The Patriot Post® · Beware a 'Grand Bargain'

Politics, they say, is the art of compromise. You give something to get something. Everyone ends up with half a loaf. You don’t get everything you want, but everyone comes out ahead.

That’s the theory, anyway, and sometimes it even works out in reality. Usually, though, someone winds up on the losing end – not only no better off, but worse.

Which brings us to the proposed “grand bargain” on the federal budget.

The idea, backed in a letter to Congress by the CEOs, presidents and chairmen of more than 80 top U.S. corporations, is that policymakers should bring the budget back into balance through a mixture of spending cuts and tax hikes.

Seems sensible, right? Spend less, earn more. But if history is any guide, it won’t work out like that.

President Reagan found out the hard way. He had, as promised, managed to get a package of tax cuts through Congress shortly after being elected. But the cuts were being phased in gradually, so the economy was still suffering in 1982. Reagan faced intense pressure to agree to raise taxes as part of a deficit-reduction plan. His team began meeting with representatives of House Speaker Tip O'Neill to hammer out a deal.

The result: a proposal for you guessed it, a grand bargain. Congress would cut spending by $3 for every $1 in tax hikes (on corporations, not individuals) that the president was willing to accept. Reagan naturally abhorred the idea of any kind of tax hike, however modest. But – believing it was the best deal he could get, and that O'Neill’s team was acting in good faith – he reluctantly agreed.

So the Tax Equity and Fiscal Responsibility Act of 1982 became law. Unfortunately, it proved to be low on both responsibility and equity.

“You don’t have to be a Washington veteran to predict what happened next,” former Attorney General Ed Meese writes in an Op-Ed published last year. “The tax increases were promptly enacted – Congress had no problem accepting that part of the deal – but the promised budget cuts never materialized. After the tax bill passed, some legislators of both parties even claimed that there had been no real commitment to the 3-to-1 ratio.”

In fact, Congress added insult to injury: Spending for fiscal year 1983 was some $48 billion higher than the budget targets.

Even if we could be sure that today’s legislators would honor their commitment to cut spending, tax hikes won’t help. Why? Because incentives matter. Businesses react to higher rates by slowing down and delaying economic activity. They won’t make the necessary investments because the payoff simply isn’t worth the risk. Thus, the hoped-for increase in revenue often fails to materialize. That’s part of what’s been happening in parts of Europe. Greece, Italy, Spain and France have raised rates, only to see their countries tip into recession.

Just ask Aetna CEO Mark Bertolini, a signer of the letter now before Congress: “You can’t tax your way to fix this problem.” He’s right on this point. Even if tax hikes were part of the solution, does anybody really think that they will go toward reducing the deficit? We need budget cuts. Mr. Bertolini goes on, “you can’t cut entitlements enough to fix this problem.” That’s true also. We need real cuts across the budget. But entitlements are so massive and growing so fast that bold, sweeping reforms to Social Security, Medicare and Medicaid are urgently needed to make these programs affordable and preserve them for future generations.

The CEOs who signed that letter should know this. If they genuinely believe that increasing taxes is the answer, Heritage Foundation budget expert J.D. Foster has a suggestion: “They should tell us how much they are willing to see the taxes rise on themselves and their own companies,” he writes in a piece published on National Review’s website. “Surely they are not so feckless as to propose a budget solution of taxing others. They should lead by example and have their own corporations take the first tax hike.”

They won’t, of course – any more than a new “grand bargain” will bring the spending cuts the federal budget needs to be brought into balance. If lawmakers are serious, they must cut spending. Now.