A Bad Budget Deal: Higher taxes now for notional reform later is worse than nothing.

By WSJ, Editorial

It’s clear by now that the budget talks are drifting in a drearily familiar Washington direction: Tax and spending increases now, in return for the promise of spending cuts and tax and entitlement reform later. This is a bad deal for everyone except the politicians who want more money to spend.

Consider the tax increase now being touted as a sign of “compromise.” Speaker John Boehner has moved from opposing higher tax rates to offering higher rates for incomes above $1 million a year. While that’s better than the scheduled increase on incomes above $200,000 a year (for singles), it would still put the GOP on record as endorsing a tax increase, in particular on small businesses that file individual returns.

President Obama has countered with a ceiling of $400,000. If they compromise at $500,000, we are all supposed to thank the two sides for their reasonableness. Yet both parties will have declared that raising tax rates is no big economic deal. This will hurt the economy, and it further advances Mr. Obama’s political goal of separating the middle class from the affluent on tax policy.

What about tax reform next year? A final judgment on this prospect depends on the fine print, but it’s already looking grim. The GOP has prepared the ground for a genuine tax reform, on the Simpson-Bowles model, that lowers rates in return for fewer deductions. In what is shaping up as this budget deal’s prototype, tax reform looks like it means both higher rates and fewer deductions.
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This isn’t reform. It’s another tax increase next year disguised as reform. The Fortune 500 CEOs who are lobbying Republicans don’t mind because they hope to get a cut in the corporate tax rate. But small businesses will be stuck with a huge immediate tax increase, at least until their owners can scramble to reorganize as corporations instead of Subchapter S companies or LLCs.

As for spending cuts or entitlement reform, these look notional at best. The only tangible agreement that has been leaked so far is to calculate future tax brackets and entitlement benefits based on “chain-weighted CPI.” This is a more accurate measure of inflation than is currently used and we support it, but it is a small change worth perhaps $270 billion over 10 years.

It is also in part a tax increase ($95 billion over 10 years). Indexing tax brackets for inflation prevents taxpayers from paying higher tax rates unless their real earnings rise. As Steve Entin of the Tax Foundation notes, raising the income thresholds by less each year means more “bracket creep” into higher tax rates for more taxpayers. So even chained CPI is less entitlement reform than meets the eye. All the more so because the White House is even trying to rig this calculation based on income.

Mr. Obama has agreed to nothing else that is serious and specific. House Democrats have already declared that increasing the benefit age for Medicare to 67 from 65 is off the table, and the White House won’t negotiate on Social Security or even, according to the latest leaks, Medicaid. Even if Mr. Obama agrees to income-testing for affluent Medicare recipients, this means another tax increase if it comes in the form of premium increases.

None of this is anywhere close to the reforms that might slow the pace of health-care spending, which everyone agrees is the biggest fiscal problem. Look for Mr. Obama to pocket the immediate tax increases, then next year demand another tax increase in return for token entitlement reforms.

The biggest insult to the public’s intelligence is Mr. Obama’s demand for more spending now. We thought this exercise was about deficit reduction. But as always in Washington, the method is to put deficit “savings” into the future as part of a fanciful 10-year budget estimate while adding to the deficit in the near term by spending more now.

Mr. Obama wants an extension of jobless benefits worth $30 billion a year, plus $50 billion for public works (at union wage rates). He also wants to lift the sequester—the automatic spending cuts set to hit on January 1. And he wants the debt limit increased for at least two years, if not permanently. Oh, and he wants a permanent fix for the Alternative Minimum Tax that Democrats invented but now threatens blue-state middle-class voters.

Remind us again what achievement the Tea Party Republicans could point to in all this? A smaller tax increase than Mr. Obama wants, as long as Republicans put their fingerprints on it too? Congratulations.

By Tuesday afternoon, even Mr. Boehner seemed to be throwing up his hands. His plan seems to be to pass a House bill extending the current tax rates for everyone who makes less than $1 million and tossing that to the Senate. Democrats will then have to decide to accept or pass their own bill that extends the rates only for those making less than $200,000. Either way we get a tax increase without tangible progress on the spending problem.

Mr. Boehner is certainly in a tough spot, with tax rates set to rise on January 1 if Congress fails to act. His fellow Republicans haven’t helped by whining about their lack of “leverage” and publicly negotiating with themselves over the terms of their tax surrender.

We think they have more leverage than they believe if they are willing to fight on taxes into next year. But if they’re not, at least they shouldn’t associate themselves with a deal that increases spending and taxes with little or nothing tangible in return.

Let Mr. Obama own the tax increase and its measly 7.5% annual reduction in a $1.1 trillion deficit. Let the sequester take effect as planned, which at least means some spending restraint. Then engage Mr. Obama next year in trench warfare over spending and the debt limit as voters figure out that soaking the rich doesn’t begin to solve the problem. A bad budget deal is worse than no deal at all.

A version of this article appeared December 19, 2012, on page A18 in the U.S. edition of The Wall Street Journal, with the headline: A Bad Budget Deal.

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