As the lame-duck session begins in earnest after the Thanksgiving holiday, President Barack Obama's legacy and the future of our nation hang in the balance. That may sound a bit hyperbolic, but the fact is, the policy outcome and narrative that transpire from the lame duck will set the stage for what is possible in 2013 and beyond.
While the president has returned from the campaign trail in recent weeks with a slightly more conciliatory tone, his dogged insistence on a year-end tax hike on small businesses is unchanged -- regardless of its economic damage and the little to no effect it would have on deficit reduction.
Browbeating Republican lawmakers and moderate Senate Democrats into capitulating on higher tax rates with vague and empty promises of eventual spending cuts and budget reform is a recipe for disaster. While that cynical strategy could possibly score the president and some Democrats short-term political points, it will destroy thousands of jobs, retard economic growth and handicap the prospects of comprehensive tax and entitlement overhaul next year.
There are currently two fundamental points of contention that must be bridged to avert the fiscal cliff and lay the groundwork for addressing our long-term fiscal challenges.
1. The mandate of the 2012 election
Obama insists his re-election by a 1 percent to 3 percent margin is a mandate for higher taxes. However, the re-election of the House Republican majority undercuts the president's political spin. Nonetheless, the common ground we share is that neither the president nor the House Republican majority were re-elected to destroy jobs.
The problem is the president wants to increase tax rates for the top two brackets, which will hit more than 1 million small businesses -- 53 percent of all small-business income. According to Ernst and Young, his plan would result in the elimination of 700,000 jobs. This is not surprising considering that small businesses create nearly two out of three new jobs in America.
The position of congressional Republicans on extending current income tax rates for all Americans is far from extreme. In fact, it is the same position Obama espoused two years ago when he agreed to extend all the Bush-era tax rates for two years on the basis that raising tax rates would hurt our weak economy. That logic still stands. In fact, the economy is growing at a slower rate than it was in 2010, in large part because of the looming costs of the president's health care law and his administration's dramatic increase in regulations.
2. The root cause of our $16 trillion debt and four consecutive years of deficits exceeding $1 trillion
The president's demands for a "balanced approach" -- his insistence on higher taxes -- give the false impression that tax revenue is down and that this decrease is the reason the budget deficit has exceeded $1 trillion for the past four years. But that could not be further from reality.
For fiscal year 2012, tax revenue is up by 6.4 percent, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Since Obama took office, federal spending has increased by 25 percent and more than $5 trillion has been added to the debt. Federal government spending is nearly 23 percent of gross domestic product, up from its historical average of about 18 percent.
The biggest driver of our short- and long-term deficit problems is the exponential growth in spending on entitlement programs, which has increased from less than half of total federal outlays 20 years ago to nearly 62 percent in 2012. On its current trajectory, the cost of Medicare, Medicaid, Social Security and Obamacare will reach 18.5 percent of GDP by midcentury.
Ultimately, in order to address both our economic and fiscal challenges, we must shore up entitlements and comprehensively reform the tax code by lowering rates and closing special interest loopholes to create a fairer and simpler code.
But first, the president and Congress must come to an agreement in the next month on legislation that ensures: 1. Jobs are not destroyed by higher tax rates, and 2. automatic spending cuts are not "turned off" but rather are done in a way that does not threaten our national security.
The lame-duck session is a critical opportunity to lay the groundwork of bipartisanship with policies that reflect our economic and fiscal realities that will set the stage for entitlement reform and comprehensive, pro-growth tax reform in the 113th Congress.