First Principles January/February 2007

The Rancor Dividend

The new Democratic Congress just might help the White House mend the country’s broken fiscal policy.

What is especially striking about the current administration’s fiscal record is that it nearly matches the Johnson administration not just in expansion of the deficit, which reflects both spending increases and tax cuts, but in spending increases alone. And the recent outlays on Iraq and homeland security are not the only cause of the spending surge. The president’s budgets, subsequently enlarged by Congress, have increased non-defense, non-homeland-security discretionary spending almost as quickly—and much faster than the budgets of Bill Clinton or George H. W. Bush.

All of the administration’s tax cuts account for only about a quarter of the deterioration in the ten-year projected budget balance since 2001. The rest is outlays—on defense, and on everything else. Far from restraining spending in order to make room for tax cuts, as a conservative administration and Congress might have been expected to do, the Republican Congress typically added to the spending requests of a fiscally expansive White House—and then cut taxes as well.

As a result, merely reversing the administration’s tax cuts will not bring the books into balance. The scale of the fiscal problem demands both tax increases and spending restraint.

History suggests that spending restraint might be the easier part. With Democrats running Congress, the president may for the first time see a spending bill he does not like, and veto it. And the Democrats, unlike their predecessors, are unlikely simply to endorse and enhance the president’s own spending priorities. As the bargains get struck, there is no guarantee that the sides will bargain down rather than up, but the record is encouraging. With luck, the administration and the new Congress might just squabble their way to a sleeker budget.

Taxes could be more difficult. On this the two sides seem more deeply dug in. The president has little to brag about right now except for the tax cuts that so anger the Democrats; to surrender those would be a blow. A deal does look certain on the Alternative Minimum Tax (an anti-avoidance measure aimed at the very rich that is starting to catch millions of the less-than-rich). Both sides agree that something must be done about this—but AMT reform is a tax cut, not a tax increase.

Tax increases are unlikely to happen accidentally, as a natural result of partisan contention. They will require courage and creativity. But a solution is available that practically cries out: the gas tax. Raise it modestly to start with, but announce a schedule of further increases over the next ten years. On grounds of economic efficiency, the case for a bigger gas tax is unassailable. Politically, it could be linked to deeply resonant issues—the environment, energy independence—and might offer a measure of face-saving for the administration. You could sweeten it further: promise up front that 50 percent of the proceeds will go to deficit reduction, and 50 percent to reductions in the Social Security tax, or to an expanded earned-income tax credit (both of which especially help the low-paid).

Fiscal prudence, environmental responsibility, and tax relief tilted to the less well-off—is that such an unappealing compromise, impossible to sell? What is bipartisanship for, if not measures such as this, which require both sides to give ground? People in the White House and on Capitol Hill ought to be thinking it is worth a try.

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