Rescuing us from the disaster that is the U.S. tax code while reducing the federal debt will require nothing short of a superhuman feat; Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) stepped up today to the challenge with a new tax proposal.
The United States is not the first nation to face tough fiscal challenges. Other countries have faced similar fiscal challenges – and gotten out of them.
What are the lessons?
- Large, multiyear adjustments have been more successful.
- An emphasis on spending cuts often - although not always - had the best results. To explain what worked and what didn't, it is important to look at the starting point. Many of the countries started with extremely high spending levels, so lower spending most certainly had positive effects by “crowding in” private demand. Many of the countries also had extremely high tax levels, so raising taxes even more would probably have been counterproductive. In countries where the initial conditions are not as tax and spending heavy, there is more room to raise revenue. (In the end, however, the design of the tax system is always critical.)
- It is also important to adopt other economic policies supporting the fiscal turnaround at the same time. Among the most important policies are: having credible fiscal rules and fiscal goals in place to help maintain discipline and stimulate an active public conversation; allowing the central bank to follow a strong anti-inflation policy; pursuing an appropriate exchange rate policy; and maintaining open trade and capital markets. These economic policies reinforce and are reinforced by the turnaround.
- A public dialogue is critical in building support for a fiscal turnaround. Particularly in Canada and Sweden, the government took great care to educate the public about why large fiscal adjustments were in both their interest and the national interest – and why there was no realistic alternative.
The experiences discussed offer a cautionary tale to U.S. policymakers of the risks of not taking timely, appropriate action. Countries with severe fiscal and macroeconomic imbalances which have tried to muddle through circumstances similar to those now facing the United States were, in the end, forced to make dramatic fiscal adjustments by a crisis or by the threat of a crisis. It is always better for policymakers to take action on their own terms.
Earlier today, Senators Judd Gregg (R-NH), and Ron Wyden (D-OR) released what they call A Bipartisan Plan for Tax Fairness.
We're glad to see Senator Wyden and Gregg are beginning to take tax reform seriously, and hope others will join. We'll have more to say soon about the specifics of their proposal.
Yesterday, the White House released its version of a health care reform bill to restart the debate on how to reform the country's health care system. The CBO has announced that it will not be able to provide a detailed cost estimate of the proposal this week, citing additional needed information and the complexity of the issues involved.
In the table below, CRFB has expanded on a table put together by Think Progress' Wonk Room, comparing select components of the President's proposal to the House and Senate bills.
|Premium Subsidies||Limits premiums to between 1.5% and 12% of income, for families making up to 400% of poverty line||Limits premiums to between 2% and 9.8% of income, for families making up to 400% of poverty line. Overall premiums are less generous than the House.||
Limits premiums to between 2% and 9.5% of income, for families making up to 400% of poverty line. Subsidies between House and Senate levels for very low income families, and more generous than either for families of moderate income.
|Cost Sharing Subsidies
||Limits cost sharing to between 3% and 30%||Limits cost sharing to between 10% and 30%||Limits cost sharing to between 6% and 30%|
|Spending on Community Health Center (five yrs)||$12 billion||$8.5 billion||$11 billion|
|Oversight of Premiums||Rate review of proposed premium increases||Rate review of proposed premium increases||Creates Health Insurance Rate Authority to oversee premiums|
|Consumer Protections||Grandfather policy, but must complywith certain rules within five years||Grandfather policy||Grandfather policy, but plans must comply with certain protections|
|Individual Mandate||2.5% of income penalty for lack of compliance||Flat fee of $750 (by 2016) or 2% of income for non-compliance (whichever is higher), but hardship waiver||Same as Senate but lower flat fee of $695 and high percent of income (2.5%)|
|Employer Mandate and Small Business Support||8% payroll tax for employers who do not offer acceptable health insurance||No requirement but large employers must pay amount for workers getting tax credits||
Small businesses: tax credits; Large employers: same requirement as Senate Bill
|Medicare Advantage||Phases down payments based on local costs||Creates a "bidding model" for payment rates||Phases down payments based on local cost, incentivizes quality and enrollee satisfaction|
|High-Cost Excise Tax||None||40% tax on plans above $8,500 for singles, $23,000 for families starting in 2013||40% tax on plans above $10,200/$27,000 starting in 2018|
|High-Income Taxes||5.4% surcharge on high-income earners||0.9% HI tax increase on earning above a certain amount||Same as Senate, in addition to 2.9% tax on unearned income for those making over $200,000/$250,000|
|Fee on Brand Name Pharmaceuticals||None||Raises $13 billion over 10 years||Raises $23 billion over 10 years|
|Closing Tax Loopholes||Tightens bio-fuels tax credit, penalizes "unjustified" tax sheltered transactions||None||Adopts House bill policies|
|Federal Matching for Medicaid||100% federal matching, then 91% after first two years||100% federal matching first two years, then 32.3% increase in state's regular federal match||100% federal matching initially, phasing down to 90% by 2020|
|Health Insurance Providers Fee||None||Raises $67 billion over 10 years||Delay fee until 2014 and exempt certain providers|
|Medical Device Fee||Raises $20 billion over 10 years||Raises $20 billion over 10 years||makes fee an excise tax, delayed until 2013, raises same revenue|
|CLASS Act||Provides Payroll deduction for a program that provides cash disability benefits||Same as House bill||Strengthens long-run solvency of program (unspecified)|
|Other New Provisions||N/A||N/A||Protects Social Security Trust Fund, spends $1 billion to effectively implement reform policies|
|New "Waste, Fraud, and Abuse" Provisions from Kirk Bill (H.R. 3970)||N/A||N/A||Background checks of Medicare billing agencies, exclusing individuals making fraudulent Medicare claims, better fraud informations sharing, hold Medicare contractors liable for payments made to excluded providers, strengthens standards for community mental health centers, recovers Medicare payments to fraudulent health care providers|
Check back later for more details.
On Friday evening, the FDIC reported that it has taken over an additional four banks (La Jolla Bank, George Washington Savings Bank, The La Coste National Bank, Marco Community Bank) for a cost to the FDIC of over $1 billion. This brings the total number of failed banks since the beginning of 2008 to 186. Total deposits of all failed banks now equal over $12 billion for 2010 and $383 billion since the beginning of 2008, all at an estimated cost to the FDIC of about $62.5 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
|Total Deposits||Cost to the FDIC|
|La Jolla Bank||$2,800,000,000||$882,300,000|
|George Washington Savings Bank||$395,300,000||$141,400,000|
|The La Coste National Bank||$49,300,000||$3,700,000|
|Marco Community Bank||$117,100,000||$38,100,000|
Commission Commencement – President Obama signed Thursday the Executive Order officially creating the National Commission on Fiscal Responsibility and Reform. He also named former Clinton White House Chief of Staff Erksine Bowles and former Republican Senator Alan Simpson as the bipartisan co-chairs of the panel. The group is tasked with “identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” It will report on its recommendations by December 1. After originally being non-committal, Republican leaders last week promised to appoint members to the commission. CRFB joined the Concord Coalition and the Committee for Economic Development last week in praising the choices of Bowles and Simpson and offering recommendations for making the commission successful.
A Healthy Debate? – The White House today posted its health care reform proposal in advance of the White House health care summit this Thursday. President Obama has challenged Republicans to bring their own proposal to the gathering, which will be televised live. Although they expressed initial reluctance to participate due to concerns that the event would just be a photo op, Republicans say they will attend. It’s looking more likely that Democrats in Congress will consider a health care overhaul using the budget reconciliation process so that passage will require a simple majority instead of 60 votes.
Fed Up with Debt – A key Fed bank president last week strongly stated that America’s rising debt must be addressed. In remarks before a Peterson-Pew Commission on Budget Reform conference on “Avoiding a Government Debt Crisis” Thomas Hoenig, President of the Federal Reserve Bank of Kansas City and a voting member of the Federal Open Market Committee this year, said that monetizing the debt as some suggest or continuing the status quo would likely lead to an inflation-induced economic crisis. The Fed last week raised the short-term discount rate a quarter point to 0.75 percent, indicating that it may begin reducing its balance sheet and unwind the enormous liquidity it pumped into the financial sector.
Congress Gets Back to Work – Congress reconvenes this week after the Presidents Day recess to a full plate of hearings and other business. Various committees will hold hearings on the President’s budget and Federal Reserve Chairman Ben Bernanke will present his semiannual monetary report to the House and Senate banking committees.
Getting the Job Done? – The Senate plans to vote on a jobs bill crafted by Majority Leader Harry Reid today. The bill is expected to cost about $15 billion, about one-tenth of the cost of the bill passed by the House. The Senate is still considering how to move extensions of expiring provisions, including emergency unemployment benefits and a federal COBRA subsidy for laid-off workers, which were included in the original Senate bill but were carved out by Reid. Those provisions expire on February 28 along with the “doc fix” preventing a 21 percent cut in Medicare payments to doctors.
A Taxing Effort – Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) plan to unveil comprehensive tax reform legislation this week. A joint statement from the duo says the bill “will make the federal tax code simpler and fairer for all Americans and businesses of every size.”
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
The New York Times argued that the temporarily higher federal matching for state Medicaid funds should continue past the end of next year, when the higher matching rates are set to expire. They claimed that this would be a good way to help states' budgets and will help the increased numbers of poor people who currently rely on Medicaid for healthcare.
The Financial Times called on Congress to act on the recommendations that will be made by President Obama's fiscal commission, hoping that the commission can act as political cover for a bipartisan agreement. They also criticized the fact that the commission had to be created in the first place by Executive Order rather than by Congressional statute.
The Washington Post recommended that Congress try to pass a less ambitious healthcare reform bill rather than going for broke. A bill that "cherry-picks" what they argue are the best provisions, such as the Medicare commission, Medicaid expansion, and encouraging health insurance exchanges, would show that "Washington can tackle a serious problem and reach some degree of bipartisan agreement."
The New York Times said that anything short of a total overhaul of the financial system would be inadequate. They specifically criticized Senate Republicans for halting a financial reform bill in the Senate, arguing that this would create the opportunity for "piecemeal reform" that banks and other financial institutions would be able to avoid. The Times wants any reform bill to regulate derivatives and allow regulators to break up too-big-to-fail institutions.
Update: The Wonk Room has put together a short table comparing the President's plan to the House and Senate bills. Check it out below.
|Provision||Obama’s Bill||House Bill||Senate Bill|
|Affordability||Improves the Senate bill’s subsidies for lower income Americans. Families below $44,000 and above $66,000 would pay less in premiums. Also raises the percent of health costs that are paid by insurers from the Senate proposal.||Families earning below $55,000 would still receive more subsidies under the House bill, but Americans earning more than $55,000 would pay higher premiums (as compared to Obama’s proposal). The percent of costs paid by the insurers is higher than Obama’s proposal.||Families making under $55,000 would see higher premiums than Obama’s proposal and the percent of costs paid for by health insurers is lower than Obama’s proposal.|
|Excise Tax||‘Labor agreement’ for everyone. Changes effective date of the Senate policy from 2013 to 2018. Raises the amount of premiums that are exempt from the assessment from $8,500 for singles to $10,200 and from $23,000 for families to $27,500 and indexes these amounts for subsequent years at general inflation plus 1 percent.||No excise tax.||40% excise tax beginning in 2013 on individual polices worth $8,500 or higher and family policies starting at $23,000.|
|Payroll Tax||Adopts Senate bill approach and adds a 2.9% assessment on unearned income.||5.4% surcharge on high-income households.||Payroll tax increase of 0.9% on earnings above a specific threshold for a total employee assessment of 2.35% on these amounts.|
|Individual Mandate||Mixed bag. May be easier for younger Americans to opt out. Lowers flat dollar amount to $695 by 2016 from the Senate bill and raises the alternative percent of income to House levels that individuals will pay for not having health insurance. Hardship waiver when premiums over 8% of their income, and couples under $18,700 are exempt from the requirement.||2.5% of income by 2016 with a limit of the average national health premium.||Flat rate of $750 by 2016 and hardship waiver when premiums exceed 8% of income.|
|Employer Mandate||No mandate, free rider provision. Large employers (50+ workers) have to pay a fee if employees receive subsidies. Improves transition to free-rider policy by subtracting first 30 workers. (A firm with 51 workers that does not offer coverage will pay an amount equal to 51 minus 30, or 21 times the applicable per employee payment amount.)||Employer mandate. The House bill requires a payroll tax for employers that do not offer health insurance that meets minimum standards.||No mandate, free rider provision. Large employers have to pay a fee if taxpayers are supporting the health insurance for their workers.|
|Grandfathered plans||Plans have to conform to new regulations. Plans have cover adult dependents up to 26yo, prohibits rescission. After exchanges begin in 2014, plans can’t institute annual and lifetime limits or pre-existing condition exclusions. Beginning in 2018, the President’s Proposal requires “grandfathered” plans to cover proven preventive services with no cost sharing.||“Grandfather” policy that allows people who like their current coverage, to keep it. Abide by all rules after 5 years.||“Grandfather” policy that allows people who like their current coverage, to keep it.|
|Medicare Donut Hole||Completely closes donut hole. Replaces $500 increase threshold increase limit with a $250 rebate to Medicare beneficiaries who hit the donut hole in 2010. Closes donut hole by phasing down the coinsurance so it is the standard 25% by 2020 throughout the coverage gap.||The House bill fully phases out the donut hole over 10 years. Raise the dollar amount before the donut hole begins by $500 in 2010.||The Senate bill provides a 50% discount for certain drugs in the donut hole. Raise the dollar amount before the donut hole begins by $500 in 2010.|
Check out the video from WeCantPayThatTab.org:
A month ago, we called on those who oppose tax increases to take the spending challenge, showing us how to stabilize the debt only through spending cuts, and those who oppose spending cuts to show us how to stabilize the debt through tax increases. We think it will be quite difficult to get our fiscal house in order without addressing both sides of the budget. But the truth is, we also think it is time to start getting specific on policy ideas -- and are willing to listen to whatever idea anyone has to help the dismal fiscal situation.
Privatize General Motors. Stop the spending on the recovery act (stimulus package) - whatever is left. Funds from repaid TARP should go back to closing the deficit, not spent on something else.
Let’s see how much these would save…
Privatize GM: After the government converted about $40 billion in GM stock into a 60.8 percent ownership stake in the company, GM now owes the government a total of $5.7 billion. But privatizing the 60.8 percent ownership stake now, when GM still faces weak finances and an uncertain future, would actually increase costs to the government -- given that an ownership sale now would only recoup a fraction of the billions originally invested. And since the CBO calculates everything on a risk-adjusted net present value basis, baseline forecasts already assume the present value of owning GM and that the government will not hold onto the company indefinitely. So unfortunately, this is probably not a money saver.
Stop spending Recovery Act (ARRA) funds: Wednesday was the one-year anniversary of the ARRA, a large package of tax cuts and spending increases expected to cost $862 billion over 10-years. So far, based on our tracking at Stimulus.org, a bit over $300 billion has gone out. Back of the envelope math suggests that stopping stimulus spending tomorrow would save about $550 billion (although the actual number would vary for a number of reasons). A more realistic policy would be to cancel all stimulus spending which has not yet been obligated; we estimate this would save about $230 billion. If you were to also repeal the tax credits made available for 2010 -- including what has already been issued -- this might save another $75 billion or so.
These estimates exclude interest savings, but the also do not account for the drop in demand and output which might occur is stimulus is withdrawn too early.
Don’t spend any more TARP funds: TARP was originally given $700 billion in budget authority – meaning that the Treasury had the ability to spend up to $700 billion if it as deemed necessary given financial market conditions. Currently, about $400 billion remains available.
When TARP was created, it was scored on what we refer to as a risk-adjusted present value basis. The calculation itself is quite complicated (see here for a more detailed explanation), but it essentially aims to estimate the net cost of any TARP spending to the deficit, based on the likelihood the loans and investments will be paid/bought back.
In the January baseline, the CBO estimated a roughly 25 percent subsidy rate for all investments made so far. So that means the $300 billion disbursed so far have increased the deficit by around $75 billion. Now compared to spending all of the remaining $400 billion in funds, not spending any would save about $100 billion -- assuming CBO's 25 percent subsidy rate. However, in its baseline, CBO already assumes that $350 billion of that will never be spent. In other words, current deficit measures assume that only $50 billion more in TARP will go out, total. So technically, the budgetary savings of rescinding that would be $25 billion.
|Rescind all ARRA spending and tax cuts immediately||$550|
|Rescind all unobligated ARRA spending||$230|
|Repeal ARRA tax credits for 2010||$75|
|Don't spend anymore TARP funds||$25|
In the face of $14 trillion of deficits over the next decade (according to our “current policy” baseline), ending stimulus spending would make only a small dent. There also is a legitimate concern that withdrawing stimulus too quickly could send the economy into a "double-dip" recession.
That said, while these do not come close to solving the problem, they provide significant savings.
We continue to applaud our contestants for doing what to many policymakers are unwilling to do: come up with specific spending cuts and tax increases to begin bringing the debt under control.
As always, we welcome all additional suggestions; and will try to provide estimated budgetary savings for them, if we can.
Feel free to offer your own in the comment queue below.
The CBO has released its cost estimate of the Senate Jobs bill, the Hiring Incentives to Restore Employment Act, as introduced by Senator Harry Reid last week (compare it to the House jobs bill here). The bill would provide about $15.6 billion in funds directed toward job creation.
On the revenue side, the legislation mainly calls for temporarily exempting the wages of workers hired in 2010 from employer payroll taxes and creating a new tax credit for employers who retain new workers for at least one year. On the spending side, the legislation would extend through this year the authorization for surface transportation programs and would transfer $19.5 billion from the general fund to the highway trust fund.
The bill also includes nearly $17 billion in offsets from changes in foreign account tax compliance, including increased disclosure of beneficial owners, under reporting of foreign assets, and other disclosure provisions.
|Provision||2010-2011 Cost (billions)||2010-2020 Cost (billions)|
|Tax Incentives for Hiring and Retaining Unemployed Workers||$9.8||$13.0|
|Qualified Tax Credit Bonds||-$0.4||$2.3|
|Extension of Current Surface Transportation Programs^||$0.2||$0.3|
|Sub Total for Job Creation Funds||$10.5||$15.6|
|Total Deficit Impact||$9.7||-$1.1|
*Denotes a cost between -$50 million and $50 million.
^Under scoring conventions, CBO does not score the transfer of $19.5 billion from the General Fund to the Highway Trust Fund. Since the Appropriations Committees would have to pass additional legislation to give the Highway Trust Fund the authority to expend these resources, this legislation would not result in additional outlays.