Ross Douthat wrote a smart blog post basically asking those questions, and, apropos of the deal that prevented us going over the fiscal cliff, concluded, basically, “no.” Democrats may believe that they are the responsible party, who would be willing to do both if push came to shove, but, in Douthat’s view, this is as much fantasy as the Republican view that all would be well if we simply cut unspecified unnecessary spending.
But here’s the thing. The Obama Administration both raised taxes on the middle class and instituted serious entitlement reforms in its first term. As Chief Justice Roberts made clear to the electorate, the mandate in Obamacare is a tax (that’s why it’s constitutional), and it’s a tax that overwhelmingly hits the non-wealthy. Plus there are a variety of other taxes embedded in Obamacare that skew more toward higher-income individuals, but still hit much lower than the $400,000 threshold. And, as the Romney/Ryan campaign made clear to the electorate, Obamacare also mandated reduced payments to Medicare providers, using the savings to pay for expanded coverage for the uninsured. You may not like those taxes or those cuts – and you may not believe they will be maintained. But they were passed. And President Obama won reelection handily nonetheless.
The fiscal cliff was not a test of Democratic ability to raise tax rates on the middle class, because the Democrats went into the negotiation saying they didn’t want to raise tax rates on the middle class. If we had gone over the fiscal cliff, taxes would have spiked across the board and spending would have been slashed. The Democrats would then have proposed a bill restoring spending and cutting taxes on earners below $250,000. And the Republicans would have countered with a bill restoring only defense spending and cutting taxes for everybody. And we’d then have had a negotiation about whether restoring all that domestic spending was worth compromising on taxes, with the clock ticking as the market demanded some solution to the sudden austerity. Is it so obvious that we would have wound up in a different place than we are now?
There is clearly substantial opposition within both the Democratic and Republican parties to raising income tax rates on anyone but the wealthy. Within the Democratic coalition there’s debate about who constitutes the wealthy; within the Republican coalition, a majority opposes raises tax rates on anybody. But we’re still talking about income tax rates. If we now move to tax reform, that leaves open the possibility of loophole-closing tax reform that raises revenue without raising rates. And it leaves open the possibility of new consumption taxes (a VAT, or a carbon tax, or a series of smaller Pigovian taxes). For that matter, the expiration of the payroll tax holiday was a tax hike on the middle class that just passed with bipartisan support. These kinds of taxes aren’t going to be popular. But they are not the same as raising income tax rates. The real question remains whether Republicans would be willing to consider additional revenue as part of a tax reform package.
As for entitlement spending, my view for a long time has been that a prerequisite for tackling it is putting Medicare on a budget, the way it is in Canada. Congressman Paul Ryan has advocated doing precisely this for Medicare as part of his privatization scheme; indeed, the only way in which his privatization scheme can be demonstrated to save money is that it imposes such savings by fiat. And Ryan just voted for the fiscal cliff deal. The most persuasive reason, from my perspective, why he might have done so, rather than side with Cantor and Rubio and other Republican legislators who preferred to keep their hands clean of tax increases, is that he wants to be part of the negotiation over entitlements, on the inside and not the outside. He’s not likely to get privatization (President Obama ran on opposition to voucherizing Medicare), but if he actually wants to focus on controlling costs, it seems to me he’s bought himself a seat at the table. Now we’ll see whether the Obama Administration wants to take another bite of that particular apple, in the context of the “grand bargain” that President Obama seems eager to get.
I’m not saying I’m an optimist about the prospects for either tax or entitlement reform. But I don’t think the negotiations over the fiscal cliff specifically offer grounds for outright pessimism either. The situation is pretty much the same as it’s been for some time: our system as currently constituted can’t pass anything without wasting a huge amount of time, driving up to the brink of crisis, and generating massive uncertainty about policy outcomes, all of which can’t be good for the economy. But the endgame of the fiscal cliff negotiations looks pretty good to me. President Obama got his rate hike, and now we know what tax rates are going to be going forward. Additional revenues are going to have to come from tax reform. Good. And on we lurch to the next inevitable crisis.