Republicans Draw Line in the Sand

Opposition lawmakers walk out on debt talks because the president insists on raising taxes.

President Barack Obama and House speaker John Boehner talk in the garden of the White House in Washington DC, July 3
President Barack Obama and House speaker John Boehner talk in the garden of the White House in Washington DC, July 3 (White House/Pete Souza)

Negotiations over raising the United States’ debt ceiling between President Barack Obama and congressional leaders collapsed this weekend when House speaker John Boehner refused to back $1.2 trillion in tax increases. He has promised to work with Democrats and Republicans in Congress to reach a deal instead — without administration officials present.

Boehner walked out on negotiations at the White House on Friday when the administration demanded $400 billion in revenue increases on top of the $800 billion which the speaker had already agreed to. The increases would have come from closing tax loopholes and ending special interest deductions — “spending in the tax code,” according to the president — without actually raising tax rates. Indeed, Republicans favor ending “tax subsidies” while lowering the nation’s corporate tax rate which is the highest in the industrialized world and hampering job creation, they say.

The president announced Friday afternoon that he had offered Republicans over a trillion in discretionary spending cuts over the next ten years, including defense, along with some $600 billion in cuts to public health and pension programs. Including $800 billion in revenue increases, the package, worth well over $2 trillion, would have allowed Congress to raise the legal debt limit by a similar amount and prevent having to vote on the issue again before the 2012 elections.

Entitlement or mandatory spending is mainly responsible for driving up federal expenditures in the future but lawmakers are not expected to reach a compromise agreement on reforming Medicaid, Medicare and Social Security this week. The president has threatened to veto a short-term extension of the debt ceiling that could give Congress time to negotiate a grand bargain.

Previous bipartisan negotiation efforts identified up to $300 billion in long-term savings by scaling down the pension benefits of federal workers and changing the way in which inflation is measured to slow the growth of general retirement payments. Medicare benefits for wealthy retirees could be reduced although Democrats fear that it could lead to an erosion of public support for the program. They previously rejected a Republican plan to private Medicare and replace it with “premium support” or vouchers.

Mere hundreds of billions in spending reductions won’t make the programs solvable however. Medicare is expected to run out of money in 2024 and Medicaid, which subsidizes health care for the poor and is paid for by the states, is increasingly crowding out investment in other areas, including education and infrastructure. The Social Security trust fund is projected to last until 2036 but once it is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits it is required to pay seniors.

To put $2 trillion in cuts over the next decade in perspective, the Congressional Budget Office estimates that federal spending will reach nearly $46 trillion over the same period.

The Treasury Department expects that it will have exhausted its legal ability to borrow by August 2 by which time Congress should have raised the $14.3 trillion debt limit in order to continue to finance the government or risk a technical default.