Fiscal Cliffhanger
The GOP’s goal is clear: no permanent tax increase without tax and entitlement reforms.

Central fiscal-cliff players Harry Reid and John Boehner


James C. Capretta

If this becomes the vehicle for the next stage of negotiations, it’s clear what Republicans should seek: a temporary, rather than a permanent, rise in the top rate. They could argue, reasonably, that because there is no ten-year spending plan, there shouldn’t be a permanent tax hike either. Indeed, the whole point of the kick-the-can option is to buy time for more stable agreements to be hashed out over tax and entitlement policies. If a permanent tax hike is put in place, there would be no incentives for a broader deal to be reached.

The other possible scenario is the reemergence of a “grand bargain”–type plan, or at least a modest version of it. That was what Speaker Boehner and President Obama were discussing a week ago when optimism was running high. The broad outlines of that deal were relatively clear: Republicans agree to raise the revenue baseline by $800 billion (Boehner’s offer) to $1.2 trillion (the president’s offer), and in return the Democrats agree to secure that revenue through a tax-reform plan (not just tax-rate increases) and to produce entitlement reforms totaling $600–$800 billion. In addition, defense spending would be cut again, as well as non-defense appropriated accounts, even as the sequester cuts were turned off.

In theory at least, this kind of deal should be far more appealing than going over the cliff, because it would mean a real possibility for entitlement reform, and because the revenue hike, which is inevitable now that the president has been re-elected, would be achieved with a better law instead of damaging rate hikes. For Republicans, it’s hard to see a better way forward in 2013 than that.

But Republicans should entertain this kind of agreement only if the enforcement mechanisms are designed properly. More specifically, if in 2013 a tax reform plan does not emerge, then whatever rate hike on the rich was imposed to avoid the fiscal cliff should be turned off. In other words, no tax reform means no revenue increase.

Similarly, it’s imperative that Republicans not enter into a budget agreement without an ironclad assurance that it will result in real entitlement reform, which does not mean deeper and more irrational cuts in Medicare’s regulated payment systems for hospitals, nursing homes, physicians, and others. Real entitlement reform means bringing better consumer incentives into Medicare and giving states meaningful authority to run Medicaid on a predictable and more affordable budget. This is not an agenda Democrats will ever be inclined to support, but it’s the only reason Republicans should ever be willing to give on taxes. If there’s no entitlement reform, there’s shouldn’t be a budget deal either.

To ensure that is the case, the enforcement mechanism for entitlements must be drawn up the right way. The easiest way to figure out what that means is to consider the wrong way to do it. At least one press story on the Boehner-Obama talks of a week ago indicated that if there was no bill on entitlements in 2013, the draft agreement would have enforced cuts in entitlements in a manner entirely acceptable to the administration. If that was indeed what was planned, it would have been a terrible deal for Republicans. If the Obama administration can live with the automatic cuts in Medicare that are intended to force agreement on alternative legislation, the administration will never agree to more fundamental reforms of the program (such as described in this piece). It’s also a clear indication that the automatic cuts would be designed to look like the provider cuts that were enacted in Obamacare and that do nothing to change the basic spending dynamics of the program. Republicans must never agree to such a deal.

The right kind of entitlement enforcement structure is one that is equally unacceptable to both sides, thereby putting pressure on both to reach a legislative agreement. It’s easy to imagine what this would mean: in provider payments, deep cuts of a size that could not be absorbed easily (such as the 30 percent physician-fee cut scheduled for January 1); and large, automatic increases (such as increases in deductibles) in what the beneficiaries must pay for services. If such provisions were scheduled to go into effect in 2014 absent real entitlement reform in 2013, then Democrats might actually move toward an agreement.

Republicans are prone to self-inflicted wounds, and last Thursday was surely that. But this story is far from over. The GOP still has time to pull itself together and fight for a decent outcome in this struggle. Is it possible that a budget plan will emerge that will excite Republicans? No. But if they negotiate smartly, they can still make it clear to the president that he will never get the permanent tax increase he seeks unless he agrees to the fundamental tax and entitlement reforms that the country desperately needs.

— James C. Capretta is a fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.