Tax Hikes, Fewer Benefits Key to Federal Deficit Crisis Fix

Tax hikes and reduced benefits are key to solving the fiscal crisis.


Action is urgent. Rather like the closing reels of B-list Western movies, we have two columns of cavalry with flashing sabers riding to the rescue. The one we might call the official brigade, commissioned by President Obama, is a bipartisan panel of lawmakers and others headed by Erskine Bowles and Alan Simpson. There is no final agreement yet, but on the table is a stunning $1 trillion in tax hikes, plus much more in spending cuts through 2020, all aimed at reducing deficits by $3.8 trillion, with mortgage deductions ended, the Social Security retirement age raised two years to 69 by 2075, and an increase in the gasoline tax of 15 cents a gallon.

[See photos of the Obamas behind the scenes.]

The unofficial column, without lawmakers, is chaired by former Sen. Pete Domenici of New Mexico, the longtime senior Republican on the Senate Budget Committee, and Alice Rivlin, a former budget director for both Congress and President Clinton. The unofficial brigade has a more convincing plan, combining huge cuts in spending with necessary measures to grow the economy—including a bold one-year relief from Social Security payroll taxes (though, given huge unemployment rolls, it would be even better for jobs and business planning to declare a three-year holiday).

The Domenici-Rivlin program includes other excellent proposals, such as a radical and overdue reform of our tax system for both individuals and corporations. It would end most deductions and credits while simplifying the rest in a way that would enable reductions of individual and corporate tax rates. Nearly 90 million households would no longer have to file returns. To reduce the debt, they would supplement the proposed income tax changes with a 6.5 percent debt-reduction sales tax. Similarly, they would strengthen Social Security by gradually raising the amount of wages subject to payroll taxes and slightly reducing the growth and benefits for the top 25 percent of beneficiaries, while raising minimum benefits for long-term, low-wage workers, and indexing benefits to life expectancy.

The other major proposal would control healthcare costs by reforming Medicare and Medicaid while starting in 2018 to cap and then phase out the tax exclusion for employer-provided healthcare.

Naturally, all sides of the political spectrum have objected. But there will be no smooth walk to fiscal freedom. They can argue all they like, but nobody can argue away the danger—not with the deficit exploding, going from a surplus of 1 percent of GDP in 1998 to a deficit of 3.2 percent of GDP in 2008. During this same period, public debt per capita increased by 50 percent from $13,000 to more than $19,000. Both indicators have risen sharply since.

To climb out of the fiscal hole inevitably means inflicting pain. No area of government spending can avoid being scrutinized or having its expenditures reduced. Nobody will be able to protect their sacred cows. The people understand there will have to be trade-offs, but they look for political leadership.

This means telling both sides what they don't wish to hear: Conservatives will have to accept tax increases and defense cuts, and liberals will have to accept the paring of entitlement benefits that are no longer affordable—especially public pensions grotesquely out of line. The kind of debt service we face would otherwise eat up the stock of private capital available to finance vital investments, and unchecked government deficits will ultimately crowd out federal spending for research, education, and infrastructure.

We are at a historic turning point that mandates getting our fiscal house in order or suffering dramatic domestic and international consequences. The political center, which voted like Democrats in 2008, voted like Republicans in 2010—but both parties know they will suffer if progress is not made on the central issue of excessive debt.

[See a slide show of 5 factors complicating Obama's relationship with a GOP majority.]

The Republicans must resist the temptation of victory. They have not won a mandate for obstructionism or for partisan investigations of half-baked charges. They must discipline themselves to move to the center where the people live. Otherwise they risk having people believe that they are motivated only by blind anger. Blocking everything will boomerang against the Republicans, just as stupidly shutting down the government hurt them in 1995, the last time they were in the majority in the House. They must design some kind of useful grand bargain on the economy. If they do, they will establish their credibility as a governing party and not just as a political party.