Fight over raising the debt ceiling almost sure to lead to bad policy

For lawmakers at every level of government, there are two unalterable prerequisites for making bad policy.

One: Paint yourself into a corner. Two: Run yourself up against an implacable deadline.

Both conditions are spectacularly displayed in the ongoing Washington cabaret over the federal debt ceiling. As I write these words, President Obama and congressional leaders are locked in a high-stakes tug of war over raising the debt ceiling, which the Treasury Department says must be done before Aug. 2 to keep the U.S. from defaulting, for the first time, on its bonds.

Default is one government action sure to unite all segments of the population in shared misery — businesses will face a renewed credit crunch, job creation for ordinary citizens will crash again and people dependent on government checks may not get them.

This is what makes for cabaret: Whether Washington is displaying normal eleventh-hour posturing of the kind that makes politicians everywhere tick, or whether this time a routine congressional action will be bollixed up by a cadre of hard-liners curious to see if the catastrophe forecast by experts on both sides of the political divide will actually happen.

How routine is this vote? The debt ceiling has been raised 91 times since 1960.

The smart money says that a deal will be reached to stave off default, but even the smart money is speaking with its fingers crossed. It’s quite likely that any deal is going to involve compromises that were unthinkable even a few short weeks ago.

The compromises being talked about recently involve spending cuts falling in the near term upon the shoulders of the elderly and the working class and tax increases falling heaviest on the wealthy class, to be negotiated sometime in the distant future.

Driving the resistance to tax increases is the huge bloc of congressional Republicans who have put their names to a pledge promulgated by Americans for Tax Reform, a rabidly anti-tax group headed by the inexplicably influential Grover Norquist.

This pledge is a commitment to vote against any tax increases even, presumably, if hell freezes over, as it’s poised to do. The group says that 234 of the 240 current GOP members of the House and 40 of the Senate’s 47 Republican members have signed the pledge, along with three congressional Democrats.

Why politicians would openly tie their own hands no matter what conditions might arise in the real world is inexplicable, except as the meanest kind of pander to party extremists. Yet there is no question that the Norquist bloc today stands in the way of a fair debt deal that balances spending cuts and tax increases. They’ve painted themselves into their own corner, but they leave the rest of the country to find the exit.

Typical of the compromise proposals being bruited about is one developed by the so-called Gang of Six, three Democratic and three Republican U.S. senators. Their plan, according to their descriptive handout, purports to be a “comprehensive and balanced” approach to slashing deficits. Yet they slipped into their manifesto a number of partisan, mostly conservative, hobbyhorses.

For example, the plan would tie Social Security cost of living increases to the inflation index known as the chained consumer price index. As I observed recently, this is a way to cut benefits by as much as 10% over the coming decades.

This gradual shrinkage insidiously achieves one of the long-cherished goals of conservative enemies of Social Security, which is to make it less relevant to younger generations and thus easier to kill outright.

The Gang of Six also proposes to repeal the CLASS Act, a component of last year’s healthcare reform bill that creates a program of voluntary long-term-care insurance financed by individual premiums, so elderly Americans can stay out of nursing homes and off the public rolls.

Conservative hostility to the CLASS Act is hard to understand, except that the measure targets a segment of the commercial health insurance business that remains largely free of regulation. Still, congressional analysts say that the CLASS Act will reduce the federal deficit by $70 billion over 10 years (mostly because it collects premiums for at least five years before paying benefits), so repealing it seems a mite counterproductive.

Then there’s the permanent repeal of the Alternative Minimum Tax. The AMT is sort of a Trojan hobbyhorse. It is popularly assumed that the tax, which was originally aimed at wealthy individuals who reduced their IRS bills to zero through tax shelters, has turned into principally a middle-class burden. This is not quite true.

In recent years, Congress has enacted a “patch” to exempt most middle-class filers from the AMT. Thanks to the patch, taxpayers earning more than $200,000 paid 94% of all AMT collected in 2009, according to the Tax Foundation. In other words, repealing the AMT might disproportionately favor wealthy taxpayers. The obvious alternative is not repeal but revision of the AMT to recover its original purpose of countering the effect of tax shelters.

It’s unclear how AMT repeal fits into the Gang of Six’s overall tax reform plan, the goals of which are to provide $1 trillion of additional revenues, produce “tax relief” of $1.5 trillion and “maintain or improve” the “progressivity of the tax code” — that is, ensure that the wealthy pay progressively more.

By the way, the Gang of Six also proposes “broadening the tax base.” Depending on who’s speaking, that’s a shibboleth that sometimes means cutting tax breaks that disproportionately benefit high-income taxpayers, like the mortgage deduction, and sometimes means raising rates on the middle and working classes.

How all these factors shake out will be a classic case study of the devil being in the details, with the diabolical details being the AMT, progressivity, the reduction of the top tax rate to no more than 29% from 35% today and the shrinking of deductions for mortgage interest, employer-paid health insurance and the like. Can any of this be done without further burdening the middle class?

As long as decisions affecting the long-term health of the U.S. economy are made by lawmakers with their backs against the wall, the answers will be cloudy. Haste, panic and confusion always favor those already in control; in today’s frenzy over the debt ceiling, who do you think will get trampled?

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at [email protected], read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.