A Rigged Debt Deal

Obama has a plan to make sure the rich get taxed.

President Obama’s interpretation of the debt-reduction deal he made with Congress twists the terms to favor entitlement programs and assure higher taxes on the rich. A White House “fact sheet” on the deal reveals these crafty terms showing Obama’s attempt to rig the agreement. Obama’s fiscal fancies, however, conflict sharply with approaches other countries have used successfully to rein in debt.

Actions by England and Sweden have shown dramatically that cutting spending worked better than raising taxes. They found that deficit and debt can be reduced by cutting, not boosting, taxes. A new study by the Tax Foundation, released July 29, notes that international experiences have occurred quite similar to the recent drawn out, bitter struggle involving Congress and the White House over raising the nation’s debt ceiling.

The agreement at the final hours prior to a probable default on the U.S. credit included the promise to create a special congressional debt committee. Its task is to handle the hot potatoes of entitlement reforms, such as for Medicare and Social Security, cuts in sensitive government programs, and possible tax reforms.

The tough budget cuts will be handed to this special committee made up of six Democrats and six Republicans, who will have to recommend debt reductions of $1.5 trillion over 10 years and report back to Congress by Thanksgiving. Congress is supposed to act on the recommendations by Dec. 23.

Studies have been made by Goldman Sachs (GS) and the European Central Bank (ECB) comparing the experiences of countries which have tackled the complex task of bringing under control debt and deficit problems like those of the U.S. The conclusions of the two studies are “remarkably similar,” Tax Foundation Economist David Logan explained.

Spending cuts are more effective than tax hikes, the Goldman Sachs Global Economics Paper No. 195 in April 2010 stated. Deficit and debt reduction can occur while taxes are being cut, according to the European Central Bank working paper No. 634, May 2006. “Perhaps the most striking and counterintuitive result of the literature is that spending cuts and tax decreases can yield a successful reduction of a nation’s deficit and debt.” According to the 2010 Goldman Sachs report, since 1975, some 20 countries have needed large deficit/debt reductions. Reductions driven by “government expenditure cuts, rather than tax increases...proved successful.”  Each “positively affected the deficit, reduced public debt, generally boosted economic growth" and resulted in “significant bond and equity market performance.” Is anybody listening?

In contrast, the deficit/debt reduction attempts driven by tax increases typically failed to correct imbalances and, furthermore, generally proved damaging to growth. “Successful episodes were three and a half times more likely to use tax decreases than increases. Contrary to the conventional wisdom in the United States, the international experience indicates that pairing spending cuts with tax cuts produce meaningful debt reduction and improved economic performance,” Logan concluded in his report.

The so-called fact sheet released by the White House declared up front: “The President will insist on shared sacrifice from the most well off and those with the most indefensible tax breaks.” The enforcement mechanism in the agreement will trigger spending reductions beginning in 2013—split 50/50 between domestic and defense spending.

“Enforcement,” the White House fact sheet said, “protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.” That would eliminate an unidentified raft of programs that subsidize the poor from the budget-cutting knife.

The deal, said the fact sheet, includes funding an Obama favorite -- the Pell Grants -- a maximum award of which is $5,500. For 9 million students, that would be $49 billion. Pell grants, unlike regular college loans, never have to be repaid.

If the powerful 12-person debt-reduction committee “took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education.” Steep defense cuts possible in the sequester process would be “very high risk,” according to field commanders.

The White House fact sheet further states: “The Deal sets the stage for Balanced Deficit Reduction with the President’s values....And the President will demand that the committee pursue a balanced deficit reduction package where any entitlement reforms are coupled with revenue-raising tax reform that asks the most fortunate Americans to sacrifice.” (There he goes again.)

“The Enforcement Mechanism Complements the Forcing Event Already in the Law—the Expiration of the Bush Tax Cuts—To Create Pressure for a Balanced Deal: The Bush tax cuts expire [Obama can hardly wait] as of 1/1/2013, the same date that the spending sequester would go into effect. These two events together will force balanced deficit reduction. Absent a balanced deal, it would enable the President to use his veto pen to ensure nearly $1 trillion in additional deficit reduction by not extending the high-income tax cuts.”

You can see him just rubbing his hands together with relish. With such failed policies in store, it is doubtful America will be on the road to recovery anytime soon.