The Supercommittee's Failure Was 2 Decades in the Making

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Newt Gingrich and the GOP had a master plan to turn the U.S. into a low-tax, small-government society back in 1994. Look how far they've come.

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The deficit reduction "supercommittee" has failed. This is not terribly surprising, given the stark divide between Democrats and Republicans. Democrats insist that taxes must go up as part of any deal. Republicans want to reduce the deficit with no net tax increases (although they are willing to increase revenues through higher user fees for government services).

But the fact is that Republicans have already won. In 1994, Newt Gingrich -- the man who is now the frontrunner in the Anyone-But-Mitt race -- led the conservative bloc to a sweeping electoral victory, definitively wrenching the party out of the grasp of "moderates" like George H.W. Bush. At the time, the top income tax rate was 43.7 percent and the top capital gains tax rate was 29.2 percent, set by the Tax Reform Act signed by President Reagan in 1986.

To understand the GOP's victory, consider what the tax landscape would look like if Republicans agreed to everything that Barack Obama asked for in his deficit plan released this September. First of all, taxes for almost all families would hardly change at all. Almost all of the 1997, 2001, and 2003 tax cuts would still be in place. Tax rates for families making less than $250,000 per year would be locked in at the lower rates set in 2001.

Obama says he wants to roll back the tax cuts for the rich. But as far as I can tell, he only proposes to roll back one of them -- the reduction in the top income tax rate. Under his plan, the top tax rate on capital gains and dividends would be made permanent at 18.8 percent -- a figure that includes the 15 percent level set by the 2003 tax cut, plus 3.8 percent for the Medicare payroll tax. The estate tax exemption would be $3.5 million, not $1 million as it was before 2001. The Pease and PEP (personal exemption phaseout) provisions that limit deductions and exemptions for high-income taxpayers, which were suspended by the 2001 tax cut, would be killed permanently. As a result, the top marginal tax rate would be down slightly to 43.4 percent (the 39.6 percent level set in 1993, plus 3.8 percent for the Medicare payroll tax).

Talk about Sore Winners: The GOP carps about big government, but discretionary spending is on pace to shrink to a 90-year low.

How would the government pay for this? Through huge spending cuts. In 1994, discretionary spending was 7.8 percent of GDP. In 2001, the last year budgeted under President Clinton, it was 6.3 percent. In 2009, the equivalent year for President Bush, it was 8.8 percent. (See OMB data, Table 8.4.) In 2021, even if the supercommittee does nothing, and even if the automatic cuts scheduled in the Budget Control Act are repealed, discretionary spending will be down to 5.5 percent of GDP. That would be the lowest level since 1931.

Entitlement programs haven't escaped the budget-cutting ax, either. Medicare was hit with major spending cuts in 1997 and in the Affordable Care Act of 2010, and with smaller cuts in other years. President Obama's plan would squeeze more than $300 billion more out of health care programs over the next ten years in spending cuts or higher cost-sharing (premiums and deductibles). The only major increase in entitlement spending over the past decade, of course, was the Republicans' Medicare Prescription Drug Act of 2003.*

In short, if Newt Gingrich, Dick Armey, and Grover Norquist had a master plan to turn the United States into a low-tax, small-government society back in 1994, it's safe to say they are ahead of schedule. If they split the difference with Obama -- say, eliminating some tax expenditures to increase revenues and, in exchange, getting the 35 percent tax rate made permanent for the over-$250,000 set -- they could probably get some more entitlement cuts out of the current round of negotiations, like the lower cost-of-living adjustment they want for Social Security. And they would get credit from independent voters for compromising and combining tax increases with spending cuts.

In the short term, however, the Republican caucus has its hands tied by the anti-tax movement, particularly the Taxpayer Protection Pledge. They can't declare victory and go home -- even though they've won overwhelmingly -- or they'll be attacked as sell-outs by Tea Party insurgents on their right. So, for now, they seem doomed to continue pushing the envelope of crazy, now demanding that tax rates on the rich go down to 28 percent, well below where President Bush left them in 2001. (Of course, with Herman Cain and Rick Perry promising top marginal income tax rates of 9 percent and 20 percent, 28 percent seems downright socialist.)

Which means there's still an outside chance that no one will agree to anything, December 31, 2012 will roll around, and all of the Bush tax cuts will expire. Which is the only thing that has any chance of increasing taxes on the rich and reducing the deficit. 

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*The subsidies for health insurance purchased through state-based exchanges under the Affordable Care Act are a new entitlement, but the ACA as a whole is deficit-reducing, both over the next ten years and in the long term, according to the CBO.

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    James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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    James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.
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