A congressional supercommittee tasked with finding more than a trillion dollars in reductions to ten year spending projections failed to compromise in part because Republicans refused to raise tax rates. The reason is that twice in recent history did Republicans agree to raise taxes in exchange for budget cuts only to end up with higher tax rates and higher spending.
Democrats on the deficit reduction committee were adamant about retiring the “Bush era tax cuts” for high income earners. These cuts in rates, enacted during the first George W. Bush Administration, are slated to expire after 2012 unless Congress makes them permanent.
Republicans argue that taxes shouldn’t be raised in the mid of a recession and want to extend the Bush tax rates indefinitely. To meet Democrats halfway and agree to some increases in revenue to offset long term spending reductions, Pennsylvania senator Pat Toomey proposed a tax reform package that would have brought in up to $300 billion in additional revenue over the next ten years. The increase would have been achieved by eliminating tax deductions and closing loopholes while lowering the nominal tax rates.
The $300 billion in extra revenue would be matched by $900 billion in less spending to achieve $1.2 trillion in deficit reduction between now and 2021. This would have been almost $3 trillion short of the amount in deficit reduction that’s estimated to be necessary to balance the federal budget over that period.
The deal was rejected by Democrats however who insisted that wealthy Americans shared in the sacrifice of austerity and see their tax rates go up. Republicans wouldn’t submit to tax hikes because, as they see it, they’ve made that mistake before.
In 1982, after enacting historic tax cuts with overwhelming congressional support, President Ronald Reagan agreed to raise business and excise taxes in exchange for $280 billion in spending reductions over six years. Taxes went up but so did spending—by $450 billion, $140 billion of which was allocated to defense. Revenue, however, increased by only $375 billion during the remainder of Reagan’s tenure.
A couple of years later, President George H.W. Bush struck a similar deal with Democrats. In violation of his campaign pledge not to raise taxes, the senior Bush accepted a “balanced” approach that included spending cuts and tax increases to mend the deficit. Except the spending cuts never materialized and Bush lost reelection in 1992 because the voters felt they’d been cheated.
Before last year’s midterm elections, Republicans again vowed not to raise taxes. They have put out several tax reform plans that would see revenue increase despite reductions in the rates but cannot afford to break their pledge—again.