Edging Closer to the Fiscal Cliff

Mattie Duppler
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Posted: Jul 27, 2012 12:01 AM
Edging Closer to the Fiscal Cliff

In typical Washington fashion, hyperbole regarding the challenges coming for the lame-duck Congress is heating up, while actual solutions remain slim. Talk of averting the $50 billion defense sequester coming on January of 2013 and replacing the cuts with tax hikes stand to upend the gains taxpayers have made this year as we edge closer to the “Fiscal Cliff.”

The idea that tax hikes can be bartered for spending cuts undermines a critical difference between Republicans and Democrats. Republicans, for their part, have disarmed Democrats who have been able to claim fiscal credo by fixating on “deficit” problems. Instead, House and Senate conservatives have been keeping a laser-like focus on the real cause of the country’s fiscal malaise; overspending. This is why the debt deal last summer was such a significant victory for taxpayers; both Republicans (and Democrats, 138 of whom voted for the Budget Control Act) attested that a fiscal solution rested solely on the spending side.

These lawmakers also stand to undermine real progress on tax reform. “Closing loopholes” now takes revenues off the table for comprehensive tax reform later. With more spending to support if the sequester is eliminated, this further impedes progress in moving towards a fairer, flatter tax code.

As the current imbalance between spending and revenues attests—last year, the government spent $3.7 trillion while taking in $2.2 trillion in revenues—once there is more cash on the table supposedly prudent policymakers lose all reason to restrain spending. Offering tax hikes in place of spending cuts allows Democrats to claim with a straight face that a spending problem is simply an under-taxing problem.

Importantly, sheer mathematics don’t bear this out. Under President Obama’s budget, the Pentagon is slated to spend nearly $6 trillion over the next ten years. Under the same estimates revenues will total $39 trillion, bringing tax revenues to 20 percent of GDP, two percentage points higher than the historical average.

As Chris Preble of the Cato Institute points out, even under a more “constrained” budget like that proposed by presidential candidate Mitt Romney, defense spending would still average 64 percent higher than annual post-Cold War budgets and 42 percent higher than average spending under Reagan. The idea that we need to spending more, and taxing more, for a program that will take up 15 percent of historically high revenues is one real conservatives should be leery of supporting.

Importantly, buying into the myth that defense spending should always be sacrosanct removes pressure to actually streamline military budgets. In turn, resources are routinely diverted to wasteful projects, squeezing the personnel and procurement budgets proponents regard as sacrosanct.

The fallacy that the only alternative to the sequester is hiking taxes to pay for defense was exposed when the House passed the Paul Ryan budget—which replaces the sequester with mandatory savings elsewhere, with no tax hikes. The appropriations process now offers several opportunities for lawmakers to champion smart defense spending decisions now.

Both the House and Senate defense authorization bill and House appropriations bill contain efforts to pinpoint waste (dispelling, once again, the myth that national security is undermined by any cuts to defense accounts) but the test remains whether the Senate Appropriations Committee will reach to do the same.

Take, for instance, the ongoing debate regarding missile defense systems. Over the last twenty years, the Pentagon has funded two different programs with remarkably different results. Over ten years after its inception, the Army began another program to improve the successful Patriot missile program. Over a decade later, the new program, the Medium Extended Air Defense System (MEADS), has become far more expensive than upgrading the Patriot system and become so impractical the Pentagon has announced it has no intention of actually procuring it. Like the famed F-135 alternate engine earmark, funds continue to be obligated for MEADS, despite decades of spending on a project that has yet to yield an actual product.

The program also proves the folly of offering tax hikes in place of the sequester; it would simply keep the tab open for this kind of waste to continue. Moreover, cancellation of the project is as simple as refusing to toss more cash down the MEADS black hole. Hundreds of millions could be saved if appropriators simply refuse to underwrite amorphous “cancellation costs.” These savings would have no impact on national security since the program will never be put to use anyway.

The pressure of the sequester should signal to lawmakers that to promote financial and national security, resources must be allocated more intelligently. In an environment where trillion dollar deficits have become the norm and political gridlock is inescapable, consensus on these efforts that would promote smarter spending should be simple.