July 27, 2010 -- On both sides of the aisle, lawmakers are coming to terms with hard political fact: services are going to have to be cut and taxes are going to have to go up to keep the $13 trillion-plus national debt from skyrocketing into infinity and beyond.
Even some leading Republicans have said in recent days they expect that a debt reduction plan will include a "revenue" element. That means taxes.
It turns out the national debt, when you factor in the promised benefits of Social Security and Medicare versus what those programs are expected to bring in, is much higher than the $13 trillion national debt – between $61 and $106 trillion, depending on whom you talk to.
The long-term benefits are going to have to be cut. Or taxes are going to have to go up. Probably both.
"To achieve fiscal sustainability we are going to have to accept higher tax burdens than we have enjoyed in the past. The challenge will be to adopt those revenue enhancing measures that are most compatible with economic growth and equity," wrote Robert Reischauer, President of the Urban Institute, in testimony prepared for President Obama's debt reduction commission, which is studying ways to deal with the debt.
Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, says there is a "fundamental disconnect " between what people expect from the government and what they expect to give the government.
Americans want services and entitlements from the government, but they do not, in large part, want to pay higher taxes for them.
There are two tax arguments on the horizon. In the short term, Democrats are poised to allow tax cuts enacted by President Bush lapse next year for the wealthiest Americans. Treasury Secretary Timothy Geithner made that argument to Jake Tapper on "This Week" last Sunday.
Republicans, in particular, will argue that taxes should not be raised in a time of economic peril. Democrats, for their part, argue the same about emergency spending. Democrats likely will come under fire from their base if there are Social Security or Medicare cuts. For proof, watch the combative and entertaining debate in a hallway between commission member and former Republican Senator Alan Simpson and a liberal journalist. Watch it here.
But in the long term, as politicians begin seriously to consider how to reform Social Security and Medicare to keep them solvent decades from now, a tax element might have to be part of the cure, even according to some Republicans.
Sen. Judd Gregg, a leading deficit hawk and ranking Republican on the Senate Budget Committee, told the ABC News online program "Top Line" this week that "Everything has to be on the table – there's no question about that."
By "everything," Gregg means that spending cuts will have to be considered in conjunction with tax hikes, or revenue.
Gregg sits on the President's debt reduction commission, which will make recommendations in December – intentionally after the November election.
The chairman of the commission, former Clinton White House Chief of Staff Erskine Bowles, calls the debt a "cancer" eating away at America. He has said 75 percent of debt reduction should come from spending cuts and 25 percent from tax hikes.
Gregg did not dismiss that ratio of cuts to tax hikes.
It is one thing to hear Gregg talk about tax hikes. He's in his final term in the Senate and, perhaps, a bit less encumbered than a Republican who must face the voters in years to come.
It is another thing entirely to hear the top Republican in the Senate, Mitch McConnell -- who is accountable to all his members and will help set the Republican agenda in years to come -- say the same thing.
"I think that we have a serious problem here because we spend too much. I think we ought to concentrate on the spending side," said McConnell. But then he referenced Bowle's ratio.
"I've in fact been encouraged by the comments of Erskine Bowles, who's one of the chairmen of the president's Deficit Reduction Commission, a Democrat, who's saying that he thinks two-thirds or three-fourths of the problem is a spending problem. So that's where we ought to -- That's where we ought to start."
McConnell spokesman Don Stewart later clarified that McConnell was not endorsing Bowles' ratio, but pointing out that the commission chairman, a Democrat, thinks the onus should be on cuts rather than tax hikes.
Most Republicans on Capitol Hill have taken a hard pledge not to ever raise taxes. Sponsored by Americans for Tax Reform, the pledge counts the vast majority of Republican lawmakers -- 33 Senators (including a Democrat, Ben Nelson) and 173 House members (including four Democrats).
Leaders from both parties have promised that if 14 of the 18 debt commission members can agree on a debt reduction proposal, Congressional leaders have promised to seek an up or down vote on it in December.
Any tax hikes will have vocal opposition.
"If the deficit reduction commission comes up with a combo approach, tax hikes and spending cuts, how would I reel about that? Not good." Said Minnesota Gov. Tim Pawlenty, a Republican widely thought to be eyeing a run for the Presidency in 2012. "I don't think the argument could credibly made that the United States of America is undertaxed compared to our competitors," he said at a meeting with reporters Monday in Washington, D.C., sponsored by the Christian Science Monitor.
Pawlenty suggested that modernizing Medicare to make it focus more on results than providing services would cut down on costs. If Democrats experience in enacting health care reform is any guide, though, Medicare reform would not be easy. He also suggested giving younger workers the option of taking control of their own social security contributions.
Transitioning Social Security from a plan with defined, monthly checks to seniors into a 401k-style plan has many fans on the right, but is often demonized on the left as privatization. A plan to transition social security was pursued by President George W. Bush in 2005 to no avail.
A far more radical plan has been proposed by Rep. Paul Ryan, R-Wisconsin. He would be able to reduce the debt, according to the nonpartisan Congressional Budget Office, but it would remake America in the process. He would replace Medicare with a voucher system and transition Social Security to a defined contribution system. It would also eliminate most corporate taxes and do away with tax exemptions for employer-sponsored health insurance and it would instead institute an 8.5 percent consumption tax.
Bowles has suggested in appearances that the commission could suggest a major overhaul of the American tax system to lower the corporate tax rate and instead institute some sort of consumption tax. He has also floated the possibility of ending ending popular exemptions, like the one that homeowners get for the interest they pay on their mortgages.
What is a consumption tax?
"Basically a retail sales tax, which Americans are familiar with, except instead of being collected at the retail outlet, it is collected throughout the supply chain," said Donald Marron, director of the nonpartisan Tax Policy Center.
Even that proposal is rejected by anti-tax crusaders.
"If you have a spending problem you solve it by spending less, not by raising taxes. If you have a drinking problem you solve it by drinking less, not by buying more gin," said Grover Norquist, President of Americans for Tax Reform, which administers the tax pledge.
Norquist pegs the unfunded obligations and total national debt at more than $106 trillion – others say the number is closer to $70 trillion. But Norquist says if a debt reduction plan were only one quarter tax increases, that would still be more than $25 trillion in tax increases.
And any suggestions from the debt commission will only be considered after the elections in November, which many political experts believe will be a bruising one for Democrats.
"As a matter of realpolitik – if the Republicans effectively take control of one or both chambers of Congress this fall, the commission will have done all this work, proposing tax increases, which would be a nonstarter. So I would hope they would focus on spending and entitlement reforms," he said.
Pawlenty suggested that if Republicans make serious gains in the November midterm elections, any talk of tax increases to deal with the debt would be quashed.