Fiscal Cliff Debate: Entitlement Reform Must Be Included

Dec. 4, 2012 — -- Besides revelry, this New Year will ring in $500 billion in tax hikes and $110 billion in spending cuts unless Congress and the president can come together to steer clear of the "fiscal cliff" beforehand.

All the Washington handwringing is ironic, considering that Congress itself created this mess. How? By creating the sequester's ill-conceived spending cuts in the Budget Control Act of 2011 and teeing up expiration of many different tax policies (some in place for more than a decade) in legislation passed two years ago.

Infographic: The Fiscal Cliff

President Obama has repeatedly insisted on raising tax rates for high-income earners. This is an anathema to Republicans so the fiscal cliff looms. Obama called this a "balanced approach" to solving our fiscal challenges. But is it necessary?

Hardly. Tax revenues are quite low, but official budget forecasters from both the Congress and the White House show revenues returning to historical levels as the economy improves.

Read more: The Fiscal Cliff and Medicare: To Cut or Not to Cut

Spending is high today at just over 23 percent of the economy, versus the historical average of roughly 20 percent. But rather than returning to historical levels, spending will remain high over the next decade and then spiral ever upwards reaching nearly 38 percent of the economy within a generation.

Read more: Will the Mortgage Deduction Survive the Fiscal Cliff?

This massive spending increase is driven by three entitlement programs—Social Security, Medicare and Medicaid. Costs will balloon as retiring baby boomers file into these programs. In just 13 years, when today's kindergarteners enter college, these programs plus interest on the debt will devour all tax revenues.

Entitlement reform is necessary, urgent, and inevitable.

Yet the fiscal cliff discussion has focused only on increasing taxes. What's missing - if we are serious about fixing our budget mess - are substantive steps to rein in entitlement programs.

Thursday's White House proposal has details on tax increases, but was shockingly devoid of details on spending. First, the president would increase taxes by nearly $1.6 trillion. Besides millions of families having less to go around on payday, this would also hit the engine of American job creation—small businesses.

It's hard to understand why this makes sense when the economy is still lumbering along and unemployment high. The president also wants a new $50 billion stimulus package. Americans know: new taxes don't usually go to deficit reduction, but more spending. All told these new tax increases, beyond those in Obamacare, would cover only 15 percent of the new debt in the president's budget.

There was a marker for potential entitlements savings of up to $400 billion. But the proposal was vague, and the savings aren't guaranteed, as they would happen sometime later only after the tax increases and new stimulus package.

Read more: Republican Doomsday Plan

Talks of a plan aren't really centered on the fiscal cliff. Congress and the president could come together quickly and simply pass legislation to steer clear of the cliff if they wanted to. Rather, it's about reaching a "grand bargain" to address our chronic deficits in advance of hitting the debt limit early next year.