President Obama urged Congress to agree on a combination of tax reform and spending cuts to achieve deficit reduction during a speech Tuesday in which he proposed an alternative to the drastic automatic spending cuts that were part of the budget sequester deal.

Back in 2011, Congress and the White House struck a deal to raise the debt ceiling on the condition that Democrats and Republicans come up with a way to produce at least $1 trillion in deficit reduction measures over 10 years’ time, or else face a combination of automatic spending cuts in both defense and non-defense programs starting this year. After a bipartisan “super-committee” of lawmakers failed to agree on a plan, congressional leaders and the Obama administration have struggled to find a way to avert the spending cuts, although they recently agreed to delay them by four months.

“The threat of massive automatic cuts has already started to affect business decisions,” said Obama. “So we’ve been reminded that while it’s critical for us to cut wasteful spending, we can’t just cut our way to prosperity. Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery. It’s not the right thing to do for the economy; it’s not the right thing for folks who are out there still looking for work.”

Obama said the right solution was to combine spending cuts with tax reforms, but Republicans have insisted that the higher taxes that were included in last month’s fiscal cliff deal were as far as they were prepared to go on revenue increases.

“For all the drama and disagreements that we’ve had over the past few years, Democrats and Republicans have still been able to come together and cut the deficit by more than $2.5 trillion through a mix of spending cuts and higher rates on taxes for the wealthy,” said Obama. “A balanced approach has achieved more than $2.5 trillion in deficit reduction. That’s more than halfway towards the $4 trillion in deficit reduction that economists and elected officials from both parties believe is required to stabilize our debt. So we've made progress. And I still believe that we can finish the job with a balanced mix of spending cuts and more tax reform.”

Obama noted that he and Speaker of the House John Boehner, R-Ohio, had come close to agreeing on a package of spending cuts, tax increases and entitlement reforms during the fiscal cliff negotiations.

“The proposals that I put forward during the fiscal cliff negotiations in discussions with Speaker Boehner and others are still very much on the table,” he said. “I just want to repeat: The deals that I put forward, the balanced approach of spending cuts and entitlement reform and tax reform that I put forward are still on the table. I’ve offered sensible reforms to Medicare and other entitlements, and my health care proposals achieve the same amount of savings by the beginning of the next decade as the reforms that have been proposed by the bipartisan Bowles-Simpson fiscal commission. These reforms would reduce our government’s bills by reducing the cost of health care, not shifting all those costs on to middle-class seniors, or the working poor, or children with disabilities, but nevertheless, achieving the kinds of savings that we're looking for.”

Obama insisted that tax increases on corporations and the wealthy needed to be part of the mix. “In order to achieve the full $4 trillion in deficit reductions that is the stated goal of economists and our elected leaders, these modest reforms in our social insurance programs have to go hand-in-hand with a process of tax reform, so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans,” he said.

“Leaders in both parties have already identified the need to get rid of these loopholes and deductions," he added. "There’s no reason why we should keep them at a time when we’re trying to cut down on our deficit. And if we are going to close these loopholes, then there’s no reason we should use the savings that we obtain and turn around and spend that on new tax breaks for the wealthiest or for corporations. If we’re serious about paying down the deficit, the savings we achieve from tax reform should be used to pay down the deficit, and potentially to make our businesses more competitive.”

Obama emphasized that the combination of spending cuts and tax reform needed to be balanced, but he warned that the time was approaching for the budget sequester to take effect on March 1. “I think this balanced mix of spending cuts and tax reform is the best way to finish the job of deficit reduction,” he said. “The overwhelming majority of the American people—Democrats and Republicans, as well as independents—have the same view. And both the House and the Senate are working towards budget proposals that I hope reflect this balanced approach. Having said that, I know that a full budget may not be finished before March 1st, and, unfortunately, that's the date when a series of harmful automatic cuts to job-creating investments and defense spending—also known as the sequester—are scheduled to take effect.”

Obama proposed passing a smaller package of spending cuts and tax reforms in the short term to avoid the damaging automatic cuts.

“If Congress can’t act immediately on a bigger package, if they can't get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution,” he said. “There is no reason that the jobs of thousands of Americans who work in national security or education or clean energy, not to mention the growth of the entire economy should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special interest tax loopholes or government programs that we agree need some reform.”

Obama noted that lawmakers from both parties were in the process of negotiating on a way to head off the automatic spending cuts. “Congress is already working towards a budget that would permanently replace the sequester,” he said. “At the very least, we should give them the chance to come up with this budget instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery.”

Obama warned that the economic recovery could be damaged by “self-inflicted wounds” if Congress didn’t act. “Our economy right now is headed in the right direction and it will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington,” he said. “So let’s keep on chipping away at this problem together, as Democrats and Republicans, to give our workers and our businesses the support that they need to thrive in the weeks and months ahead.”

Congressional Reaction
House Ways and Means Committee chairman Dave Camp, R-Mich., labeled Obama’s proposal a tax hike. “Tax reform should be about making the code simpler and fairer for American families and helping employers create more jobs,” he said in a statement. “The President’s proposal is nothing more than another tax hike to pay for more Washington spending. That is not what America needs.”

Senate Finance Committee chairman Max Baucus, D-Mont., reacted more favorably to Obama’s call for Congress to quickly pass legislation to avoid the harmful consequences of automatic, across-the-board cuts, but favored a long-term solution to tax reform. “I agree with the President that Congress must continue to work on plans to avoid the sequester and take a balanced approach to reducing our nation’s deficits and debt, including both spending cuts and revenue,” he said in a statement. “When it comes to tax reform, we must avoid the urge for the quick fix. We owe it to the American people to do a comprehensive review of the code to ensure it works for today’s economy and is flexible enough to adapt to the changing world. Tax reform is about more than revenues. It is about simplifying peoples’ lives, encouraging businesses to invest and grow, and boosting innovation and education. We are not going to have multiple bites at this apple. I want to ensure that when we do tax reform, we do it right.”

House Ways and Means Committee ranking member Sander Levin, D-Mich., agreed with Obama’s proposal to replace the sequester over the coming months with a balanced package of spending cuts and revenues. “We must take all reasonable steps to avoid the sequester because of its potentially harmful effects on the fragile economy,” he said in a statement. “The Republicans are irresponsibly opening their arms to the sequester, pursuing unyielding opposition to balanced deficit reduction regardless of how much that intransigence hurts the economy. The damaging economic impact of Republicans’ refusal to consider any additional revenue is a price they seem all too willing to let the American people pay.”

Senate Judiciary Committee ranking member Chuck Grassley, R-Iowa, a former chairman of the Senate Finance Committee, said the solution needed to come in the form of spending cuts, although he agreed that the across-the-board spending cuts in the sequester were not the best solution. “The details of the sequester are less than ideal, and spending cuts ought to be made in a way that shows good management, but the sequester is the law, and the White House and the Senate have failed to work on an alternative month after month,” he said in a statement. “The pile of cans that have been kicked down the road under the watch of the President and the Senate Majority Leader would be worth a lot of money in Iowa, where you get five cents for every can you turn in. There’s nothing funny, though, about the fact that both short- and long-term spending problems are being virtually ignored by the President, even when it’s so obvious the harm it does to future generations and to getting the economy turned around so we can create jobs today. Even so, the President is asking for more tax increases in place of spending reductions. The grassroots knows that spending is the problem. The reality is you can’t raise taxes high enough to fix the budget impact of the entitlement programs. And, Washington failing to address fiscal problems works against the certainty and confidence needed to build a stronger economy.”

Senator Tom Coburn, R-Okla., disagreed with Obama’s approach to tax reform. “President Obama is right that targeted spending cuts are a better way to reduce the deficit than across-the-board cuts,” he said in a statement. “I’m relieved he disagrees with some on his side who say cutting any spending, including wasteful spending, is austerity. However, I’m disappointed the President today attempted to unilaterally change the terms of the debate on tax reform. Tax reform does not mean closing loopholes to solely pay down the deficit. Tax reform means closing loopholes to primarily lower rates for working families in order to promote economic growth, which has the effect of increasing tax revenues for the federal government. That is the balanced approach embraced by conservatives and liberals on his own Simpson-Bowles debt commission, and that understanding was the basis of President Reagan and Speaker O’Neill’s historic tax reform deal in 1986. The balanced tax reform proposal in Simpson-Bowles proposed to use the savings from eliminating loopholes and breaks for the wealthy by primarily reducing tax rates for lower income families from 15 percent to as low as 8 percent. The President’s statement today suggests lower income families should keep paying higher rates. Ironically, the very tax earmarks the administration slipped into the fiscal cliff deal for special interests such as Hollywood movie producers, the wind industry and NASCAR, kept rates artificially high for lower income and middle class families. That’s not economic justice, and that’s a terrible way to grow our economy.”