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The Real Bipartisan Compromise: Cut Spending on the Rich

Charles Blahous | 05/12/2011

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Bipartisan efforts at federal deficit reduction will face stronger headwinds as the 2012 election approaches. Public statements even of those pledging an immediate focus on fiscal repairs are already exhibiting the increasing influence of political considerations. President Obama’s April budget address, for example, incongruously referenced opposition “presidential candidates,” and was more specific in its criticisms of Congressman Paul Ryan’s budget framework than it was revealing of the Administration’s own policy ideas. Even members of the bipartisan Senate “Gang of Six” are dropping hints that their proposed implementation of the Simpson-Bowles commission recommendations may largely omit Social Security reform -- an especially stark concession to political concerns, considering that Social Security cost growth over the next decade will exceed that of any other federal program.

The essential problem is that the two major parties are now seeking to distinguish themselves on politically sensitive tax and entitlement policies at precisely the time that bipartisan cooperation on such issues is becoming most necessary. And yet there is a clear path available for the two parties to cooperate to improve the fiscal outlook while still preserving the cores of their respective political messages: namely, by cutting the growth of federal spending on “the rich.”

The central budget messages of the two parties are distinct but not necessarily in irreconcilable conflict:

Democrats are largely stressing distributional issues. They charge Republicans with pursuing “tax cuts for the rich” and with plotting to cut vital spending on the poor. Democrats, at the same time, deny Republican charges that they (Democrats) are indifferent to the exploding growth of federal spending.

Republicans are generally focusing on the size of government. They charge Democrats with supporting runaway spending. They in turn deny Democratic charges that they are insensitive to the vulnerabilities of the poor.

These two messages run along different axes: one being from bigger government to smaller government, the other from rich to poor. This ideological geometry allows for substantive common ground. Specifically, if the two parties agree to cut federal spending (meaning actual outlay spending, as opposed to simply closing tax loopholes) on higher-income Americans, they can simultaneously advance Republican objectives of containing the growth of government, while also advancing the Democratic message of targeting federal resources on those of greatest need – and all while reducing federal deficits.

Both parties could actually benefit with their core constituencies from such a deal, by showing they can reduce the structural deficit without betraying their core principles. Each party would also acquire a new defense against one of the other side’s primary political attacks: Democrats would have shown a willingness to address runaway spending growth, while Republicans would have demonstrated their willingness to go after “the rich.”

Substantively, what could such a deal contain? As it happens, the two largest and fastest-growing areas of federal spending, Social Security and Medicare, are both ones for which the wealthiest Americans are fully eligible for rising benefits. Both programs are, to be sure, of extreme political sensitivity. But the financial imbalances in these two programs require correction by elected officials in any event. To the extent that spending on the wealthy is constrained within these programs, it will reduce the financial pressure for even more politically-sensitive changes to them.

The essence of what is required is for the two parties to agree on how many high-income individuals to affect, and on how much. Social Security provides a ready case study in how this could be done. Many Democrats, for example, have expressed sympathy with the concept of raising the current $106,800 limit on the amount of wages subject to the Social Security tax. Such a measure would affect roughly 20% of workers (the number who have wages above the current limit at some point in their careers). Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum. (It is best to set the target in terms of the wage percentile rather than a dollar amount of wages because Social Security benefits are calculated based on an average-wage figure called the AIME, which typically includes several zero-earnings years that bring down one’s career average, and which does not count any earnings above the wage cap. Accordingly, AIME dollar figures are much smaller than most people tend to associate with real-world earnings patterns. To avoid bipartisan discussions being hung up on such confusion, the parties would do well to first determine the percentile that they wish to affect, and then have the Social Security actuaries produce the implementing dollar-figures after such conceptual bipartisan agreement has been reached.)

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

As for Medicare, Democrats and Republicans fiercely disagree on whether cost containment is best achieved via a premium support model, or by the federal government’s imposing price controls within the program’s current design. But they do agree on the need for cost containment itself. Already certain features of federal health care law, such as the exemption from the “Cadillac plan tax” and the vouchers provided under the new health entitlement, will grow only with the Consumer Price Index (CPI), despite the fact that historically health cost inflation has exceeded economy-wide CPI. If it is politically acceptable to restrict these forms of federal health care support to CPI growth, surely Medicare direct spending on the highest-income beneficiaries could similarly be limited. (This cost containment could be achieved most neatly by changing the rate of growth for income-related Part B premiums so as to hold the growth rate for total Medicare per-capita expenditures to CPI for the highest-income beneficiaries).

Though these are the largest federal spending programs, and though most other direct spending is not targeted on the rich by any definition, savings from direct payments to higher-income individuals need not end there. Agriculture support payments, for example, are currently made to farmers with adjusted gross farm incomes as high as $750,000 (and allowing for an additional $500,000 in non-farm income). At a time when so many continue to struggle amid a weak economy, when federal finances are in desperate condition, and when many talk of the necessity of raising taxes on millionaires, it is difficult for taxpayers to understand why direct payments to millionaires continue. It is encouraging that reports on nascent bipartisan deficit talks indicate that such excessive farm subsidies are potentially on the chopping block.

A bipartisan effort to restrain entitlement spending on the rich will not draw unanimous praise. Some on the far left will see such reforms as part of an insidious plot to weaken popular support for cherished programs. But even objection from these quarters is potentially useful and informative. As a nation we must decide whether our loyalties attach to the programs in the abstract or to the individuals affected by them both as beneficiaries and as taxpayers. We need an informed debate over whether the costs of government should rise to unprecedented levels simply because of the political importance some might attach to buying the support of those who least need assistance.

A lasting bipartisan deal to constrain the growth of federal spending on the rich may be a bridge too far before the 2012 elections. But it is an answer that will resonate with the typical, politically independent American, who is concerned about deficits, sympathetic to Republican concerns about runaway spending, and yet responsive to Democratic warnings about potential effects on the poor. If the parties could simply agree to cut spending on the rich, they could do themselves and the nation a world of good.

Charles Blahous is a research fellow with the Hoover Institution and the author of Social Security: The Unfinished Work.