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Go Home The Non-Grand Bargain That Might Pass

JONATHAN CHAIT JULY 7, 2011

The Non-Grand Bargain That Might Pass

BY JONATHAN CHAIT

I've had two discussions with Obama administration officials who have expressed eerie optimism that they can get Republicans to accept a deal with higher revenue. It never made sense to me. But this outline of a potential deal, from Jay Newton-Small, actually makes perfect sense:

a more modest package for roughly $1.7 trillion to $2.3 trillion in cuts with upwards of $500 billion in revenue increases, including $40 billion to $60 billion from ending tax breaks for corporate jets, yachts and race horses (and, possibly, a proposal to stop taxing hedge fund managers’ income as capital gains, thus subjecting it to a higher rate); plus $150 billion to $200 billion in increased revenues from requiring more pension contributions from federal employees, broadcast frequency auctions and getting rid of farm subsidies; and another several hundred billion dollars from pegging inflation to the Consumer Price Index. All of the new revenues would be offset by a permanent or long-term Alternative Minimum Tax fix, a popular bipartisan move, thus satisfying the Grover Norquists of the world. This deal would include modest Medicare cuts, but to providers only, and could also include some short term stimulus such as an employer payroll tax holiday.

Let me try to explain what this means. The "Alternative Minimum Tax" is kind of a parallel tax rate, created in 1969, designed to ensure that very rich taxpayers didn't amass so many deductions that they could avoid paying any taxes. If your tax rate falls below your "alternative minimum tax rate," then you have to pay the AMT rate instead. It's sort of a failsafe tax rate.

The AMT has, over the decades, inadvertently grown to a point where it hits non-rich taxpayers, especially ones in high-tax states. Congress has responded by continually passing "patches" that keep the AMT from growing. Since these patches are passed generally a year or two at a time, the law assumes that the AMT will continue to grow in size and raise taxes at lower and lower income levels. The AMT is one of the differences between the budget baseline that assumes current law, and which shows the deficit falling to a modest level -- and the budget projections that assume current policy.

So according to Newton-Small, one possible deal will raise a lot of taxes, but offset the revenue by permanently fixing the AMT. That way, conservatives can say that they didn't vote for a net tax hike -- they just voted to close some loopholes and plow the revenue back into other tax reductions. This allows them to avoid contradicting their sacred pledge to Grover Norquist never to support a revenue increase.

But wait, you ask! How does this help the deficit problem?

The answer is that if you assume that Congress will continue to patch the AMT year after year anyway, then the revenue loss from that "tax cut" isn't real. You're just accounting for revenue that would be lost anyway, but paying for it rather than financing it with debt. In other words, you're turning a future assumed debt-financed tax cut into a future paid-for tax cut. That's genuine budget savings.

I still think that a grand bargain probably can't pass the House. But this kind of agreement may have a real chance.

If I had to guess right now, I'd guess that this is what Obama and Boehner are going to try to do. Obama's leaks last night about supporting a grand bargain may reflect a genuine willingness to pass a deal like that, but Obama knows full well it won't happen. He's just demonstrating that the reason the deal doesn't do more is that Republicans, not the administration, refuse to go higher. It's positioning. If there's a deal, I expect it to be something like this.

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20 comments

The likes of Tom Coburn aren't yet close to breaking the Norquistian grip on the Republican Party, so if a deal is cut between starboard and port, it will have to be along these lines.

- liberalref

July 7, 2011 at 1:16pm

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If I can't read it quickly, understand it, and reject it out of hand, there's no way that Tea Party infused types will come to a greater level of tolerance for this kind of sophistry. I think, as Herman Cain might say, it doesn't pass the "3 pages or less" rule and is a non-starter with the ultra-conservative Republicans who, in this primary season, set the terms for conservative Republicans.

- chaitless

July 7, 2011 at 1:50pm

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Love the non-grand bargain - especially AMT fix AMT is a bane to those who exercise ISOs and significant long-term capital gains. (probably no one on this blog). Hoping they blow AMT up.

- mr_rationale

July 7, 2011 at 2:06pm

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That is the least truculent post from the starboard moonbat that I can recall. Is the Heritage staffer who writes this program having down day?

- liberalref

July 7, 2011 at 2:11pm

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There's a story about a basketball team that had an incredibly long winning streak to the point where every game was tension filled with whether it would finally end. When the team finally lost a game, the coach was asked for his reaction, "Good," he said, "now we can get back to playing basketball." Raise taxes already, so we can get back to running the government.

- Nusholtz

July 7, 2011 at 2:15pm

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I still want to see how they cut $2 trillion without hitting Social Security or Medicare. It would be nice to abolish farm subsidies and I feel like a lot of the Homeland Security stuff can go, but that probably won't be the stuff that gets touched. Not that it would reach anywhere near 2 trillion anyway.

- WillPastor

July 7, 2011 at 2:20pm

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Oh, I don't know, there's something about approaching Armageddon where the fault can be laid to your door (Republicans) that concentrates the mind wonderfully. Just as there's something about the 11th hour that this House finds remarkably motivating. And if all that fails, there's something about watching our economy begin to come crashing down, when there WAS a deal it just wasn't "good enough" for the Republicans, that again is intensely motivating. Just ask Newt Gingrich.

- AllanL5

July 7, 2011 at 2:21pm

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Actually, I think it does include social security, which is in Newton-Small's reference to the CPI.

- rayward

July 7, 2011 at 3:34pm

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I'm definately in touch with my inner-Roi reading this. I'm focused on the macro here: the Republicans manage to convince the media - and Obama? - that they care about debt. Now the people who caused every bit of it have managed to set the terms of the "fix" which wil no nothing but punish people who had and have nothing to do with it. Even I know that going to back to Clinton tax rates and cutting defense would address the debt in a year. The rest is ideological thuggery and Obama's chicken shit response.

- WandreyCer

July 8, 2011 at 8:35am

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Yeah, over on another thread where I was discussing budget numbers with seattle, one of his claims led me to figure out what the numbers would look like if the 2011 so-called "discretionary" Federal budget (which means only that it is appropriated annually unlike entitlements that are based on eligibility requirements that may be adjusted from time to time but do not require annual appropriation) were the same percentages of GDP as in 2000, the last Clinton budget year. The budget documents for 2011 show that if the Bush tax cuts were rescinded, we would have $700 billion more of revenue in 2011. Discretionary (appropriated) spending would be $600 billion lower if the percentages of GDP were the same as in 2000. But, of that, $500 billion is in security/defense and only $100 billion is in everything else. The budget deficit is $1.15 trillion. So, if we had Clinton era tax rates and a Clinton era security/defense budget, we would have no deficit. Very simple. Between the increased defense spending that Bush wouldn't raise taxes to pay for, as he should have, and his completely irresponsible tax cuts, that is the current annual deficit right there. While Obama and the Republicans are busy beating the tar out of Medicare and Social Security, the current deficit in the rest of the budget is about $735 billion, the vast majority of the total. The entire non-security discretionary budget, meaning not security and not mandatory spending such as entitlements and Medicaid, is only $520 billion. That represents the entire non-defense Federal government. If we eliminated the non-defense government entirely -- no government, only an army -- it would not cover this deficit. Do we still think the failure to collect adequate taxes is not the real problem here? Unless one thinks that defense spending is out of control and should be slashed, the claim that our problem is spending, rather than Bozo the Clown's income tax structure is utter horseshit. Lies. Nonsense. Garbage. Please, someone, supply some more forceful adjectives. I just cannot think of any more right now. Meanwhile, back at the social security and Medicare ranch, I highly recommend this link for the official report on the trust fund and their status. http://www.ssa.gov/oact/trsum/index.html The trust funds actually grew last year. The 2011 deficit in social security in terms of taxes versus benefits is $49 billion. For Medicare, I believe the figure is $300 billion. But the trust fund is $2.4 trillion. The whole point of saving with the trust fund is that there are periods where the worker/retiree ration was favorable. So we saved. Then, with baby boomer retirements, it turns unfavorable. But the fact is that these two programs are entitled to run deficits now as we get into the long-anticipated dis-saving period. Long-term, the trust fund is not enough to sustain these programs by itself, but the purpose of the trust fund is not to sit forever, but to smooth out these very problems. Bottom line, if Social Security and Medicare are adjusted for long-term solvency, we still have a $735 billion deficit due entirely to the rest of the budget. Strangely enough, this is almost exactly the current cost of the Bush tax cuts. The incredible scam, in which Obama appears to be participating eagerly, is that entitlements or non-defense spending are the problem. They are not. Defense spending and tax cuts are the problem. Yet what they are negotiating to do is to take whacks out of what is neither the cause nor the solution while continuing the same feckless policies that are both the cause and the solution (if that is we reversed those feckless policies). Democrats are politically incompetent to have allowed themselves to be maneuvered into this position and to be incapable of fighting back. And the incompetence starts right at the top.

- roidubouloi

July 8, 2011 at 10:06am

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Strangely enough indeed Roi. Thanks for the final word.

- WandreyCer

July 8, 2011 at 10:30am

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My pleasure.

- roidubouloi

July 8, 2011 at 12:06pm

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Roi and Wandrey. Now that you've got a good part of the budhgetary solution--- still omitting REAL health care reform (saving another 200-400Bil/year in a few years), now how do you ever get there?? Certainly not with BHO and the Repubs in any position of real power!! you better pray constantly that bthe debt-limit talks fail-- because their success with these Bozos negotiating guarantees a Hooverian solution and an economic crisis in 6-12 months instead of now. A crisis now at least gives some hope of a progressive challenge to BHO and a Dem to vote for in 2012-- instead of a Reagan Repub vs a LaRouche Repub. And before calling me crazy, propose a solution with a better chance of ocurring and succeeeding. Note that bthe debt crisis has a VERY real chance of occurring. What that produces is highly problematic, but at least gives a little hope that voters are actually smarter than most pundits and tnr commentors.

- drofnats1

July 8, 2011 at 12:33pm

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Based on the way they are going, I do hope these talks fail and then we see who blinks. The only thing that seems promising about them is Obama upping the ante so that he can claim he actually proposed significantly larger savings than the Republicans and they balked. Frankly, anything that maintains current spending, even if it does something to social security and Medicare five years from now that we have time to undo when people start to feel it, is okay with me. Since the Republicans won't accept entitlement cuts, revenue increases, or defense cuts, the only thing they will accept is massive cuts to nutrition and medical care for the poorest and the decimation of the entire rest of the Federal government. If that is the price, I do hope the talks fail. I have written that I think we can continue to pay the bills without lifting the debt ceiling, but even if we don't, I would rather the country experience the turmoil that results and make a decision at last about whether our future is to be the savage Republican extremism or not. These frauds have been hiding for far too long behind lies. A real crisis would expose them for what they are.

- roidubouloi

July 8, 2011 at 1:04pm

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The only answer on health care is some form of single payer. It is not Medicare that is out of control, but the entire health care system. Medicare costs are better controlled than private costs.

- roidubouloi

July 8, 2011 at 1:05pm

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Roid, great insights and information. I remain concerned for two reasons: 1. I'm less confident than you seem to be that a crisis would expose Republican extremists "for what they are." So far they've played what should be a losing hand--Republicans' responsibility for the mess we're in--very well. Or perhaps better to say that Obama has played his hand poorly, or (as you've suggested) has failed to even try to play a hand that would have put them on the defensive. Would this pattern change even in the face of a crisis? 2. On the other hand, if Obama cuts a deal that satisfies those extremists, it leaves the country and the economy in such bad shape that it hurts the prospects for positive changes going forward. I do realize that Obama might conceivably be outmaneuvering them, as per your observation about his upping the ante. Still, I'd welcome you or anyone else telling me why my concerns are ill-founded.

- Thunderroad

July 8, 2011 at 1:31pm

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Plus slightly lower Soc Sec benefits and slightly higher taxes for everyone (Soc Sec and income) based on a different inflation index. Right, or don't we read the newsapers? Still not a bad deal, although once again the rich will benefit (slightly) at the expense of the rest of us. Something has to be done and nobody gets a free pass.

- mlottman

July 8, 2011 at 1:36pm

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I wouldn't disagree with you, thunder. But a deal that makes cuts without revenue increases is a lousy deal, and any deal that makes current spending cuts is an awful deal. Guaranteed to increase unemployment, prolong the recession, and perhaps lead to defeat in 2012. A trade off of some significant revenue increases for future cuts, even in ss and medicare (to be undone later if possible), is livable. I deal of cuts without serious revenues or with any significant current cuts is a disaster politically and as policy. Gotta hold the line somewhere.

- roidubouloi

July 8, 2011 at 2:23pm

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We need to have a backup plan, since a deal appears unlikely. Just vote on raising the debt ceiling, with deficit reduction to be a big issue in the 2012 campaign. Just say "we obviously can't agree, since the Repubs definition of compromise is.............Republican policies. So we'll take our competing visions to the voters in 2012." I would love that argument, as it's our balanced sensible approach versus their slash Medicare, Social Security, and especially Medicaid, as well as transportation, education, and basic research. You may object that the Repubs have said they won't vote to raise the debt ceiling without a budget deal. I think about 90% of House Repubs won't, but we only need 10% plus the Democrats.

- bjones

July 8, 2011 at 3:55pm

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Roid writes: "The budget documents for 2011 show that if the Bush tax cuts were rescinded, we would have $700 billion more of revenue in 2011." $700B per year of additonal revenue? You are way off on that. WaPa "fact checker" says "Tax cuts are estimated to have totaled $2.8 trillion" over the years 2001-2011. That's about $280B a year. Of that, $70B are tax cuts for wealthy, the rest are tax cuts on middle class. These are CBO numbers. That's in line with the round number stored in my head of $300B/year. Can you clarify? More of your basement spreadsheets? :) www.washingtonpost.com/blogs/fact-checker/post/revisiting-the-cost-of-the-bush-tax-cuts/2011/05/09/AFxTFtbG_blog.html

- seattleeng

July 9, 2011 at 3:39am

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