It’s the Tax Cuts, Stupid! or: Supercommittee Post-Mortems
The collapse of the Supercommittee’s effort to produce a joint package of recommendations for deficit reduction proves conclusively that for Republicans and their corporate allies that deficit reduction is, and always has been, a secondary objective. The primary objective is to protect and expand the Bush tax cuts.
From reports now leaking out it is apparent that Democrats on the Supercommittee had offered massive cuts to Medicare and Medicaid amounting to a minimum of $500 billion over the coming decade. Those cuts were in addition to the $1.2 trillion automatic additional deficit cuts negotiated as part of last August’s Debt Ceiling Deal. That deal already had authorized $1 trillion in spending-only cuts. So the Democrats’ offer was the $1.2 trillion automatic deficit cuts—all spending about equally divided between defense and non-defense cuts—plus another $500 billion in Medicare-Medicaid matched by another roughly equal $500 billion in tax revenue increases.
The Republicans on the Supercommittee offered a different ‘mix’ of tax revenue and spending cuts. Their counter was $760 billion in Medicare-Medicaid cuts plus approximately $300 billion in tax revenue recovery. However, that tax revenue recovery was largely raised from increasing taxes on the middle class, by reducing the mortgage interest deduction and other middle class tax breaks. In addition, the Republicans required a further major tax break for the top personal income tax bracket and for the corporate income tax. Both currently are set at a 35% tax rate. Republicans proposed to reduce both to between 25%-28%. In other words, raise taxes on the middle class and give it to the rich and their corporations. And make seniors, retirees and the poor pay $760 billion in Medicare-Medicaid benefit cuts.
What these maneuvers by both parties shows is the following: First, Republican’s top priority is shielding the Bush tax cuts. Those cuts cost the U.S. budget a minimum of $2.9 trillion last decade. Another $450 billion in extensions 2010-12. And a projected $2.2 to $2.7 trillion if extended for another decade. By proposing further tax cuts for the top income brackets and corporations, it is clear Republicans aren’t all that concerned about the deficit and debt in fact. They are focused on protecting and further cutting taxes for the rich and their corporations. What’s new in their position, revealed by the Supercommittee’s machinations, is that they now propose that not only seniors and the poor pay more for continuing (and expanding) those tax cuts, but that now the middle class will also have to pay for them with more tax hikes.
Second, it is clear the Democrats continue to be more than willing to put Medicare-Medicaid on the chopping block. They proposed $500 billion cuts last June, in the secret negotiations between Vice-President, Joe Biden, that broke down. They repeated that offer in July as President Obama offered the same as part of a ‘grand deal’ that also imploded. Obama subsequently offered up front $320 billion in Medicare-Medicaid cuts last September 19 as an enticement to get Republicans to agree to his $447 billion third recovery plan. And just a few weeks ago, the Democrats again proposed $500 billion. In other words, the Democrats have repeatedly offered massive cuts in Medicare-Medicaid. They will likely continue to do so in the coming months.
Third, the sticking point between the two is not whether Medicare-Medicaid will eventually be cut, but only when. Nor is the amount of these cuts really in question. It will be between $500 billion and $1 trillion when it happens—and it eventually will happen.
Fourth, the real bottleneck is the Bush tax cuts and Republican efforts to not only protect those cuts but extend them as well, even if now at the expense of the middle class. What the breakdown of the Supercommittee’s efforts shows is that the Republicans calculated they would have a better chance at extending the $2.2 trillion Bush tax cuts for another decade by deferring the vote on their extension until next fall, 2012, in the midst of the final months of the 2012 election campaign.
Republicans no doubt looked beyond November 23 and see several legislative ‘choke points’ that will enable them to extract more spending cut concessions from the Democrats without having to give up on the Bush tax cuts. The first of such ‘choke points’ will come next month, in December 2011.
There are four major legislative bills that Democrats and Obama desperately want that will have to be decided by Congress before the end of 2011. The first has already been raised by Obama: continue the 2% payroll tax deduction for workers another year. That will cost another $112 billion to the budget and deficit this coming year. A second is an extension of unemployment benefits for millions of more workers, whose benefits run out at year end. That’s another $55 billion cost. The third is yet another year ‘fix’ to the Alternative Minimum Tax, AMT, which impacts the upper middle class who earn more than $150,000 a year. That’s another $70 billion cost. The fourth is also another delay in the 29% cut in doctors’ fees for serving medicare patients. That’s tens of billions more cost to part B medicare spending. We’re talking here about at least another $250 billion. If these bills are not passed, it will mean a major hit to GDP and the economy in the first
quarter 2012, for an economy already extremely fragile and susceptible to a double dip early next year. In fact, the Federal Reserve now predicts the likelihood of a double dip occurring in the US economy early next year is now greater than 50%.
The Republicans will especially drive a hard bargain, and extract more than a ‘pound of legislative flesh’, in exchange for agreeing to pass the extension of unemployment benefits and the payroll tax cuts for another year. They will demand more spending-only cuts, likely to include Medicare-Medicaid, and also likely demand that the $450 billion in defense spending cuts mandated in the $1.2 trillion automatic deficit reduction are removed from the $1.2 trillion. Obama will be hard pressed not to agree to remove the defense spending cuts if he wants his payroll tax cut and unemployment benefits extensions passed before year end 2011. Obama and the Democrats will be desperate in an election year to have the unemployment benefits and payroll tax extended, as well as the AMT ‘fix’ which otherwise would impact the ‘independent voters’ heavily that he is courting heavily in the coming election. The Republicans know all this, and will push to extract cuts in spending at least equal to the $250 billion cost for these various measures coming up in December 2011.
Republicans may also get another opportunity in early 2012 to extract spending cuts without having to touch their Bush tax cuts. According to last August’s debt ceiling deal, that reduced spending by $1 trillion immediately and the $1.2 trillion additional automatic cuts that will now go into effect, there would be no further need to raise the debt ceiling until after the November 2012 elections. That was the trade-off for the $2.2 trillion in spending cuts that the Obama administration and Democrats in Congress agreed to: i.e. no more debt ceiling crises in exchange for the $2.2 trillion in spending only cuts. But the debt ceiling issue may still re-emerge before the elections, and maybe even as early as this spring 2012.
As part of the August 2011 deal the U.S. Treasury is authorized to raise another $400 billion or so this spring and increase the debt ceiling by that amount. But it the economy retreats in early 2012, as many now increasingly predict, that will mean less federal tax revenues than originally projected and a larger budget deficit in 2012 than originally forecast. That might potentially reintroduce the need to raise the debt ceiling again in mid-2012 even more than projected last August. If this scenario unfolds, the Republicans will have yet another ‘bite at the apple’ of deficit cutting. That’s in addition to the four bills coming up next month costing $250 billion, for which Republicans will demand at least an equivalent spending cuts elsewhere to fund.
So look for the issue of cutting Medicare-Medicaid to continue to be on the negotiating table despite the Supercommittee’s recent breakdown. The Supercommittee may fade away, but not the fundamental issues behind it. Those issues are the continuing weak US economy and its impact on deficits, the intense commitment by the Republicans, corporations, and the wealthiest 1% to protect their Bush tax cuts ‘at all costs’, and the repeated willingness of Obama and the Democrats to offer up Medicare-Medicaid as a bargaining chip.
The Republicans are in the preferred bargaining position going forward. They will try to cash in on some of Democrats’ repeated offers to cut Medicare-Medicaid by $500 billion—first in exchange for agreeing to pass the $250 billion in bills in December and thereafter potentially in the spring should the debt ceiling issue raise its ugly head again.
As the November 2012 election grows nearer, Democrats’ resolve not to extend the Bush tax cuts another decade will also undoubtedly weaken. Republicans count on chipping away at Medicare-Medicaid and other spending over the coming year, while bidding their time for the best timing to extend the Bush tax cuts for another decade.
It’s no wonder, therefore, that the Republicans on the Supercommittee were more than willing to allow the Supercommittee to implode. They can protect their tax cuts better, and extract spending cuts more effectively, by going at it piecemeal over the coming year.
Jack Rasmus is the author of Epic Recession: Prelude to Global Depression, May 2010, and the forthcoming Obama’s Economy: Recovery for the Few, February 2012, both published by Pluto Press and Palgrave-Macmillan. He is also author of the just published 35pp. pamphlet, An Alternative Program for Economic Recovery, which can be purchased from his website: www.kyklosproductions.com. His blog is jackrasmus.com.