Tags: tax | cuts | spending | cliff

James Baker: Spending Cuts, Tax Increases Necessary for Grand Bargain

Friday, 16 Nov 2012 11:18 AM

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Both spending cuts and tax increases should be implemented to cut the budget deficit, with an emphasis being placed on cuts, says James Baker, Treasury secretary under President Ronald Reagan.

“Any grand bargain will have to include spending cuts and revenue increases,” he writes in The Wall Street Journal. “The negotiations shouldn't be preconditioned — everything must be on the table, including the possibility of cuts to entitlements and defense.”

As for the balance between cuts and increases Baker suggests starting with the 3-to-1 ratio of cuts over increases that was part of the Simpson-Bowles deficit reduction. “My preference would be for a bargain weighted more toward cuts.”

There needs to be a guarantee that spending cuts agreed upon will actually happen, Baker says. That’s because tax increases often are implemented as planned, while spending cuts often are not.

Baker has a proposal to solve that issue. “The parties would agree to cap federal spending at a certain percentage of gross domestic product,” he writes. “Were a future Congress to increase spending above that cap, then the tax increases set by this compromise would automatically be rescinded.”

As for tax increases, the emphasis should be on broadening the tax base rather than lifting marginal rates, Baker says.

He thinks it’s unrealistic to expect a grand bargain on the budget before the fiscal cliff of automatic spending cuts and tax increases arrives Jan. 1. So Congress should postpone those measures until March 31 to give itself time for thorough negotiations, Baker says.

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