A (Not So) Grand Bargain

Ed Feulner

11/2/2012 12:01:00 AM - Ed Feulner

Politics, they say, is the art of compromise. You give something to get something. Everyone ends up with half a loaf. You may not get everything you want, but everyone comes out ahead.

That’s the theory, anyway. And sometimes it even works out in reality. Usually, though, someone winds up on the losing end -- not only no better off than before, but worse.

Which brings us to the proposed “grand bargain” on the federal budget.

The idea, backed in a letter to Congress by the CEOs, presidents and chairs of more than 80 top U.S. corporations, is that policymakers bring the budget back into balance through a mixture of spending cuts and tax hikes.

Seems sensible, right? It’s exactly what you would do to fix a family or company budget: spend less, earn more. But if history is any guide, it won’t work out that way.

President Reagan found that out the hard way. He had, as promised, managed to get a package of tax cuts through Congress shortly after being elected. But the cuts were being phased in gradually, so the economy was still suffering in 1982. Reagan faced intense pressure to agree to raise taxes as part of a deficit-reduction plan. His team began meeting with representatives of House Speaker Tip O’Neill to hammer out a deal.

The result: a proposal for … you guessed it, a grand bargain. Congress would cut spending by $3 for every $1 in tax hikes (on corporations, not individuals) that the president was willing to accept. Reagan naturally abhorred the idea of any kind of tax hike, however modest. But -- believing it was the best deal he could get, and that O’Neill’s team was acting in good faith -- he reluctantly agreed.

So the Tax Equity and Fiscal Responsibility Act of 1982 became law. Unfortunately, it proved to be low on both responsibility and equity.

“You don’t have to be a Washington veteran to predict what happened next,” former Attorney General Ed Meese writes in an op-ed published last year. “The tax increases were promptly enacted -- Congress had no problem accepting that part of the deal -- but the promised budget cuts never materialized. After the tax bill passed, some legislators of both parties even claimed that there had been no real commitment to the 3-to-1 ratio.”

In fact, Congress added insult to injury: spending for fiscal year 1983 was some $48 billion higher than the budget targets.

Even if we could be sure that today’s legislators would honor their commitment to cut spending, tax hikes won’t help. Why? Because incentives matter. Businesses react to higher rates by slowing down and delaying economic activity. The hoped-for increase in revenue often fails to materialize. That’s what’s been happening in parts of Europe. Greece, Italy, Spain and France have raised rates, only to see their countries tip into recession.

Just ask Aetna CEO Mark Bertolini, a signer of the letter now before Congress: “You can't tax your way to fix this problem, and you can't cut entitlements enough to fix this problem.” He’s right. We need budget cuts. Not cuts in the rate of growth in spending, which is usually all you can manage to get through Congress once every couple of decades. Actual cuts.

The CEOs who signed that letter should know this. And if they genuinely believe that increasing taxes is the answer, Heritage Foundation budget expert J.D. Foster has a suggestion: “They should tell us how much they are willing to see the taxes rise on themselves and their own companies,” he writes in a piece published on National Review’s website. “Surely they are not so feckless as to propose a budget solution of taxing others. They should lead by example and have their own corporations take the first tax hike.”

They won’t, of course. Any more than a new “grand bargain” will bring the cuts the federal budget needs to come back into balance. If lawmakers are serious, they can do that any time they want. They can cut spending. Now.