Sometimes in post-election America, there is excitement about what the future will bring. This time around, the prospect is rather horrifying. America is racing, pedal to the metal, toward the fiscal cliff—a mixture of tax hikes and defense cuts that loom just after New Year’s.
The same Congress and the same President, unable to avert the cliff during the past 12 months, now have a few short weeks to get the job done. This crisis is one entirely of Washington’s own making, and the stakes are high. But next—and perhaps even more ghastly—we are fast approaching the debt limit. So, what to do?
House Speaker John Boehner (R–OH), after congratulating the President on his re-election, delivered a firm vision of how to move forward. As he noted, we don’t want to go over the cliff, but we cannot solve our long-term fiscal imbalance overnight. Lawmakers should now begin to press for agreement on permanent, substantial spending reductions in entitlement programs to take effect very soon in order to defuse a highly politicized battle over the debt limit, now expected in early 2013. Yet the President has been relentless in calling for a “balanced approach” to our spending and debt crisis.
As Boehner noted, a balanced approach is not balanced if we:
- Don’t cut spending and reform entitlements,
- Slash defense, or
- Raise taxes, hurt small business owners, and cost jobs.
Even today, after Boehner’s offer, the President steadfastly insisted on anti-growth tax hikes, noting that we “can’t just cut our way to prosperity.” Evidently, he wants to tax his way to prosperity.
So here’s the challenge: Is there is a way to generate more tax revenues and give the President what he asks for that conservatives could agree to? Boehner hit it squarely on the head:
Because the American people expect us to find common ground, we are willing to accept some additional revenues, via tax reform. [Emphasis added.]
This is what conservatives believe. Pro-growth tax reform would deliver a stronger economy. A larger pie for all means that individuals, savers, and businesses will have more income. Fewer Americans would need unemployment benefits or anti-poverty programs, so spending would decline. And tax revenues would grow—without tax hikes on small businesses or investors.
Details are important, though. Pro-growth tax reform is revenue neutral, using traditional revenue scoring and raising the same amount of money the old system would. That means no Bowles-Simpson-like “grand bargain,” which eliminated various credits, deductions, and exemptions and lowered some rates partially but tapped $1 trillion for deficit reduction.
And eliminating the “special interest loopholes and deductions” that Boehner spoke of should be fully offset by bringing rates down across the board. The lower the rates—including the top rates and those on capital—the more growth and revenue. The additional revenue comes from the additional economic growth that traditional revenue scoring explicitly ignores.
And, as Boehner said, these new revenues should go forward with, and preferably preceded by, spending cuts and entitlement reforms.
The first order of business for post-election Washington is to steer clear of the fiscal cliff—no crushing tax hikes and no reckless cuts to defense. Congress and the President should then get a head start on preparing for substantive spending cuts and entitlement reforms, agreed to early next year, that will eliminate the need for another dangerous and deliberately high-stakes debt limit battle.
Raising revenues by hiking taxes is a non-starter. If the President wants more revenues, he can have them through pro-growth tax reform that generates more revenue by economic growth alone.