In a sense, the raging debate over the “Gang of Six” plan to raise the debt ceiling is much ado about nothing. After all, there’s virtually no substance to the plan. It talks a good game about deficit reduction, but never says how it will do it.
For example, the sparse, five-page document promises “tax reform” that will deliver $1.5 trillion in real tax relief. It suggests some good policy changes here, such as rate reductions and corporate tax reform.
But “real” tax relief is not the same as “net” tax relief. The Gang also suggests “reforms” to generate an additional $1 trillion in revenues for the general treasury, plus another $133 billion for the Highway Trust Fund.
And that’s just for starters. The plan’s cloudy language masks the fact that, by accepting CBO baseline assumptions, the Gang proposes letting the Bush tax cuts expire. This would hike taxes an additional $3.8 trillion. Add it up and we find that the plan would raise taxes by as much as $4.9 trillion and give $1.5 trillion back. In Gangland, “real tax relief” is actually a net $3.4 trillion tax hike.
Realizing that some of us might object to socking a struggling economy with an even heavier tax burden, the Gang says not to worry. Not one thin dime of the additional tax revenues will go to new spending, they promise. It will all be used to pay down the debt. Riiight! Promises are easy to make, and in D.C., routinely broken. By definition, every extra dollar of tax revenue permits an extra dollar of spending.
The plan presents a clear goal: reducing the deficit by $3.7 trillion. But there the clarity ends. How will it hit this target? By spending cuts? More tax hikes? A combination of both? It’s anybody’s guess, because the plan presents absolutely no overall spending target. All is says is that it will hit its deficit reduction goal through a three-phase process.
Phase One is what they call an “immediate aggressive deficit reduction down payment” of $500 billion. Is that spending cuts or “immediate aggressive” tax hikes? They don’t say. And how soon is “immediate”? Will any cuts be made this year? Next year? When would the tax hikes kick in? Or will it all happen sometime in the immediate, post-2012-election future?
Phase Two calls for various congressional committees to start fleshing out actual spending cuts, tax hikes and budget process reforms. Basically, it’s a plan to have committees come up with plans that have eluded them for years. There are no guarantees that any plan will be developed, much less approved and implemented.
Phase Three is even more vague. The goal of this phase is to make Social Security solvent within 75 years. The Gang inserts a major caveat here: Congress, they say, can proceed to this phase only after Phase One has passed the Senate. This proviso means Congress can’t lift a finger to save Social Security until they reduce the deficit by a half-trillion (even though Social Security is contributing more and more to the deficit with each passing month).
Equally troubling, the Gang offers no guidance on how Phase Three should fix Social Security. It’s entirely possible to “fix” Social Security in a way that would significantly increase the debt. Yet this alleged deficit-reduction plan doesn’t rule that out.
Instead, the Gang inserted a proviso in Phase Three that constitutes a poison pill for the entire plan. It stipulates that, unless the Phase Three Social Security fix (whatever it is) passes the Senate with at least 60 votes, the previous (Phase One) deficit-reduction bill becomes null and void. If this is the case, why offer the bill at all?
What the Gang of Six has presented is more Rorschach blot than plan. Conservatives can view its vague language as a commitment to cut spending and taxes. Liberals can see in the same sentences a clear call for higher taxes and spending.
At the end of the day, this inkblot signifies nothing but risk. Risk that spending won’t be cut now or in the future. Risk — make that a likelihood –that taxes will go up, further depressing the economy. Risk that this vacuous document will once again let Congress shrink from making the transformational budgetary reforms needed to put the nation on a sound economic and fiscal path.
The Gang of Six plan does offer one certainty, however. Its lack of clarity and substance guarantees that it will not “>meet the Moody’s test for ensuring a AAA credit rating. Should lawmakers embrace this plan, they can kiss that credit rating — and favorable interest rates — goodbye.
— Alison Acosta Fraser is director of the Heritage Foundation’s Roe Institute for Economic Policy Studies.