Peter Huessy

Many are making the argument that raising tax rates on the “rich”–by $84.9 billion a year–would bring in enough revenue to offset the $1 trillion in cuts required by sequestration to domestic defense and non-defense spending. So Senator Murray and Minority Leader Pelosi are claiming let’s make a deal: raise taxes on those who can afford it and we can avoid most sequestration. Wiping out deductions for these same two tax rates beyond 28% brings in another $47 billion according to CBO. The total of $132 billion in “new revenue” looks enticing.

But like the Wicked Witch in Snow White and the Seven Dwarfs, the apple looks inviting. Its full of poison. Here’s the first problem:

The income levels being taxed are $214,000 for a single taxpayer and $267,000 for a married couple. These people are not “rich”. In most cases they are small business owners whose income can reflect finally doing well after years of investment. Or two wage earner families trying to make it and save for retirement and their children’s education. Over half of all small business income would be affected as well as tens of millions of workers who get a paycheck from these job creators. What economic growth is benefited from these tax hikes? Economic assessments say 2.12 million jobs will be lost, $214 billion shaved off of GDP, and 1.5% added to the unemployment rolls if sequestration goes through. But a number of econometric studies say that 700,000 jobs would be lost if the tax rate hikes go into effect, with the resulting drop in GDP as well. And just last year the administration said raising taxes in a weak economy is counter-productive. Is the economy strong right now?

OK you say, but as one Fox News analyst wailed, we have to get revenue somewhere and “why not raise taxes on the rich for a few years to lessen the deficit. Ah, more poison apples.

If the raised revenue is used to offset the spending that otherwise would be cut, there is no deficit reduction. Ms. Murray and Pelosi have not told us where the replacement spending cuts would come from.

Furthermore, the administration’s budget says spending will reach $5.5 trillion in 2021. This is not a typo. That is $5.5 trillion. That compares to $3.6 trillion we are spending now in FY12.

But things get worse. These numbers do not reflect the new Obama Care numbers from OMB which hit a ten-year total of $2.7 trillion, $1 trillion more than the last CBO estimate and $1.7 trillion more than the administration estimates of $900 billion when the Affordable Care Act passed.

So spending will hit $5.67 trillion in ten years. But there is more. The administration counts on the states picking up a portion of the expansion of Medicaid in years 5-10. The Supreme Court said the system of penalties on the states is unconstitutional. Potential cost to Uncle Sam if the states now opt out, but Uncle Sam picks up the tab? Another possible $84 billion a year even though initially Uncle Sam pays 100% of the cost for the first four years–that is the bribe price to coerce state particiaption. In the outyears the total could reach $500 billion over 10 years. But CBO says 30 million Americans would still remain uninsured despite spending $270 billion a year on Obama Care.

So the spending now is above $5.72 trillion a year. And HHS admitted they double counted the “Medicare” savings by $500 billion over the decade which means spending is $5.77 trillion.

Today we collect $2.3 trillion. Add the tax rate increases on the rich which is going to generate $147 billion a year, (assumiong all tax increases have no negative economic consequences) and we have $2.447 trillion collected. The average increase in revenue to the US government for the past 30 years in the growth yeqrs has been $150 billion. Good years get us $200 billion or more added revenue per year.

But since 2007, there is a decline in revenue of $200 billion. The administration projects revenue increases of over $400 billion next year and $350 billion the year after that, with $1 trillion added in the next three years. The biggest previous increase has been $800 billion between CY2003-CY2007 or four years or $200 billion a year on average.

The largest ever? Under Bush 43 at $240 billion. So where does $1 trillion in 3 years come from when unemployment is not dropping, welfare and assistance roles are expanding, and prospects for recovery are dismal?

Even if we do collect $200 billion more every year for the next ten years, revenue hits $4.3 trillion. But spending hits $5.77 trillion!! The deficit: $1.47 trillion, if we are lucky. If interest rates hit average historical levels soon, debt payments hit $1 trillion (compared to roughly $550 billion now) and Uncle Sam is spending $6.37 trillion a year. The annual debt would then be: $2 trillion annually EVEN WITH TAX RATE INCREASES ON THE RICH.

The $109 billion cut–the sequestration required–is equivalent to 2.6% of the entiire Federal budget, if everyone gets a hair-cut. Medicaid expansion alone will add $200 billion a year to the Federal budget, to say nothing of the doubling of the number of people collecting disability over just the past three and one-half years.

The Pentagon has already seen its funding reduced by $992 billion from the original plan for FY2009-FY2018. Sequestration would add $500 billion to that over the next decade… If tax rate increases pay for avoiding sequestration, then they cannot also be used for debt reduction… again, tax rate hikes which are central to the administration’s argument for iarness and a balanced approach to our budget, do not even begin to address the nation’s debt problem.

Now, here is the punch line. Now that you know the math, why would the Hill newspaper July 23, 2012) write the following: “Democrats said the only reason there is no agreement to adjust the sequester is because Republicans have refused to raise taxes, along with the spending reductions the GOP wants, as a way of helping to balance the budget.” Helping to balance the budget as in $2 trillion in deficits? How can revenue offset spending and at the same time reduce the deficit? You cannot say you want to avoid sequestration–especially to non-defense programs which are heavily represented in the Washington, D.C. area, and at the same time say the tax increases are to reduce the deficit. But ranking House budget member Van Hollen thinks it can:

“Budget Committee ranking member Chris Van Hollen (D-Md.) said that Democrats agree with the need to replace the sequester. However, he said defense cuts were made part of the sequester precisely because Republicans thought that was a better option than raising taxes.

“Let’s make no mistake,” Van Hollen said. “The reason we’re here is that our Republican colleagues deliberately chose as part of the sequester to put defense spending on the chopping block along with other spending. That was the choice above an offer to deal with revenue as part of the sequester.”

Actually, Van Hollen is wrong. The administration said the only spending on the block would be domestic discretionary spending and defense had to take at least $1 trillion of the cuts, of which $487 billion has already been ordered. So half the cuts had to come from 14% of the budget.

News of the Week on Sequestration: The House approved legislation on Wednesday that would give the Obama administration 30 days to provide details on how it will deal with a required $109 billion cut to 2013 spending, which the administration must impose under last year’s debt-ceiling agreement. The bill enjoyed broad support from both parties and passed easily in a 414-2 vote. The two “no” votes came from Democratic Reps. Eliot Engel (N.Y.) and Maurice Hinchey (N.Y.).

The language is similar to language that the Senate approved in June as an amendment to the farm bill. That language calls on the Defense Department to report on the impact of defense sequestration by August 15.

The Senate language also calls on OMB to report in 30 days on the impact of sequestration, and the administration to release a report on the impact of all sequestration across defense and non-defense spending.

Sen. John Thune (R-S.D.), who has a companion bill in the Senate, said he would keep pushing for a vote on his bill in the Senate.

“Sen. Reid has said, ‘I’m not going to back off sequestration,'” Hensarling said. “Thus, we are looking at a 10 percent real cut in our national defense.”

House Armed Services Committee Chairman Buck McKeon (R-Calif.) went further, calling on Democrats to work with Republicans to avoid deep defense cuts. The House already has approved a bill doing just that, but the Senate has not moved any bill to rework the sequester.

“I ask that we come together on this issue,” McKeon said on the House floor. “I ask the president to put forth some leadership. As commander in chief, he has the obligation to help us solve this problem.”

But while Democrats called for a deal that includes cuts and revenue, Ryan rejected this approach.

“Government first, taxpayers second,” Ryan said. “That’s what the so-called ‘balanced approach means.’ It means keep feeding higher spending with higher taxes.

“The problem is … the arithmetic just doesn’t add up. You literally cannot tax your way out of this mess. Spending is the cause, we need to address our spending.”

Ryan said that as of today, the transparency bill is needed because there is no resolution of this fight over how the sequester might be replaced.

“Since there’s an absence of leadership on these critical fiscal issues from the president of the United States, from the Senate of the United States, at the very least, show us how this is going to work,” Ryan said.

McKeon added that details about the pending cuts could give the defense industry a needed heads-up, because many of those companies are suffering from the uncertainty about defense spending levels.

“We are going to put thousands of people in jeopardy of [losing] their jobs,” McKeon said. “This is already in motion.”

House passage sends the bill to the Senate. The Obama administration had not released a statement on its opinion of the bill as of early Wednesday afternoon.

Sen. Patty Murray (D-Wash.), who is in charge of retaining the Democrats’ majority in the upper chamber, suggested on Monday that Democrats should go over the “fiscal cliff” — letting the Bush-era tax rates expire and the sequestration cuts occur —if Republicans refuse to raise taxes on upper-income earners.

“Unless Republicans end their commitment to protecting the rich above all else, our country is going to have to face the consequences of Republican intransigence,” Murray said at the Brookings Institution.

Her position was echoed by Senate Majority Leader Harry Reid (D-Nev.) this week, and President Obama has threatened to veto attempts to undo sequestration without a “balanced” approach to alternate deficit reduction.

GOP leaders responded by accusing Democrats threatening to hold the economy hostage in order to raise taxes.

Republicans in Congress turned their fire on Obama. House Armed Services Committee Chairman Buck McKeon (R-Calif.) said this week in an interview with The Hill that blame for sequestration lies with the president for being AWOL.

House Speaker John Boehner (R-Ohio) also pinned the cuts on Obama.

“Remember one thing, we have this sequester because the president of the United States, for his own convenience, only wanted to deal with the debt limit once before the election,” Boehner told reporters at his weekly press conference Thursday.

Presumptive Republican presidential nominee Mitt Romney has turned the sequester into a campaign issue, as he and his surrogates attacked Obama for cutting the military last week while the president was making a campaign stop in Virginia, a key swing state and military hub.

The GOP rhetoric was backed up by a House bill Republicans passed that would force the White House to explain the cuts to Congress, and with a hearing in the Armed Services Committee where defense executives testified about how bad the cuts would be for the defense industry.

The GOP message was boosted with a new study from the Aerospace Industries Association that found 2 million jobs could be lost from sequestration in the defense and domestic sectors.

“The way to avoid the fiscal cliff is to do what we’ve been trying to do now for more than a year, and that is get a small amount of revenue by the way that the American people agree should happen,” Reid said Tuesday. “We have to have a balanced deal.”

[ Provide for the Common Defense Comments: “A small amount of revenue”? So $147 billion a year will pay for a $1.3 trillion annual deficit—they must teach this kind of math at the cowboy poetry reading fairs in Nevada of which the majority leader is so fond].

Defense analysts say that Democrats hold an advantage in the leverage game going into the lame-duck session because the defense cuts will occur and the Bush tax-rates will expire if Congress does nothing, two outcomes Republicans are more concerned with stopping.

That gives Democrats little incentive to act on sequestration before November unless Republicans are willing to increase taxes.

However, Obama and congressional Democrats agreed to extend all the Bush-era tax rates in 2010, despite tough talk to the contrary.

Regardless, with Republicans accusing Democrats of harming the military and national security and Democrats accusing Republicans of protecting the wealthy, both sides have a message with sequestration they can campaign on into the election.

While defense-focused lawmakers like McKeon, Senate Armed Services Committee Chairman Carl Levin (D-Mich.) and ranking member John McCain (R-Ariz.) have said repeatedly that the cuts must be dealt with before the election.

There have been calls to find a one-year deal — or even something shorter — to give businesses certainty that the cuts won’t be coming Jan. 2 when sequestration hits in.

But the sequester cuts have been coupled with the Bush-era tax rates, analysts say, making a short term fix difficult to achieve.

House Armed Services ranking member Adam Smith (D-Wash.) said he agreed with Murray not to extend any of the Bush tax rates when given the choice between “all or nothing.”

He was less willing to commit when it came to the sequestration cuts.

“I think that’s a more flexible thing,” Smith said in an interview on C-SPAN’s “Newsmakers” program that will air Sunday.

“We’re reaching the point where one of the wise courses of action is saying, ‘No, we’re not going to do this,’” he said. “We still have to deal with the deficit, but we’re not going to put a gun to head of economy.”

In the debt limit deal, the administration put a 6-shooter to its head, and like the scene from Blazing Saddles, exclaimed: “Stop me or I will shoot the US in the head.” In this case the choice was raise taxes and tank the economy–one new econometric study and a new CBO study say 700,000 jobs would be lost if the top two rates went up and $47 billion in new Obama Care taxes also hit the economy. Or, cut another $500+ billion from defense and throw as the AIA has concluded, 1.2 million additional people would be out of work.