Mitch McConnell hardly could have been more emphatic. Making the rounds of the Sunday talk shows, the Senate minority leader declared on the ABC program This Week: “The tax issue is finished. Over. Completed. That’s behind us.” He closed the door to raising additional tax revenue as part of further deficit reduction. He wants to rely solely on spending cuts.
One reasonable line of thinking is that Congress and the Obama White House must find another $1.2 trillion or so in savings to stabilize the country’s debt as a share of the overall economy during the next decade. Already, they have agreed to $1.5 trillion in spending reductions, plus the $563 billion in new revenues in the “fiscal cliff” agreement. Add another $1 trillion in spending reductions, and the mix, as noted by Robert Greenstein of the Center on Budget and Policy Priorities, would be five parts spending cuts and one part tax increases.
That falls far short of the necessary balanced approach. The Bowles-Simpson commission, applauded by Republicans and Democrats, calls for an even split of new tax revenues and spending reductions over a decade. That is the sensible course, especially with “nondefense discretionary spending” already headed for historic lows. This spending covers education, research, child care subsidies, housing assistance, national parks, law enforcement and clean water projects, among other foundation pieces for the quality of life.
President Obama hasn’t proposed such an overall split. He has discussed equal parts spending cuts and tax increases for the final $1.2 trillion in deficit reduction. That would amount to a total package of $2 in spending reductions for every dollar in new tax revenue. Put another way, the president, again, has shown his willingness to compromise.
Ideally, the president would unveil the way forward on spending reductions, showing how crucial priorities would be protected, from the safety net to public works. Such an approach would add clout to his call for additional revenues via tax reform, or the closing of various loopholes, special treatment and subsidies.
For instance, hedge fund operators and others on Wall Street argue the fees they receive amount to returns on investments as opposed to regular income. Thus, under the “carried interest” provision, they pay taxes at the lower capital gains rate. Tax reform presents more than an opportunity to remove such inequities. It makes way for easing the many distorted incentives that harm growth.
It also represents a smart vehicle for routing revenue toward long-term deficit reduction. If the task of putting the country’s finances in order is the important step so many proclaim, then “the tax issue” must be viewed as far from finished. There’s a worthy contribution still to be made.