The sequester took effect this week, with President Obama acknowledging that the event would go forward. As planned, the cuts will impact federal programs in many areas, including the Transportation Security Administration, the Department of Education, Border Control and civilian furloughs at the Department of Defense, to mention just a few.
Practically speaking, military training will be cut. There are added cost savings: the Iraq War is ended and the Afghanistan engagement is concluding next year. There will be fewer education grants, and programs like Headstart will be trimmed. There may be fewer teachers hired and larger class sizes, all at a time when the population is growing by over a million people a year.
Essentially, the Democrats are looking for a combination of spending cuts and tax increases, while Republicans want just cost cutting; a meeting of the minds is necessary to provide better predictability in government spending over time.
The Democrats are amenable to cutting spending up to $110 billion, and during the campaign, former Governor Mitt Romney supported the idea of fine tuning the deductions for higher income taxpayers in addition to looking at closure of some corporate tax loopholes. Herein lies a potential resolution of the current stalemate. Such a compromise solution could include not only the Democratic proposal to go forward with cuts of $110 billion by reducing agricultural subsidies and defense (although, as explained above, the sequester itself will result in some defense cuts), but also a modification of this proposal could be combined with former Governor Romney’s campaign suggestion to fine tune deductions for higher income taxpayers while closing some corporate tax loopholes.
There are other options down the road, including phasing in the Clinton administration’s tax rates or migrating Medicaid to the states over time. The Clinton era tax rates helped to balance the federal budget, so a return to these rates could be phased in. In addition, Congress could consider the Forbes flat tax proposal offered previously.
If the economy continues to grow and spending can be held to the current levels, the budget can be balanced. This result could happen as a byproduct of the government receiving greater tax revenues from increased business activities coupled with holding spending to the current levels.