Saturday, May 26, 2018
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Diminished expectations

THE House-Senate conference committee on federal fiscal policy has opened for business amid appropriately diminished expectations.

After last month’s disastrous Republican-provoked clash that resulted in a 16-day government shutdown and near-default on federal obligations, no one expects GOP lions to lie down with Democratic lambs. Committee members all but dismissed a grand compromise to stabilize the country’s finances.

Senate Budget Committee chairman Patty Murray (D., Wash.) calls for a “minimum” deal that would replace across-the-board sequestration cuts and set a new level of annual spending on defense and nondefense discretionary programs to replace the current figure of $982 billion. Even that “won’t be easy,” she adds.

The big question is what role higher revenues should play in the deal-making. Higher taxes will be required to pay for the costs of an aging society, even if, as is also necessary, Congress enacts savings to the entitlement programs — mostly for the elderly — that are also indispensable to a long-term fix.

Republicans generally say “no way,” Senate Majority Leader Harry Reid has declared that higher taxes are a must.

The U.S. tax code is riddled with $1 trillion worth of exclusions, exemptions, and credits known as “tax expenditures,” since they were generally enacted to subsidize a favored group or activity. These breaks distort markets and disproportionately benefit top earners. Eliminating or blunting them would be part of any sensible revenue-raising tax reform.

One of the least defensible breaks, the favorable tax treatment of “carried interest,” as the compensation for hedge fund and private equity managers is known, could be included in a modest budget deal. It’s symbolically potent, economically wasteful, and, at $1.6 billion a year, not very large.

Revenue is mostly not indispensable to achieve a short-term deal that avoids most or all of the sequester — which would otherwise drive the spending rate down to $967 billion — while re-allocating spending among defense and nondefense programs. This could be paid for by savings in entitlements not subject to the sequester: federal retirement, farm subsidies, or tweaks to Medicare such as higher premiums for upper-income seniors.

Mr. Obama reportedly told GOP senators that revenue is not a deal-breaker, depending on the broader shape of the deal. Given the GOP’s political advantage — a reversion to sequester is automatic if the conference fails, and the GOP is more willing to accept that than Democrats — this strikes us as a sensible position.

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