Dueling measures to deal with America’s debt ceiling crisis were on tap in the House and Senate yesterday. The Republican-controlled House of Representatives debated and passed H.R. 2560, more familiarly known as the “Cut, Cap and Balance Act.“ The legislation calls for raising the debt ceiling by $2.4 trillion in exchange for immediate spending cuts, along with the adoption of a constitutional or “similar” amendment requiring a balanced federal budget. In the Senate, members of the bipartisan “Gang of Six,” given up for dead until Tom Coburn (R-OK) unexpectedly rejoined the group yesterday, were working on a $3.7 trillion deficit reduction plan that would also raise $1 trillion in revenue. But what is likely to emerge from this 11th hour scramble?
The Cut, Cap and Balance bill is a three-part affair. The “cut” part would impose limits on both discretionary and mandatory spending or force a presidential sequester, which is “an automatic, across-the-board proportional spending cut written into law and implemented by the Office of Management and Budget (OMB).” Social Security and Medicare would be exempt from sequestering.
The “cap” part would enforce a limit on federal spending by tying it to a fixed percentage of the nation’s Gross Domestic Product (GDP). This is critically important. Most Americans are likely unaware of the fact that, despite tax rates being all over the lot, from a marginal rate as high as 92 percent in the ’50s to a low of 28 percent in the late ’80s, federal government receipts have averaged 18 percent of GDP for the last 60 years. The reason for this is simple: as tax rates change, so do peoples’ behavior, meaning they find ways to avoid tax liabilities.
Thus, while “tax the rich” may sound logical in terms of increasing revenue, it doesn’t bear out in reality. Furthermore, “rich” is a mobile concept: 60 percent of America’s taxpayers were in a different tax bracket in 2007 than they were in 1999. More importantly, 40 percent of those in the top fifth moved down, while 60 percent of those in the bottom fifth moved up. The primary reason America is running its highest deficits in history is because the Obama administration is currently spending a post-WWll high of almost 24 percent of GDP, and forty cents of every dollar is borrowed money. Cap would wind that spending back — gradually — to the historic average.
The “balance” part of the law would increase the debt limit by $2.4 trillion after Congress passed a Balanced Budget Amendment specifically tied to the above-mentioned limit on spending as a fixed percentage of GDP. Any tax increases above the fixed limit would have to be approved by a two-thirds majority in both houses of Congress.
The obvious plusses of Cut, Cap and Balance? A certain degree of fiscal sanity would be imposed on members of both parties, whose level of fiscal insanity has brought this nation to the brink of bankruptcy. The bill would be a mechanism for dealing with the reality that statesmanship, as in the idea of doing something for the good of the country without regard for personal gain, is dead. Furthermore, the two-thirds vote threshold required for raising taxes would largely curtail frivolous spending initiatives engendered by phony “crises.”
The obvious negatives? The required Balanced Budget Amendment, constitutional or otherwise, in exchange for raising the debt ceiling. A constitutional amendment could take years. Even a simple amendment bill would be next to impossible to pass before the August 2nd deadline, and whether Republicans realize it or not, such an unrealistic expectation undermines the rest the bill’s credibility. The bet here is they know it, but choose to get Democrats on the record rejecting the amendment. Perhaps just as telling, two out of the three revenue-eating behemoths, namely social Security and Medicare (the military is the third), remain immune to automatic cuts administered by the OMB. This could make the still-necessary reforms of both even harder to achieve.
The biggest negative? A next-to-nothing chance of passing in the Democratically-controlled Senate, and a promised presidential veto by Mr. Obama in the event of a miracle. There will be no miracles.
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