Republicans Rule Out Tax Increases in Battle With Democrats Over Debt Cap

Republican congressional leaders are ruling out tax increases or a wider revenue base in talks on extending the U.S. government’s borrowing authority, creating a conflict with Democrats who would raise more money as well as cut spending.

House Speaker John Boehner staked out the Republican position by telling the Economic Club of New York that “raising taxes is off the table” because “it will have a devastating impact on our economy.” Boehner predicted that Congress would act on a broader revision of the tax code in the next two years, though he said that Republicans wouldn’t support it “as a way of increasing taxes on the American people or enterprises.”

Boehner’s comments last night came two days after the Senate’s No. 2 Republican, Jon Kyl of Arizona, said a tax-code overhaul should be kept “totally off the table” of the debt- limit talks because eliminating tax deductions and exclusions to raise more revenue would be tantamount to raising taxes.

Meantime, the Democratic chairman of the Senate Budget Committee, Kent Conrad of North Dakota, said any plan to reduce long-term government debt must include tax increases along with spending cuts. A “credible plan” to reduce the debt cannot be “just on the spending side of the equation,” he told reporters in Washington yesterday.

Addressing an audience of Wall Street leaders, Boehner said that “without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase.” Spending cuts “should be greater” than the amount of the “increase in debt authority” given to President Barack Obama, he said.

‘Draconian’ Spending Cuts

During a question-and-answer session following his remarks, Boehner acknowledged the accuracy of Blackstone Group LP co- founder Peter G. Peterson’s characterization of the spending cuts proposed by House Republicans. “You’re right, they are draconian,” he said.

That’s because without Democratic support for overhauling Medicare, Medicaid and Social Security, deeper cuts are required elsewhere, Boehner said.

Boehner, Kyl and other Republican leaders say the House- passed plan to privatize Medicare for future recipients -- those now younger than age 55 -- won’t be part of a bargain on the debt limit.

Spending cuts, not tax increases, are the only option to reduce the debt because “raising taxes will hurt our economy,” Boehner, an Ohio Republican, said. “We do not have a revenue problem; we have a spending problem. Let’s address the spending problem.”

Stimulus and Jobs

He said the 2009 stimulus program “hampered job creation in our country” even with promises that “it would create millions of new jobs.”

His contention is at odds with the Congressional Budget Office findings last August that the stimulus package increased the number of people employed by between 1.4 million and 3.3 million and cut unemployment by between 0.7 percentage point and 1.8 percentage point.

The speaker also repeated an assertion made by House Republicans that their plan to privatize Medicare will give future recipients “the same kinds of options that members of Congress currently have.”

The Congressional Budget Office projected in an April 5 report that under the Republican plan, by 2030 the government would pay 32 percent of the health-care costs of a typical 65- year-old. The U.S. Office of Personnel Management’s benefit handbook says the government pays 75 percent of the health-care costs of federal workers, including members of Congress.

More Talks Today

Negotiations led by Vice President Joe Biden resume today among congressional leaders, including Kyl and House Majority Leader Eric Cantor, a Virginia Republican.

“I am guarded in my optimism” about the discussions, Cantor said today on Bloomberg Television. “There needs to be an acceptance that we’re going to have to do some tough things.”

One possible area of agreement may be the duration of the debt-limit extension. Conrad suggested a short-term increase through year’s end to give lawmakers a chance to approve a plan. Boehner said there is “no hard date” for raising the debt ceiling.

The Treasury Department says the U.S. will reach the debt limit of $14.29 trillion as early as May 16. Treasury Secretary Timothy Geithner has said he can use “extraordinary measures” to continue borrowing money through Aug. 2.

In his appearance before Wall Street financiers, Boehner was challenged to give investors enough assurance that the U.S. won’t default on its obligations without undermining his bargaining position in the debt-limit talks.

‘Somewhat Uneasy’

“I know there are a lot of you in this room who are somewhat uneasy with this debate,” he said. “I understand your concerns.”

“Allowing America to default would be irresponsible,” he added. “But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”

Boehner “threw down the gauntlet on this debate” and the “markets will be nervous” until the issue is resolved, said Mickey Levy, chief economist at Bank of America Corp. Still, “both sides know they will not stop servicing the debt.”

Philip J. Orlando, chief equity-market strategist at Federated Global Investment Management Corp., said the House speaker may not have allayed market concerns.

‘Foregone Conclusion’

Still, “it’s a foregone conclusion the debt limit is going up,” he said.

“What I wanted to hear was there was a stronger quid pro quo” for raising it and Boehner showed the political “backbone” of someone “true to sound economic principles of trying to keep taxes low to try to stimulate the economy and bring spending in line,” Orlando said.

The refusal by Republicans to consider ending what Kyl termed “so-called tax expenditures” makes it difficult to achieve agreement on large deficit cuts, said Jim Kessler, vice president for public policy at Third Way, a Washington group that describes itself as advocating “moderate policy.”

If “it’s a true line in the sand they’ve drawn, it makes it impossible to get a major deal. It’s only small potatoes,” Kessler said. “This may just be a negotiating position by Kyl.”

In a May 7 radio interview, Kyl rejected the idea of a tax- code overhaul that eliminates a number of tax breaks.

‘Off the Table’

“When you do that, somebody’s taxes actually go up,” he told broadcaster Larry Kudlow on New York’s WABC radio. “And so the focus here is to keep taxes totally off the table.”

“It’s becoming increasingly clear that the political stars aren’t in alignment for a large structural deal,” said William Galston, an analyst at the Brookings Institution in Washington and a former policy adviser to Democratic President Bill Clinton.

Amid debate about the deficit in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago. The yield on the benchmark 10-year note is below the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices. Yields on 10-year notes increased less than one basis point, or 0.01 percentage point, to 3.16 percent at 7:33 a.m. in New York, according to Bloomberg Bond Trader prices.

To contact the reporter on this story: James Rowley in New York at jarowley@bloomberg.net

To contact the editor responsible for this story: Laurie Asseo at lasseo1@bloomberg.net

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