WASHINGTON -- After bailing out a global financial crisis, enacting a series of major tax cuts for the wealthy and waging two unpaid-for wars, the U.S. government is some $16 trillion in debt. Now, in exchange for paying off a bit of that debt by returning some of the tax rates to their previous levels, Democrats have offered, in a series of high-profile negotiations, to slash trillions in spending, much of it hitting the elderly, the poor and the middle class. This process of transferring wealth up the economic ladder is known in Washington as a "grand bargain."
With the election over, Democrats and Republicans will soon be back at the negotiating table, driven there by the so-called "fiscal cliff" -- the moment in January 2013 when the Bush-era tax cuts expire and automatic cuts to defense and social programs take effect.
In order to avoid this scenario, President Barack Obama is proposing a grand bargain that would reduce the deficit by $4 trillion over 10 years, relying on a 3-to-1 mix of spending cuts and revenue increases.
Republicans, meanwhile, have rejected including new taxes, but are open to negotiations. What exactly will be on the table when the two sides sit down? Surprisingly, we can predict with a high degree of certainty just which programs will come under attack. A raft of articles and books have been written about last year's series of failed deficit negotiations, most importantly Bob Woodward's "The Price of Politics" and David Corn's "Showdown," offering a roadmap of where the talks are most likely headed.
Last year's talks demonstrated just how little fat the federal government could trim away from its budget before impacting the services and benefits it provides. All in all, Republicans and Democrats found only $40 billion that they agreed could be saved by targeting waste and fraud in government operations.
To make a real impact on the deficit, agricultural subsidies and oil and gas giveaways may also face the chopping block now. But more than anything, lawmakers will likely target Social Security, Medicare, Medicaid and a host of other social programs that help those with the fewest advocates in Washington, including people on food stamps, veterans, retiring federal workers, home health care workers and the elderly.
Seventy percent of voters, however, prefer a more balanced approach to deficit reduction than the deep, across-the-board cuts that the GOP has advocated, according to a new survey conducted by two progressive groups, Democracy Corps and the Campaign for America's Future. They support eliminating waste and tax breaks for special interests while also investing in critical areas like education and worker training programs to spur long-term growth.
Washington's establishment considers a grand bargain to be as necessary as it is prudent and responsible. Regular people, however, don't see it as a bargain at all. The details show why.
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Under the Budget Control Act of 2011, the law setting up the fiscal cliff, Congress placed caps on the federal government's discretionary spending starting in 2012 and running through 2021. According to the Center for Budget and Policy Priorities, those caps will force the U.S. to cut its nondefense discretionary spending by $900 billion over the next decade.
The caps do not specify which programs or departments will bear the brunt of the forced savings. Instead, Congress must exercise its discretion in passing either a yearly budget or a series of appropriations measures.
During the 2011 budget talks, both Republicans and Democrats targeted military and federal employee pension programs as prime spots to trim back. According to House Majority Leader Eric Cantor (R-Va.), in the talks Vice President Joe Biden led, the parties agreed to $36 billion in cuts to federal employee pensions, as well as an additional $11 billion from military retirement plans over 10 years. The White House proposed slashing as much as $40 billion from pensions in a draft it sent over to the speaker's office that July.
The ease with which both sides acquiesced to cuts from retirement programs gives a strong indication that these programs could become fodder again in the deficit negotiations.
Republicans have also focused on food stamps as a target for cuts. Last year, Cantor said he had identified $20 billion that the federal government could save by eliminating fraud from the Supplemental Nutritional Assistance Program. (Democrats, however, argued that the real number was closer to $2 billion.) And House Budget Committee Chair Rep. Paul Ryan (R-Wis.) slashed SNAP funding by $127 billion over the next decade in his 2011 budget.
If the cuts took effect in 2015, as Ryan proposed, 10 million Americans would lose their eligibility in the following seven years, the Center for Budget and Policy Priorities found.
In September, Congress failed to pass a new farm bill, in part due to disagreements over how much to cut from SNAP. The GOP-controlled House attempted to slash food stamps by $16 billion over the next year alone during negotiations, whereas Senate Majority Leader Harry Reid (D-Nev.) and the Senate Democrats limited the SNAP cuts to $4 billion over the next year.
Still, the food stamp program remains a likely place where lawmakers will seek to find savings this fall.
A proposed rollback of agricultural subsidies also gained traction early in the 2011 deficit reduction dialogue, with lawmakers and the White House eying between $20 billion and $30 billion in cuts.
In the end, Congress was unable to pass a new piece of farm legislation before disbanding for the 2012 election, tabling many of the disagreements over what forms agricultural subsidies will take in the near future. But the need for reform is clear.
Between 1995 and 2010, the top 10 percent of farmers collected a whopping 74 percent of subsidies. The Department of Agriculture is projected to spend $22 billion in 2012 to prop up farms, many of which look more like commercial corporate operations than the idyllic vision of a small family-operated plot.
Farm subsidies will certainly be on the table in future budget negotiations, and in this instance, the disagreements may stem from a geographic divide rather than a partisan one.
The biggest chunk of savings from non-defense discretionary spending, however, is likely to come from reducing non-entitlement health care spending. Overall, the two parties have been rather far apart on how much to pare down health care spending.
In a July 2011 presentation to Obama and Democratic leaders, Cantor argued for as much as $300 billion over the next decade in health care cuts. At the time, Obama pointed out that Democrats had come up with a much less significant figure -- savings closer to $200 billion. But the two sides did both agree to cut $50 billion from home health care programs and found another $17 billion by whittling down spending in other areas.
Even if Congress cuts health care spending aggressively, however, long-term deficit reduction requires controlling the growth of the entitlement programs: Medicare and Medicaid.
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Medicare served as one of the key stumbling blocks during the 2011 budget negotiations. Given that the program is predicted to continue to grow as a percentage of GDP over the next decade, Republicans demanded serious structural reforms to the program itself.
Ryan proposed turning the health care program into a voucher system. Under his plan, seniors would receive a set amount of money each month with which to purchase their own benefits on the open market.
The voucher system, however, would put more financial strain on the nation's seniors, in both the short and long term, critics charge. Medicare provides seniors with better value for their dollar than private insurers can. And if health care costs rise at a faster rate than the value of their vouchers, as the Congressional Budget Office projects, seniors who often have no outside income would be forced to pay more and more out of pocket.
Ryan's plan met with resounding opposition from Democrats and proved one of their rallying points against the GOP ticket after Republican presidential candidate Mitt Romney chose the Wisconsin congressman as his running mate. The public also disapproved of the plan overwhelmingly, according to a Washington Post/ABC News poll.
During the 2011 negotiations, the House GOP leadership lobbied for significant reforms on par with what Ryan was proposing, but they were also willing to look at savings that wouldn't fundamentally alter the Medicare model.
To achieve significant and long-term savings, they proposed raising the eligibility age from 65 to 67, means-testing benefits further, using systematic research to prioritize effective treatments and increasing premiums on seniors.
Democrats agreed to make cuts around the edges but were less than amenable to large-scale changes. Repeatedly, they told GOP lawmakers that they would consider more ambitious reforms only if increased revenues were also on the table.
On Medicaid, too, Republicans asked for serious structural reforms, and Democrats again asked for revenues before cutting back on benefits.
But the White House did give some indication that it would be willing to broker a compromise on Medicare. During his talks with House Speaker John Boehner (R-Ohio), Obama allowed that he could be open to raising the eligibility age to 67 and to increasing premiums for those seniors in the highest income brackets.
Given how much Congress has already cut from discretionary spending, Medicare's eligibility age, means-testing and higher premiums are all likely to be discussed when budget negotiations resume. The general public, however, is strictly opposed to structural changes to the program. According to the Democracy Corps/Campaign for America's Future poll, 79 percent of voters think it is unacceptable to cap Medicare grants and force seniors to pick up the difference, as Ryan's voucher system would require.
Although Social Security is not slated to become a black hole in the federal budget in the same way that Medicare and Medicaid would, the GOP has pushed to cut back the program as well.
Obama and congressional Democrats stood firm against most of the proposed reforms, but did allow some incremental savings and for the Consumer Price Index to be recalibrated in a way that slows the growth of retirement benefits. (AARP has already spoken out against such a change.)
On Wednesday, however, Reid took to the cable news shows to reject any notion that the Senate would touch Social Security in its efforts to avoid the fiscal cliff.
"We're not going to mess with Social Security," he said.
The majority of voters side with Reid: 65 percent see any proposal to recalculate the inflation index for Social Security benefits as unacceptable, according to the Democracy Corps/Campaign for America's Future poll.
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Throughout the negotiation process last year, Republicans refused to give on increasing taxes on the wealthy. The Biden-led talks, the supercommittee and, ultimately, the Obama-Boehner talks all foundered over this issue. Under the auspices of Grover Norquist's no-tax-increase pledge, Republicans found themselves against a wall when it came to increasing the money flowing into the federal coffers.
"Medicare, Medicaid ... everything should be on the table, except raising taxes. Because raising taxes will hurt our economy and hurt our ability to create jobs in our country," Boehner said when discussing the deficit reduction process on CBS in May 2011. He repeated the vow the day after the 2012 election.
Cantor pulled out of negotiations with Biden over the revenues issue, claiming that nothing with a tax increase would make it through the House.
“As it stands, the Democrats continue to insist that any deal must include tax increases,” Cantor said in June 2011. “There is not support in the House for a tax increase, and I don’t believe now is the time to raise taxes in light of our current economic situation. Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue.”
But just over half of Americans think that any deficit reduction plan should include new revenues, according to the Democracy Corps/Campaign for America's Future survey. A full 70 percent are open to raising taxes on the wealthiest 2 percent of earners, a measure that the president has lobbied for.
Cantor allowed that the House GOP would look at closing some tax loopholes and offsets. The home mortgage deduction could be eliminated for individuals purchasing second homes, saving the federal government $20 billion over 10 years. They scrounged up an additional $20 billion from limiting the deduction amount for the highest earners.
On the corporate front, the GOP could give on the much-touted tax cut for corporate jet owners -- which totals a paltry $3 billion in deferred revenue over 10 years -- and on the $20 billion in oil and gas subsidies.
In exchange, they sought additional tax breaks for corporations to offset the savings.
"I said yes we can do something on loopholes, but it has to be revenue neutral," Cantor told the president and congressional leaders on July 10, 2011. "If you need to do something on billionaires and corporate jets, etc, for $3 billion, then fine. Let's just find an offset, use it for some further tax relief."
Democrats, who had agreed to the mortgage deduction and the corporate loopholes, could not stand for the revenue-neutrality scheme. Rep. Chris Van Hollen (D-Md.) wanted to be more aggressive on limiting itemized deductions for the nation's wealthiest. He proposed eliminating them entirely for those making more than $500,000 a year. The White House, on the other hand, came in with a more modest proposal: cap itemized deductions at 35 percent for the highest income brackets to generate an additional $130 billion in revenue.
But none of these loopholes or deductions touched on the biggest source of revenue -- the expiration of the Bush-era tax cuts at the end of 2012.
In an April 2011 speech at George Washington University, Obama decried the Bush-era tax cuts for putting the nation in its current deficit predicament.
"We increased spending dramatically for two wars and an expensive prescription drug program -- but we didn't pay for any of this new spending," he said. "Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -- tax cuts that went to every millionaire and billionaire in the country."
Letting those tax cuts expire would drive around $1 trillion in revenue over the next decade, making up over 80 percent of the windfall needed to avoid the automatic cuts to government spending that are set to take effect next year. Some Democrats have called for letting the entire package of tax cuts expire at the end of 2012, but doing so would raise taxes on the middle-class family by an average of $3,000 in 2013 alone -- which lawmakers on both sides are loath to do in the midst of a slow economic turnaround.
To that end, the White House and leading Democrats have pushed to decouple the tax cuts for the low and middle classes from those for the highest earners.
The decoupling measure proved to be toxic for Republicans during the 2011 talks. They described it as a blatant attempt to hike taxes on the wealthy and refused to accept it.
Add to that the 2010 estate tax cut, which is also set to expire by Jan. 1, sending the rate back to its significantly higher Clinton-era level. Currently, the tax only applies to the heirs of fewer than 0.3 percent of Americans. Still, conservatives are fighting to keep the estate tax at its currently low level, and Sen. Orrin Hatch (R-Utah) is pushing to get rid of it entirely. During the 2011 talks with Biden, Sen. Jon Kyl (R-Ariz.) told the group that the GOP would fight any attempt to raise it.
The Bush-era tax cuts and the estate tax will almost certainly prove to be one of the main sticking points for future deficit reduction talks. They might also provide the Republicans with a greater incentive to pursue wholesale tax reform if Democrats stand firm and refuse to renew the tax package.
In 2011, Republicans had the advantage, as Democrats had no legislative mechanism to split apart the tax cuts for the wealthy from those for the middle class. But given that they will all expire on Jan. 1, simple inaction -- a congressional specialty -- would raise taxes across the board. Democrats could then press for a tax cut only for the first $250,000 in income, daring Republicans to oppose such a tax break. It's a hand Democrats are looking forward to playing.
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Boehner first gave an indication that a grand bargain on deficit reduction could be possible last year, when his aides proposed raising an additional $800 billion in revenue in 10 years by overhauling and simplifying the tax code, following in the footsteps of President Ronald Reagan's 1986 tax reform. By getting rid of the mess of loopholes and deductions and streamlining the income bracket classifications, Congress could both lower the top marginal tax rate and increase the amount of revenue the Treasury collected.
But in the draft that Boehner's staff sent to the White House on July 8, 2011, the speaker also called for reducing the tax rates on investment income, as well as keeping the estate tax at its notably low 2010 rate.
Obama was more than willing to go for large-scale tax reform, but only on the condition that the tax code maintained or increased its degree of progressivity. He also wanted to use the $800 billion in increased revenues as a floor in the negotiations rather than as the upper limit of what the new tax code would aim to achieve. Liberals, meanwhile, want more tax brackets, not fewer -- arguing that those earning $1 million or $10 million should pay a higher rate than someone making $250,000.
Comprehensive tax reform will be repeatedly invoked by both sides as a way to boost revenue without raising taxes -- and, not coincidentally, it's a way to raise campaign cash from corporations who need to protect their loopholes in the tax code. But it's an extremely complex piece of legislation to write and negotiate, and officials familiar with it say it could take more than a year or more to accomplish.
In other words, it can't be a part of any bargain struck in the first half of 2013, beyond vague affirmations promising that it will be accomplished.
The presidential campaign essentially paused legislative efforts to reach a consensus on deficit reduction. Both parties looked to the 2012 elections to shake up the political dynamic enough to permit either a compromise or a mandate for their vision of the federal budget.
At least on the surface, however, the status quo has prevailed. Boehner, Cantor and the GOP retain control of the House, Reid possesses a majority in the Senate but falls five votes short of a filibuster-proof Democratic contingent, and Obama is back in the White House. When Congress goes back into session on Tuesday, lawmakers will restart the hard-fought battles over taxes, entitlements and spending essentially from where they left off.
At this point, the only thing that is truly definitive is that a Grand Canyon's width of policy differences separate the Republicans and Democrats on deficit reduction plans. In order to avoid the fiscal cliff, members of both parties will have to embrace compromise, Reid said Wednesday.
"Compromise is not a dirty word. I'm willing to negotiate anytime on any issue," he said. "I'm going to do everything in my power to be conciliatory. I want to work together, but I want everyone to also understand, you cannot push us around."
But election night seemed to only bring more of the same. Boehner told a group of Republicans gathered in Washington that the House GOP's victories represented a mandate from the American people to avoid using higher taxes as a means to tackle the deficit.
“The American people want solutions, and tonight they responded by renewing our House Republican majority,” he said. “The American people also made clear there’s no mandate for raising tax rates.”
He softened his approach a day later, pledging to work for a compromise that could include significant tax reforms and possibly some revenues during an afternoon press conference on Capitol Hill.
"A stronger economy means more revenue, which is what the president seeks," Boehner said on Wednesday. "Because the American people expect us to find common ground, we are willing to accept some additional revenues, via tax reform."
In his idealistic victory speech early Wednesday morning, reminiscent of his 2008 campaign rhetoric, Obama also appeared to be reaching for a more fruitful process of give and take rather than partisan grandstanding.
"I believe we can seize this future together because we are not as divided as our politics suggests," he said. "We're not as cynical as the pundits believe. We are greater than the sum of our individual ambitions, and we remain more than a collection of red states and blue states."
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