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An opening bid on taxes that is good politics but bad policy

By Editorial Board,January 09, 2013

WHEN CRUNCH time came over the “fiscal cliff” at the end of 2012, Senate Republican leader Mitch McConnell ended up as his party’s de facto deal-maker with the White House. So it matters when Mr. McConnell declares, as he did Sunday, that the “tax issue is finished” and it’s time to “pivot” to the “biggest issue,” cutting spending. Now that President Obama has persuaded Congress to go along with $620 billion in higher income taxes over the next decade, mostly from upper-income households, there’s no reason to consider extra revenue — not even from closing loopholes, according to Mr. McConnell.

Mr. McConnell (R-Ky.) is a good political poker player, and maybe this is his opening bid in what figures to be brutal bargaining between now and mid-to-late February, by which time Congress must pass a bill authorizing additional federal borrowing. And he was right to insist that the president engage on serious entitlement reforms in the coming round of deficit reduction.

However, as a matter of policy, rather than politics, it is no more sensible to draw the line at $620 billion in additional revenue over the next decade than to insist, as have some Democrats, that Medicare and Social Security remain untouched. The country’s structural deficit poses too large a threat to future prosperity, and there is no politically or fiscally realistic scenario under which entitlement cuts alone can solve the problem.

In fact, the goal of $4 trillion in deficit reduction over 10 years that Mr. Obama and House Speaker John A. Boehner (R-Ohio) tried to reach was already too small, and neither ever really made the concessions necessary to hit that modest target. Mr. Boehner wouldn’t swallow more than $1 trillion in additional taxes, while Mr. Obama padded out his spending-cut proposals with planned savings from winding down wars, $1 trillion in previously legislated discretionary cuts and notional interest savings. Neither man ever accepted the $2.8 trillion in fresh cuts and taxes, on top of those agreed to in 2011, that it would take to stabilize the debt at 69 percent of the economy by 2022, according to estimates by a Bipartisan Policy Center task force.

Certainly $620 billion, then, doesn’t approach a solution. There will have to be real reforms to Medicare and the application of a more realistic inflation measure — known as the “chained CPI” — to government benefit programs, as Mr. McConnell suggests. But there will also have to be more revenue — probably another $600 billion or so to hit $1.2 trillion, which was the politically feasible midpoint between Mr. Obama’s opening $1.6 trillion demand and Mr. Boehner’s $800 billion opening offer.

Congress might be able to get at least part of the way there by closing or capping loopholes in the income tax code, which means that tax reform cannot be “revenue-neutral,” as Mr. McConnell insisted Sunday. We have to hope that he took that position to establish himself as a caucus leader who can ultimately deliver the votes for a compromise the country needs.