President Obama signed the American Taxpayer Relief Act of 2012 (H.R. 8) on Jan. 2. In doing so, he supposedly saved us from a "fiscal cliff" that would have come about through broader increases in tax rates and deep spending cuts. And yet the very deal that should have brought a sense of relief is now inspiring the opposite: No one concerned about our country's long-term fiscal problems is viewing this deal in a positive light, and the reasons are clear.
It's no surprise that Washington's politicians are far from serious when it comes to cutting spending. What may have come as a surprise in this deal is that Democrats showed such weak knees when it came to collecting revenue through large tax increases (especially on the middle class, which is now defined as 99 percent of Americans). They are also less willing to "soak the rich" than they originally claimed. As a result, the deal's tax increases are nothing more than symbolic measures that won't raise much revenue at all. They certainly won't make a dent in long-term debt, nor were they really intended to.
Now that another Washington-manufactured crisis is averted, it's time to start thinking about the future. Here's where the real test comes for Republicans. For too long, they have pretended to be the party of small government, simply because of their opposition to higher tax rates. Unfortunately, lawmakers have failed to realize that you don't qualify as a small-government advocate if you increase spending like a drunken sailor: voting for Medicare Part D, sugar subsidies and tariffs, other farm subsidies, Small Business Administration loan guarantee programs, the Export-Import Bank, the 1705 green energy loan program that gave us Solyndra and refusing all reductions in defense spending, even during a two-war drawdown.
Big government and low tax rates are an unsustainable combination. As Milton Friedman reminded us, the long-term cost of government is better measured by government spending than by the current tax rates. So with the tax issue out of the way, we will see if Republicans are willing to fight for smaller government, and hence for spending restraints.
For starters, Republicans should demand that the president fulfill his budget promise to cut $2.50 in spending for every dollar of tax revenue raised. He just got $620 billion in tax revenue, which means that he must now cut $1.5 trillion in spending. That, of course, should be on top of the scheduled sequester cuts, which were the price Congress agreed to pay in exchange for raising the debt ceiling by more than $2 trillion in the summer of 2011.
When that's done, they can demand some spending cuts in exchange for an increase in the debt ceiling. Better yet, they can fight for true and credible entitlement reform in exchange for extending the continuing resolution that currently funds the government through March in order to avoid a government shutdown. The benefit of that later fight is that it won't be taken hostage by the make-believe risk of default associated with the coming debt ceiling fight. The only thing at stake with a fight over the continuing resolution is the shutdown of "nonessential" parts of the federal government -- and that's precisely what should be cut anyway.
Examiner Contributor Veronique de Rugy is a senior research fellow of the Mercatus Center at George Mason University.