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November 22, 2012

What Congress Should do About the 'Fiscal Cliff'

By

After two years of fiscal dysfunction, President Barack Obama and congressional leaders are, finally, discussing the major budgetary matters they should have resolved months ago: How to avoid driving the economy over the "fiscal cliff."

Key features of that cliff are huge tax hikes and devastating cuts in defense spending — both slated to take effect automatically right after the New Year.

The tax increases — collectively known as Taxmageddon —would extract nearly $500 billion from individuals and private businesses in 2013 alone, risking another recession.

The reduction of $492 billion in defense funds over 10 years — coming on the heels of two straight years of massive Pentagon cuts — will both gut ongoing modernization programs and undermine basic force readiness.

Even with so much at stake, and the tendentious campaign season now passed, a philosophical chasm still separates Democrats from Republicans seeking to resolve these problems.

Both sides will be tempted either to engage in more high-wire brinksmanship, or to resort to some deus ex machina that lets them further postpone any serious, lasting solution for a few more months.

But gimmicks or political games would be as fruitless as the choices that brought them to this point.

Instead, lawmakers should pursue the following simple and sensible aims: Preclude Taxmageddon and any other tax hikes; prevent the defense cuts; and establish a foundation for addressing the larger spending and tax problems looming ahead through the regular practice of congressional budgeting.

To reach a serious solution, Congress must embrace four basic understandings about fiscal policy.

First, the so-called "balanced" approach to deficit reduction —mixing spending cuts and tax increases — rests on a false premise.

Budgeting requires living within one's means, not increasing those means to satisfy excessive and unsustainable spending. Spending is the reason the government taxes and borrows; it is therefore the root cause of all other fiscal consequences. Shrinking deficits means cutting spending — period.

Second, the scheduled 10 percent reduction in defense spending (called "sequestration") already has sown uncertainty in the defense industry, with contractors now announcing large layoffs.

Letting the sequester actually occur in this core constitutional duty of the federal government would further threaten the readiness and morale of the world's finest troops. This must not happen.

Third, lawmakers cannot force themselves to reach an agreement they don't want to reach. The across-the-board spending cuts looming in January result from an automatic enforcement regime Congress itself included in last year's debt ceiling deal — the ironically named Budget Control Act. The intent was to create a mechanism so onerous that it would force lawmakers to find alternative reductions.

How's that working out? Not so well.

The House, to its credit, did develop and pass an imperfect but credible alternate plan. The Senate didn't bother, however, and neither did the president. Thus Congress and the White House are barreling toward a budgetary precipice of their own making. No process can make Congress take its budgeting and governing responsibilities seriously. Legislators must choose to do so — and then make their existing procedures work.

Fourth, Congress desperately needs to restore a regular practice of budgeting, as required by law. Some lawmakers complain the "budget process is broken," but they're the ones who broke it through deliberate neglect. Although the House has adopted meaningful budget resolutions, the Senate's refusal to pass a budget in more than three years has all but emasculated Congress as a governing institution.

It also has enabled and encouraged lawmakers to adopt incoherent tax and spending practices that have destabilized fiscal policy.

This has come at the worst possible time, with a tsunami of entitlement spending approaching.

As Medicare, Medicaid, and Social Security swallow up ever greater shares of federal resources, other essential activities such as national defense will go begging — or will have to run on borrowed money forever, worsening the country's mounting debt crisis.

Only substantial policy reforms can tame this uncontrolled spending. They are best achieved through stable, reasoned, deliberative budget procedures — which already exist. Congress simply needs to employ these practices. That will happen only if lawmakers have the will.

Finish unfinished business

Following these principles, Congress should address the immediate problem, without further complicating the situation.

Preclude Taxmageddon . Congress should extend all current tax policies permanently. Temporary tax rates (i.e., those that come with expiration dates) generate economically debilitating uncertainty among businesses and consumers. What's needed is stability (and sanity) in fiscal policy.

Nevertheless, if lawmakers fail to achieve a permanent resolution, they should extend all current tax policies for no less than a year — and with the aim of establishing a foundation for tax reform.

Prevent the defense sequester. Again, the best solution is a permanent one: adopting a set of spending reductions to replace the entire $492 billion of indiscriminate cuts facing the Pentagon.

If, however, a full substitution is too heavy a lift, Congress should replace the first year's $55 billion. Lawmakers do have all the tools they need to identify adequate savings.

The Heritage Foundation has identified a pool of $150 billion in potential savings Congress could tap to replace the 2013 defense cuts. Other savings options surely are available as well.

Do not raise taxes . In addition to extending current tax policies, lawmakers should reject any other proposals to raise net taxes.

A tax "increase" occurs any time a change in tax law results in a net revenue increase to the federal government from the same level of economic activity. This is different from a change in tax policy that yields higher revenue due to improved economic performance.

Reject "grand bargains" and chimerical "bridges." Both on and off Capitol Hill, budgeteers are conjuring special, ad hoc procedures to dodge the fiscal cliff coupled with another new process leading toward a "grand bargain" on deficit reduction.

Though offered by earnest people with long experience in federal budgeting, such frameworks or bridges should be resisted. They do not work, and they simply give lawmakers cover to neglect their normal budgeting practices and further delay the serious policy choices needed to get spending under control.

Then, return to regular budgeting . Besides, Congress already has a suitable mechanism for doing the work that needs to be done. It's called a budget resolution. To have any chance of controlling long-term spending, Congress must get back to this sound, regular practice of budgeting — starting now.

Fix the problem, move on

The fast-approaching fiscal cliff results directly from willful fiscal malpractice.

Lawmakers face it — and other urgent issues (such as the need for another "doc fix" for Medicare physicians, and the expiration of extended unemployment benefits) — with no overall budget plan to guide their choices.

Congress should act, but stay focused: Prevent the steep defense cuts and huge tax hikes hanging over the country, and establish a stable foundation for tackling the much bigger fiscal challenges ahead.

-Patrick Louis Knudsen is the Grover M. Hermann senior fellow in Federal Budgetary Affairs at The Heritage Foundation.

First appeared in The Detroit News.

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