, raise taxes several times, as liberals love to point out, notably in a 1983 payroll tax increase to rescue Social Security. But Reagan also substantially lowered income tax rates. When he took office, there were fifteen marginal rates, topping out at 70 percent on all income earned above $108,300 (about $255,000 in today’s dollars). By the time he left office, there were just two rates, 15 percent, and 28 percent on all dollars earned above $18,550 (roughly $44,000 today). George H.W. Bush added a top rate of 31 percent in a notorious (to conservatives) deal cut with Democrats at Andrews Air Force Base. Bill Clinton, in his 1993 budget deal that famously passed the House of Representatives by one vote, reestablished five marginal rates, which topped out at the 39.6 percent rate to which Obama wants to see the upper-bracket households return.

Clinton of course did live to tell the tale—he established new rates in his first year in office and left himself time to recover by reelection; the economy was rolling along nicely by 1996, and antitax hysteria on the right in 1993 wasn’t nearly what it is today. George W. Bush’s two tax packages actually added a sixth rate, a lower one for those down around poverty level, in exchange for lowering the top rate to the current 35 percent, which was retained in last December’s deal between Obama and Speaker-elect Boehner.² Some recent analyses suggest that the tax burden for the average American individual is as low as it’s been for sixty years.³

That’s the brief numerical history. While it’s certainly true that rates were too high in the late 1970s, the fact is that America’s fiscal problems do stem in no small part from untold trillions in lost tax revenues over the last thirty years—a point almost never made in discussions about the problem in Washington, because Democrats are afraid to make it and Republicans don’t want to or, just as often, simply deny the fact outright. Within the GOP over the years, abhorrence of taxes has gone from being a statement of belief that conservatives shared to one degree or another to an inviolate principle, and indeed the single most important one that binds them together. As The New Republic’s Jonathan Chait wrote recently in Democracy, the journal I edit:

The conservative movement’s embrace of taxophobia is probably the most important development in American political life over the last three decades. It is the one quality that most distinguishes American conservative elites from conservative elites in other countries. [Americans are] more likely to question climate science, more sanguine about people dying for lack of health insurance, and less xenophobic (which is rather nice). But above all—far above all—they hate taxes.⁴

Readers may be familiar with the well-known “Taxpayer Protection Pledge” that Grover Norquist’s powerful Americans for Tax Reform organization makes virtually every Republican candidate for federal office adhere to. For candidates for the House of Representatives, it reads in full:

I, _______________, pledge to the taxpayers of the _____ district of the state 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.

In the 112th Congress, this pledge and its Senate counterpart have been signed by 234 House members and forty-one senators—that is, almost every Republican on Capitol Hill, plus a small number of Democrats. A few notable Republican senators have demurred, including Indiana’s Richard Lugar, Iowa’s Charles Grassley, Olympia Snowe and Susan Collins of Maine, and Thad Cochran of Mississippi. But 95 percent of Capitol Hill Republicans are committed: not a dollar more in any sort of tax. The second portion of the pledge ensures that this applies not just to income taxes, but to deductions as well.

The well-to-do taxpayers for whom deductions matter, benefiting from the furious lobbying activity in recent years by Norquist’s organization, and by industries in the finance sector that employ many of these top earners, have already seen vast reductions in their tax burdens. The Bush changes cut the long-term capital gains rate from 25 percent to 15 percent. The estate tax, which only the top 2 percent of households pay, was reduced to a fraction of its former level. Just before this year’s tax deadline, The Washington Post reported that the richest four hundred Americans went from paying an effective rate of 26 percent in 1992 to 17 in 2007.⁵

But the situation is still more extreme than this, because the Republican Party today is obsessed not merely with not raising taxes but with lowering them further, chiefly on the rich. Since the advent of the Tea Party, Lafferism has yielded to Ayn Randianism, and so the theology is rapidly becoming the conviction that redistribution of any sort is not merely unsound policy but is fundamentally immoral. Indeed, Ryan has credited Rand as the one “thinker” who is “the reason I got involved in public service.” His proposed cuts to entitlements have received the most press attention (the budget plan he has crafted is perfectly logical and even moral from a Randian perspective). But if anything his tax cuts are far more outrageous—$4.5 trillion, the vast majority of which would go to the top earners by reducing the top marginal rate to 25 percent.⁶

In his report, “The Path to Prosperity,” Ryan pays lip service to “broadening the tax base” while lowering rates. He talks—as everyone in Washington talks—of so-called “tax expenditures,” which are the deductions and loopholes used by the rich, and to some extent by all of us (home mortgage deduction, tax-free employer-sponsored health care). He has insisted that he is open to looking at many such expenditures, but in his report’s section on taxes, he stops short of listing any specific ones. “I learned long ago that when someone says everything is on the table, that really means nothing is on the table,” says Bruce Bartlett, the apostate conservative economist.

In fact, says Bartlett, as of mid-April, the only Republican officeholder in Washington who has indicated a willingness to raise even a dime more of revenue is, perhaps surprisingly, Oklahoma Senator Tom Coburn. A fierce conservative in most respects (and a signer of Norquist’s pledge), Coburn, as a member of the Bowles-Simpson commission, nevertheless voted for the group’s final report, which includes raising revenues. He has also bruited the idea of eliminating the $5 billion tax exemption for the ethanol industry. (He is, of course, from an oil and gas state; he is also retiring after his current term, and not facing one’s voters again grants one a little room to be heterodox.)

There remains the Senate “Gang of Six,” which includes three Republicans: Coburn, Saxby Chambliss of Georgia, and Mike Crapo of Idaho. Chambliss has said that he would take a serious look at the tax expenditure category, and the group was scheduled to unveil its budget-balancing proposals sometime after Easter. If it roughly follows Bowles-Simpson, it will propose lower overall rates along with eliminating or reducing some tax expenditures, for example, eliminating all itemized deductions, eliminating all capital gains and dividends breaks, converting the mortgage-interest deduction to a 12 percent tax credit, and capping and eventually phasing out the deduction for employer-based health coverage. This is by no means objectionable in theory. It’s just that everyone knows that lowering rates is easy to do, while cutting tax expenditures is nearly impossible.

The battle will unfold something like this. There will be a vote on raising the debt ceiling in late spring or summer. Republicans have pushed hard to tie raising the ceiling to commitments to future cuts, an idea that Obama, to the chagrin of some liberals, has suggested he’d consider. Obama’s negotiating position is not helped, to put it mildly, by the fact that he refused to raise the ceiling as a senator in a 2006 vote; nor by Standard & Poor’s downgrading the United States on April 18 to a negative rating outlook, which Republicans instantly jumped on as vindicating their chosen path.

The political risk here for the White House is that while Republicans may be saddled with much of the direct blame if the country goes into default, the consequences of that default—poor bond ratings, higher interest rates, possible foreclosures, inflation; in sum, an economy in a tailspin—would surely affect the President’s standing in the polls over time, making the outcome far more difficult for him than for any particular Republican member of Congress.

Assuming that mess is avoided, as many believe it will be, the next battle will come in September, as the current fiscal year ends. Compared to the early April negotiation that averted a government shutdown, the September fight “will be like nuclear war compared to a border skirmish,” says the budget expert Stan Collender. The Tea Party faction in Congress, unhappy with the cuts attained in April, will press hard for many more, most in the same nondefense discretionary portion of the budget. And there will be great pressure for both sides to come to some kind of deal on entitlements by September. The big fight over Medicare will probably occur then. Considering the gulf between the Obama and Ryan plans, it’s pretty difficult to imagine what sort of deal can be worked out between them.

Obama and the Democrats will never accept turning Medicare into a voucher program (“premium support” is Ryan’s phrase) and Medicaid into a block grant administered in each state. These are just fancy ways of saying that cost burdens will be shifted onto elderly and poor people. And Republicans won’t accept Obama’s proposals that are based on the existence of the Affordable Care Act, i.e., “Obamacare.” Many of the President’s claimed savings build on provisions in that act.

This is a potential political challenge for the White House—given that most Americans don’t quite believe that the ACA will lower the deficit as the President insists, and that slim majorities still support its repeal, he is not playing a strong hand when he argues to the country that he will contain health care entitlement costs through the bill. And what happens if the Supreme Court strikes the bill, or the individual mandate portion of it, down in the near future? Even so, Obama probably holds a stronger hand than the GOP, because even elderly Republicans like their Medicare. Whichever the case, signs point toward a stalemate—and, again, a possible government shutdown—with the main question being the usual one of which side can fix more of the blame on the other one.

The tax fight need not take place this fall. Under the terms of the tax deal that Obama and the Republicans reached last December, the Bush tax cuts don’t expire until December 31, 2012. If Washington can put something off, it typically will. That would mean a fight over taxes in an election year.

According to numerous polls taken over the past couple of years, fairly consistent and sizable majorities (55 to 60 percent, sometimes higher) support raising taxes on the wealthy. Those consistent and sizable majorities do not, alas, enjoy dominion over the United States Congress in remotely the way that the top 1 to 2 percent of the wealthiest Americans do. And it’s exceedingly hard to imagine a sequence of events by which enough Republicans (probably twenty-five or thirty in the House, depending on how the Democrats voted) would pull the lever even for such a tax increase on people with high incomes. That indicates yet another stalemate—but one on which the clock will be ticking, because if Congress does not act by the end of 2012, then everyone’s rates go up New Year’s Day as the Bush tax cuts come to an end. This, as David Leonhardt suggests, would be a good thing fiscally; but will Obama really have the stomach to risk a tax increase for all Americans while he’s seeking reelection? He said bluntly on April 13, of the lower rates for the wealthy: “I refuse to renew them again.”

There are many grounds on which liberals have good reason to be frustrated with Obama (not rank-and-file Democrats, among whom he remains pretty popular, but Washington-centered liberals). Many were disturbed before he even became president—that is, during the campaign—when he pledged that he would not raise taxes on anyone making less than $250,000, which ensured that the deficit conversation would be carried out on largely Republican terms. One can understand the political position he was in at the time, but if he had somehow found a way to communicate that intention without making it quite so ironclad, he would have more options today—raising the cap on the Social Security payroll tax, for example, which currently ends at $106,900. But to propose that now would open Obama up to Republican charges that he is breaking his 2008 vow.

In any case, the question can’t really be avoided much longer. He will have a showdown with Republicans that could force him in 2012 to risk letting taxes go up across the board. Fate has tapped Obama on the shoulder in any number of unhappy ways, and in the future, it appears that it will designate him the Democrat charged with exorcising the ghost of Mondale.

—April 28, 2011