A Fiscal Way Forward

In less than two months, America will face a fiscal cliff, with large tax increases and deep spending cuts, across the board. Unless Congress and the White House take swift action, this fiscal cliff will severely impact businesses and workers, including and especially lower- and middle-income families, potentially tipping the economy back into a recession when it has yet to recover from the previous crisis. America can ill afford this, and voters, rightly, want both parties to find common ground and avoid the fiscal cliff, while reaching an agreement to address large budget deficits and the long-term entitlement debt crisis. Polling also shows that Republicans would receive most of the blame if an agreement fails to be reached and the economy tumbles over the cliff.

This demonstrates the inconsistency and weakness of many American voters, who urge deficit reduction while electing the party of tax-and-spend policies and calling for pro-growth, fiscally responsible Republicans to compromise on their principles. An approach of “letting it burn” by capitulating to the Democrats’ demands, or even hurtling over the cliff, is looking increasingly attractive. After all, the people have spoken, and they spoke in favor of higher taxes, more debt, and slower growth.

Nevertheless, if we wish to pursue a bipartisan approach to getting the deficit back under control and on the path to balance, we must take several key steps:

1) Advocate for a simpler, fairer, and more competitive tax code. Reduce marginal tax rates on working families and job creators, in exchange for broadening the revenue base by limiting, removing and reforming unfair and distortionary tax loopholes, including the mortgage interest and employer-based health insurance deductions, on the model of Simpson-Bowles or Wyden-Coats. This may include increasing the tax rate on capital income, as advocated by many bipartisan deficit hawks, but also shunned by many fiscal Conservatives due to the negative impact on savings and investments, and, eventually, tax revenues. However, overall, such a tax reform plan would lead to higher revenues, through broadening the base as well as promoting economic growth. The Democrats would be unreasonable to reject such compromise, with substantially higher tax revenues, especially from the high-income taxpayers whom they detest so much and who benefit disproportionately from tax expenditures.

(Ideally, this should lead to a massive streamlining of both the personal and business tax codes, and should be coupled with a review of the payroll tax system alongside entitlement reform.)

2) Support reversing domestic discretionary spending to 2008 pre-bailouts, pre-stimulus levels, and continuing to cut it in real terms over the next few years. This should be enforced via stricter spending caps than under the Budget Control Act, and a comprehensive review of all federal agencies and programs. It would also be ideal if Republicans were able to provide a full list of detailed, specific spending reforms, shielding them from some of the demagoguery that Mitt Romney and Paul Ryan were subjected to. Possible spending cuts include the abolition of corporate welfare, welfare reform, and federal workforce reform, among others. If played well, in the name of “tough choices”, “shared sacrifice”, and “value for money”, but without resorting to vague generalities about “efficiencies” and “waste, fraud, and abuse”, we can convince the American public that we, unlike Democrats, are really willing to tighten Washington’s belt while protecting essential services. We will be firm and fair.

(This must involve a total deconstruction of any image the Democrats have left as “responsible” or “fair” or “compassionate”. It is not responsible, fair, or compassionate to bankrupt essential public services and leave future generations in a sea of red ink, just for political gain.)

3) Accept modest restraint in real terms defense spending. The administration has identified efficiency savings throughout the entire Pentagon, especially in the benefits system and bureaucracy, coupled, of course, with lots of harmful, wholesale cuts to the national defense. We should embrace the former, but reject the latter. We will be the party of a strong and cost-effective national defense, while the Democrats will be the party of cutting funding for our servicepeople to splurge on cronies.

(Some defense investments may have to be postponed or cancelled. While this may be risky, it will allow us to restore our image as the party of managerial competence, with no sacred cows. The Pentagon should not be ring-fenced at the cost of larger debt and higher taxes.)

4) Push for fundamental entitlement reforms, in order to preserve a strong, but limited and affordable, social safety net for the poor, young, old and sick. Medicaid reform may be a sensitive issue for low-income people, but this should not prevent us from demanding that the Democrats reform it by converting it to a block-grant to encourage state-level innovation, and then focus on expanding access to affordable, private health coverage, preferably through a generous means-tested tax credit for those who lack employer-based health insurance. Converting Medicare into a premium support system, and targeting assistance to the poorest and sickest seniors, has had bipartisan support in the past, and could be based on the Domenici-Rivlin plan, which is imperfect but is far superior to the status quo. Meanwhile, Social Security could be reformed by changing the cost-of-living adjustment, indexing the retirement age to longevity, and means-testing benefits growth, possibly combined with the liberal idea of raising the payroll tax cap. The nature of many of these reforms will ensure that they are viewed by the public as reasonable, mainstream ideas, preventing Democrats from attacking them easily.

(Again, this must involve a total deconstruction of any image the Democrats have left as “responsible” or “fair” or “compassionate”. It is not responsible, fair, or compassionate to bankrupt essential public services and leave future generations in a sea of red ink, just for political gain.)

While many of the steps here do not fit perfectly with Conservative preferences, they would be far superior to the alternative, and would reposition the Republican Party squarely in the mainstream of American politics, as a moderate, reasonable force countering the Democrats’ fiscal irresponsibility. And just as a note, these should not be adopted as party policies or principles, but as the furthest compromise which we can offer to the Democrats. The Democrats will have three options- take it, leave it, or come up with a more Conservative compromise. Unless they take the third option, they will ultimately be the ones suffering politically. That is, if we do not bungle the blame/credit game and let Obama, Pelosi, and Reid claim the title of the Great Compromisers. Republicans must be the ones making this offer of compromise first, and we must present it as the best deal we can give the Democrats after a tough decision, playing up its bipartisan credentials.

Of course, if we had a choice, the fiscal plan would be much bolder on issues like tax and entitlement reform. Instead of Simpson-Bowles, it’d be the Ryan or Huntsman tax plan. Instead of Domenici-Rivlin, it’d be the Coburn-Burr or the Heritage Foundation Medicare proposal. Unfortunately, our choices are limited.