international analysis and commentary

The “Super Committee” on the US deficit: the tax conundrum

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With only a few days to spare before the November 23 deadline for the Joint Select Committee on Deficit Reduction, hopes for an agreement are getting slimmer by the hour. Also known as the “Super Committee”, this is a bipartisan group of twelve members of Congress tasked with shaving at least $1.2 trillion from future budget deficits over the next decade. If the panel can reach any compromise at all, experts say, it might be partial, which would only postpone the toughest decisions on the deficit to a later date.

Taxes continue to be the biggest sticking point in the negotiations. Democrats want to pair budget cuts with tax increases for the wealthiest Americans while Republicans focus almost exclusively on reducing public spending.

“The simple fact is that Republicans on the panel are unwilling to consider modest tax increases on high-income households,” says Michael Linden, director for tax and budget policy at the Center for American Progress, a liberal-leaning think tank in Washington DC. “This is the biggest obstacle, by far.”

Last week, in a short-lived sign of progress, Republicans appeared suddenly willing to consider $250bln in tax increases as part of a final agreement. But for Democrats, this remains too modest an offer, especially if one takes into account the fact that the GOP demands that the Bush-era tax cuts be made permanent for everyone, at a cost of $3.7 trillion over the next ten years.

“We have gone as far as we feel we can go,” said Super Committee’s Republican co-chair Jeb Hensarling speaking of the Republicans’ newest proposal on revenue.

“I think the odds are against a full agreement,” says Edwin Truman, a senior fellow at the Peterson Institute for International Economics. “But it is more likely there will be a partial agreement on less than the $1.2 trillion.”  

One recent prediction has it that the members of the committee will agree that Congress needs to take up tax reform and revisit the amount of revenue that current fiscal policy brings into the government’s coffers – but only in theory. This would then leave the hardest part of the job – figuring out the details of such plan – to the House Ways and Means Committee and to the Senate Finance Committee. Indeed, these latter two would have been responsible for such decisions in the first place, had the Super Committee not been created.

A failure on the part of the 12-member panel to reach an agreement should automatically set off deep cuts, equally split between defense and non-defense spending. When the committee was first launched on August 2, the so-called “sequestration trigger” was designed as an incentive for both Democratic and Republican members to work together toward a compromise, to avoid seeing the programs dearest to each party slashed at random.

Almost everyone agrees, for different reasons, that the automatic cuts are bound to have potentially negative effects on the overall state of things (Republicans think the US armed forces will be harmed, while Democrats worry about the effects on Medicare and other non-defense programs).

However, the trigger is not set to go into effect for another year. And even before the Super Committee’s deadline, some members of Congress are already at work to find loopholes that will undo, or at least weaken, the sequester, jeopardizing the whole concept underlying the panel’s work.

Should that come to pass, it would probably undermine any future such attempt at bipartisan negotiations, since nobody would ever again consider it credible. “All the suspicions about Washington would be confirmed,” worries Michael Franc, “that nobody really wants to get the government under control.”

For a less divided Congress, the Super Committee’s work would probably not have been so impossible a challenge. “This is a simple problem, intellectually,” says Edwin Truman. It boils down to a basic calculation of “what expenses should be cut and what revenues should be raised, in what timeframe.” The Peterson Institute fellow believes that any agreement should also include the potential for more stimulus in the short term, to kick start what appears to be a stalled economy.

While compromise is possible, at least in theory, the political reality of Washington makes it highly unlikely today.

“We’re in a national discussion about whether to deal with our deficit through tax increases or spending reductions,” said Republican Senator from Alabama Jeff Sessions speaking of the Super Committee. “I think the American people demonstrated in the last election they were prepared to take spending reductions.”

Senator Patty Murray of Washington, one of the panel’s six Democratic members, said that her contingent would not  “accept a plan that gives a tax break to the wealthiest Americans and balances all of this incredible challenge we have on the backs of middle class families.”

The only thing everybody seems to agree on is that a bipartisan agreement becomes impossible the moment either side starts taking one program or another off the table. In the case of the Super Committee, this was true from the get-go. Pressure on the twelve members has been enormous, with all sorts of interest groups in Washington coming out and lobbying to defend whichever government program they favor.

Apart from recently making phone calls to the Democratic and Republican co-chairs of the Super Committee, President Barack Obama has largely remained on the sidelines. His presence tends to inject additional levels of partisanship into any legislative undertaking, so he has hoped that, by keeping away, the panel’s twelve members might indeed succeed in finding a compromise.

In the meantime, the clock is ticking. The federal debt of the United States topped the symbolic $15 trillion mark on November 16, unemployment is stuck at approximately 9%, and the economy is growing at a slower pace than needed to address either of these challenges.