"A Crack in the Dam?"

Sydney M. Williams

Thought of the Day

“A Crack in the Dam?”

July 20, 2011

It may be that the dim light that appeared in the tunnel that is Washington may not be a freight train barreling toward us. It may be an indication of daylight in what seems to have become an endless game of chicken regarding our debt/deficit crisis. Reading summaries of the Gang of Six’s proposal last evening and listening to a few comments, including that of the President, it would appear that the two sides of the aisle may have come upon the first steps toward finding solutions that would address both run-away spending and reforming the tax code. Keep in mind, their proposal does not address the debt ceiling, but if we can resolve this issue, perhaps there is hope for the other.

While the proposal would reduce spending by $3.7 trillion over ten years (about 5% of the budgets) and raise taxes by $1 trillion, the two most important aspects of the plan, in my opinion, are an agreement for an immediate $500 billion in spending cuts (approximately 13.5% of the current year budget) and the decision to reform the tax code. Tax reform would reduce the nominal rates to three broad ranges – 8%-12%, 14%-22% and 23%-29%. It would reduce, but not eliminate, tax breaks on mortgage interest, higher-cost health plans, charitable deductions, IRA’s and 401Ks. Importantly, it would eliminate the AMT (the Alternative Minimum Tax.) Additionally the plan would freeze Congressional pay, sell unused federal property and utilize a new measure of inflation for determining cost-of-living adjustments for Social Security. Nominal corporate tax rates would also be lowered, while credits and exemptions would be reduced or eliminated.

Also last night, the House passed a “Cut, Cap and Balance” bill that would cut spending, cap certain programs and introduce a balanced budget amendment. While passage may have made certain Republican members happy, victory was purely Pyrrhic and the vote only symbolic. Passage in the Senate is highly unlikely; if by some miracle it were to pass, the President has vowed to veto it. Initial reaction from Tea Party Republicans seems negative regarding the Gang of Six’s plan, based on the notion that if the President gives it a thumbs-up, it must be bad. However, Republican house members should recognize a good thing when it appears. They are against any plan that raises taxes, which by itself is ridiculous. If the economy recovers, taxes will go up. Tax reform that benefits small business and increases confidence will yield higher taxes. Are not those good things?

Republicans in the House risk isolating themselves. Polls, in regard to budget talks, have moved in the President’s favor. According to a Wall Street Journal/NBC News poll, 58% favor the President’s plan for $4 trillion in cuts and an increase in taxes versus 36% who prefer the leading proposals among Congressional Republicans who have recommended $2.5 trillion in cuts and no tax increase. In refusing to compromise, Tea Party Republicans risk triggering a default of some sort, which the President would surely use to his advantage. The proposal from the Gang of Six has given them an out.

Craig Pirrong, Bauer Professor of Business at the University of Houston, was quoted in today’s Wall Street Journal. He sums up the situation very well. “Unfortunately, those who desire most ardently to cut back on government and its growth are those who most ardently press for a deal or showdown that could lead to a shutdown. Although the frustration is understandable, this is shortsighted and counterproductive. It is vital to keep the big things in mind, and to avoid battles that risk the war.”

The election of 2012 is too important to lose it on August 2, especially when a plan as attractive as that proposed by the Gang of Six is presented, and is one that seems to have broad appeal. The country is facing two choices: One way, led by President Obama, would have us trend more aggressively toward a West European from of socialism with far greater government in our lives; the other direction leads toward less government, providing a system that would unleash private enterprise, allowing us to compete more effectively in the global world in which we live. While the plan is far from perfect (there are elements in it with which I strongly disagree), and it does not address the debt ceiling, it does provide a framework to do so.

While it is too early to celebrate, the Gang of Six’s proposal may just prove to be the crack we need in the dam that has caused our economy and politics to stagnate.