Taxes, taxes and more taxes. You'd think that's the only thing at stake in the "fiscal cliff" negotiations that are heading toward a climax soon, and the larger fight over paying down the national debt that's coming in 2013.
It's true that taxes are a huge immediate concern, since about $500 billion in tax hikes are due to take effect on January 1 if Congress does nothing to prevent them from happening all at once. That accounts for most of the $600 billion fiscal cliff, with the typical household's tax bill due to rise by about $3,400 if all of those tax hikes take effect. The spending cuts due to begin in 2013 account for only about $110 billion, so they've been getting less attention.
But the fiscal cliff is only a small part of the bigger problem with the national debt, and Democrats who seem to be gloating over their newfound leverage following the November elections seem to have forgotten that government spending needs to come down no matter what.
At the moment, the prevailing story line regarding the fiscal cliff is the acknowledgement by some Republican leaders — after years of opposition to higher taxes — that there's probably no alternative to raising taxes on the wealthy, at a minimum. Budget experts have long said that tax hikes are necessary to pay down the debt, and voters seem to have been buying that message. Since President Obama called for higher taxes on the wealthy as one of his campaign pledges, his re-election seems to have indicated what voters want, and now seem likely to get.
But Democrats could be overplaying their hand — a common mistake by campaign victors — by hardening their opposition to spending cuts as part of a broader deficit-cutting deal. Politico reports that leading Congressional Democrats such as Senators Dick Durbin of Illinois and Barbara Mikulski of Maryland have insisted that reforms to entitlement programs such as Medicare, Medicaid and Social Security should have no part in the fiscal-cliff negotiations, and be pushed into 2013 or later, when Congress takes up thornier budget problems.
There's no chance that a lame-duck Congress could make significant changes to programs as important as Medicare or Social Security over the course of a few weeks. But Republicans aren't likely to accept a complete punt on those entitlements, either. And pushing entitlement cuts off the table sends the wrong message to voters about the depth of the changes needed to some of the government's most cherished programs, if Washington's finances are going to get fixed. Which they must.
While all credible budget experts emphasize the need to raise taxes, they highlight the need to cut spending even more. The 2010 Bowles-Simpson proposal, which is emerging as a possible blueprint for budget reforms, called for $3 in spending cuts for every $1 in tax hikes. The Bowles-Simpson cuts would entail larger out-of-pocket costs for Medicare recipients, a higher retirement age for Social Security, lower Social Security benefits for wealthier retirees, cuts in most defense and non-defense programs, and the reduction or elimination of earmarks and other Congressional giveaways favored by members of both parties.
Even Obama's deficit-reduction plan calls for $2 in spending cuts for every $1 in tax increases. In 2011, Obama was reportedly prepared to consider reforms to Medicare and Social Security as part of a "grand bargain" with Republicans on ways to address the national debt. Obama's re-election doesn't change the need for such a bargain.
Nothing significant is likely to get decided by the December 31 fiscal cliff deadline. One likely outcome is an extension of the deadline, giving the new Congress more time to work on comprehensive solutions once the 2013 session begins in January. But just as Republicans' intransigence on the need for tax hikes has prevented a deal up till now, so will Democratic intransigence on the need for spending cuts prevent a deal in the future. The worst form of divided government is one in which one side or the other thinks it's more powerful than it is.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.