Ideas@TheCentre
Fiscal sausages
The laws made by the United States Congress are like sausages: it’s best not to see them being made. This was confirmed by last week’s fiscal cliff-hanger, and the absurdity of Congress sitting at 2:00 a.m. on New Year’s Day to resolve an imbroglio of its own making. There is at least one more act to come in this drama, as reality collides with the debt ceiling next month. Never mind that it is illogical to have a legislated debt ceiling separate from the legislated spending and tax policies that feed the debt monster in the first place. The solution is to change the spending and tax policies. But the Republican majority in the House of Representatives can hardly be blamed for using whatever levers it has to impose its policy will. That is the American system: three centres of elected power; strong checks and balances; and hurdles in the way of change. Hence the messy legislative process.
Even if we overlook the process and focus on the result, what emerged from Congress on the first day of 2013 is as unpalatable as the worst-made sausage. Congress brushed aside a large cut in the budget deficit – which is what the US needs, even if the cut due to come into effect on 1 January was badly structured – and replaced it with another fiscal band-aid. It perpetuates the myth that more tax on the rich is key to taming the budget deficit and debt, while avoiding much-needed tax reform and turning a blind eye to the health and social security programs – the main sources of the budget problem on the expenditure side.
As well as the House and the Senate, there is of course a third player in this drama, namely President Obama himself, who has been more responsible than anyone for propagating fiscal myths. The increase in taxes on the rich, even if they raise the expected revenue (which is doubtful), constitute arithmetically about one-twentieth of a complete solution to the budget problem. They enable Obama to boast that he restored the top income tax rate to where it was under the last Democrat president; as if anything less is delegitimised merely by association with a Bush or a Reagan.
An increased tax on the rich is supposedly one of the signature achievements of Obama’s eight years in office. No doubt some will see it that way, but to many others it will cement his reputation as one of the most determined class warriors in American political history. Obama would be less deserving of that reputation if only he would embrace the other half of the Clinton administration’s formula for fiscal success.
Under Clinton (and a Republican-controlled Congress), federal spending shrank from the low 20s to the upper teens as a percentage of gross domestic product, albeit under more propitious economic and national security conditions than currently prevail.
The best case that could be made for increasing the top income tax rate is not that Bush had dared to lower it but that it provides political cover for a broad attack on the budget deficit, which would inevitably also involve taking money away from people much further down the income scale, even if only in the future. But Obama – even though he can no longer claim the excuse that he wants to be re-elected – is apparently unwilling to use his freshly replenished political capital to push for the reforms of entitlement programs that are essential to a resolution of the budget problem.
The spending side of the budget will come into focus again as part of the looming debt ceiling cliff-hanger. The outcome is likely to be another unpalatable sausage unless the blunt, lop-sided and automatic spending cuts that were deferred for two months from January 1 are reshaped to include at least a start to reform of entitlements.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
