April 2011

President Obama to Present Deficit-Reduction Plan Wednesday

Yesterday, White House senior adviser David Plouffe appeared on several Sunday talk shows announcing that President Obama would be presenting his own deficit reduction plan this week. Specific aspects of the President's plan are still unknown, as is the level of detail it will include. However Mr. Plouffe did say that taxes would have to be part of the equation as well as reduced spending on entitlement programs, and that the President is looking for savings in "all corners of government."

The announcement comes two days after a late-night deal was reached between leaders in both parties on spending levels for the current fiscal year, narrowly avoiding a government shutdown. It also comes after weeks of criticism that President Obama and the White House have failed to lead on critical budget issues.

We'll be keeping a close eye on developments related to President Obama's upcoming proposal, so make sure to check back with The Bottom Line for updates throughout the week.

 

 

The Costs of a Shutdown

With a possible federal government shutdown looming in only a few short hours, it is worth noting some of the costs if such an action occurs. With a lot hanging in the balance, a shutdown could have some serious consequences.

Budgetary costs

A government shutdown will cost taxpayers money. This may seem counterintuitive at first, but the experience from previous shutdowns bears this out. A very basic estimate from the Office and Management and Budget (OMB) on the last government shutdown (which was actually two partial shutdowns in late 1995 and early 1996 that totaled 27 days) put the price tag at over $1.4 billion. As OMB deputy director Jeffery Zients said yesterday, "When you have to shut something down, that costs money, and ramping something back up costs money." For instance, government-funded construction projects around the country have to be stopped and secured, and when they are re-opened, started again. There will also be lost revenues -- various fees will not be collected and gift shops at places like Smithsonian museums and national monuments will be shuttered, though costs will still be incurred in securing these sites.

Salaries for furloughed government employees must also be considered. In previous shutdowns, federal employees received back pay for work days the government was closed, even though they did not work. The White House has already indicated it would request back pay for government employees if there is a shutdown. Plus, there will be costs associated with the loss of productivity as federal workers stay home.

Economic effects

There could also be some economic effects of a shutdown. Federal institutions like national parks can be significant sources of income for local communities, attracting tourists and business. Families of federal workers will likely restrict their spending due to the uncertainty of getting a paycheck. Government contractors and businesses that receive assistance from government agencies, such as the Small Business Administration, could see their business impacted as well.

It's also possible that, if long enough, a shutdown could also impair the fragile economic recovery. It is difficult to predict how a shutdown would affect market confidence, but with creditors increasingly becoming concerned about the ability of the U.S. to confront its mounting debt, an impasse resulting in a shutdown is only likely to compound those fears. As CRFB policy director Marc Goldwein explained in an article today, "the government shutdown will call into question whether politicians can raise the debt ceiling, and more fundamentally, whether they can deal with our long-term fiscal issues."

Political impact

A shutdown would also have costs that cannot be measured in dollars. The electorate already has a historically low opinion of Washington. A shutdown would worsen the sentiment. The lack of trust could make it even more difficult for policymakers to sell the public on tough measures down the road to get our fiscal house in order. The episode could also further sour the already poisonous political atmosphere among the parties, making bipartisan solutions more difficult to achieve.

A government shutdown could be expensive on many levels. Let's hope it can be avoided.

Government Shutdown Watch -- CRFB to Update Throughout the Day

Update 04-09-11 10:15 am: The shutdown has been averted. Details here.

Update 6:51 pm: Conflicting reports on whether deal close on Planned Parenthood rider. Check out @BudgetHawks on Twitter for more updates tonight.

Update: 5:55 pm: Sen. Harry Reid orginally scheduled to speak on Senate floor at 6 pm. Now will happen at 8 pm at earliest.

Update 5:10 pm: Many Republicans saying it is time to move on to bigger battles. Sign of a deal?

Update: 1:25 pm: Speaker Boehner emerged from the meeting with his caucus to say that "almost all" policy issues have been resolved. But still no deal. He is hopeful an agreement can be reached before midnight. Majority Leader Reid meeting with his caucus now. Both Reid and Boehner say they will forgo their pay if a shutdown occurs.

Update 12:21 pm: Senate Minority Leader Mitch McConnell (R-KY) said he believes there will be an "agreement here shortly." Speaker Boehner meeting with House GOP conference now. Senate Democratic conference meeting at 1 pm.

The federal government is headed for a shutdown at midnight tonight unless agreement is reached on either federal spending for the rest of the fiscal year or a stopgap measure to keep government operating temporarily. Budget negotiations involving House Speaker John Boehner (R-OH), Senate Majority Leader Harry Reid (D-NV) and the White House continue.

Negotiators are reportedly close to an agreement on cutting spending about $38 billion below 2010 spending levels. Yet, disputes over funding for Planned Parenthoood and certain Environmental Protection Agency activities remain a sticking point.

The budget talks are ongoing. Speaker Boehner is set to address the House GOP Conference at noon today. The reaction of his colleagues to the latest developments will significantly influence the ability to work out a deal in time.

A federal government shutdown is in no one's interest. Not only will a shutdown adversely affect the budget (as the Office of Management and Budget pointed out yesterday, shutting down and then ramping government operations back up costs money), it will also affect the economy and market confidence in our ability to deal with our fiscal challenges. 

We will be updating throughout the day on the situation. Follow us on Twitter (@BudgetHawks) to get immediate updates.

Market Watch: April 3-8

The federal budget this week has been on everyone’s mind and television set. With the federal government set to shut down tonight at midnight if no budget is passed, markets have been keeping an eye on what is happening here in Washington. Currently, no agreement is in place and signs increasingly point to a government shutdown with agencies and leaders in both parties preparing.

This is bad news for everyone; markets will almost certainly react negatively. A government shutdown could have significant economic effects, and would impact government contractors, federal employees, taxpayers expecting refunds, tourists, and homebuyers, among others. More significantly, a shutdown could hurt market confidence. If policymakers cannot come to an agreement on funding government for only a few short-months where the differences are only several billion dollars, how will they come together to raise the debt ceiling? And how will they be able to deal with our looming fiscal challenges? 

On the international front, Portugal has chosen to seek international aid from the EU to deal with their excessive debt. The prospect of this bailout has eased market fears about Portugal’s finances; according to Erik Nielsen, chief European economist at Goldman Sachs, “[t]his is good news. We've been saying for a while that Portugal's finances were not sustainable at these rates. We think the contagion stops here.” They are expected to recieve between $86 billion and $115 billion.

Meanwhile, food and gas prices have continued in their upward trend; oil prices have risen from $107.94 last friday, to $111.90 today. Some analysts have argued that these price increases will offset the positive stimulative effect of the tax cut deal (which included a payroll tax holiday) last year. They could also lead to increases in overall inflation, which could put more pressure on the federal reserve to increase interest rates, as some central banks have already begun doing.

 

Republican Study Committee FY2012 Budget Released

UPDATED 4/8/11 to include a link to the budget framework released by the Congressional Progressive Caucus.

Today, the Republican Study Committee (RSC) released its FY 2012 budget proposal. This comes on the heels of House Budget Chairman Paul Ryan’s (R-WI) budget, released earlier this week.

Apparently, neither side is completely happy with their respective party’s spending blueprint. Nearly two months ago, President Obama released his budget. And along with today's RSC contribution, additional proposals from across the aisle are expected to be released soon by the House Democratic leadership, the Congressional Black Caucus, and the Congressional Progressive Caucus (pdf).

As expected, the RSC budget is the most aggressive of the bunch. Under its proposal, the budget achieves balance in FY 2020, projecting surpluses of $50 billion that year and $115 billion in FY 2021. This would be achieved by bringing spending down to 18 percent of GDP by 2017, allowing revenues to creep back up to 18 percent of GDP by 2014, and freezing both at those levels thereafter.

On the spending side, the RSC would return FY 2012 non-defense discretionary spending to FY 2006 levels, which they estimate equates to a 25 percent cut compared to the enacted FY 2010 budget. For 2013-2021, non-defense discretionary spending would never rise above 2008 levels. The RSC also proposes larger Medicaid reductions than in the Chairman's budget -- cutting to 2006 levels and restricting Medicaid's spending growth to the rate of inflation. The RSC's Medicare plan includes a slightly more aggressive approach to raising the eligibility age, but is otherwise the same as the Chairman's proposal -- except that the RSC's premium support plan begins in 2017 as opposed to 2022. The RSC also proposes to gradually raise the Social Security normal retirement age to 70 for younger workers. While this does not have an immediate significant revenue effect, it is notable for its specificity compared to the Chairman and President's plans.

 

 

On the revenue side, the RSC proposal is very similar, if not the same as the Chairman’s proposal. It makes permanent the 2001 and 2003 tax cuts and does not allow the Alternative Minimum Tax (AMT) to hit additional households. It also repeals all tax increases included in the recent health care law. 

Additionally, the RSC proposal would reduce the corporate tax rate to 25 percent. However, aside from those details, they propose few other specific tax policy changes beyond elimination of a handful of agriculture subsidies.

CRFB commends the RSC and others for putting specific ideas on the table. This is another bold proposal intended to right the country’s floundering fiscal ship. But we continue to warn that bold proposals alone are not enough. Bipartisan support is necessary for actual agreement on a solution, and that requires an honest discussion which includes revenues and defense spending as part of the equation.

UPDATE: In a memo to House Budget Committee Ranking Member Chris Van Hollen (D-MD), Progressive Caucus co-chairs Raul Grijalva (D-AZ) and Keith Ellison (D-MN) summarized their group's as-yet-unreleased FY 2012 budget proposal, which they call "The People's Budget." Their plan would reach budget surplus by 2021, bringing debt to 64.4 percent of GDP in that year. They would achieve this through revenue from a mixture of individual and corporate tax changes as well as defense cuts, enactment of a public option, and other health care reforms, while increasing investments in things such as education, R&D, and infrastructure. The Progressive Caucus would also enact Social Security reforms which would bring the program into solvency through an increase in the payroll taxable maximum on the employee side and removal of the payroll taxable maximum on the employer side while increasing benefits.

Health Care Changes in Paul Ryan's Plan

Considering its role as the biggest driver of long-term deficits and debt, health spending has to be addressed in any serious long-term budget plan. And to Rep. Paul Ryan's credit, he has definitely done that in his FY 2012 budget proposal. There are numerous provisions in the proposal that deal with federal health care spending. Let's go through them:

  • Medicaid Block Granting: Starting in 2013, Congressman Ryan's budget converts Medicaid into a block grant to the states that would grow each year by population growth and inflation. This would save the federal government $771 billion over the next decade, and significantly more in later years. Along with some other small changes, the proposal would reduce base (non-PPACA, or health care reform) Medicaid spending by about one third in 2022 and one half in 2030. By giving states full responsibility over their own Medicaid costs and by reducing their federal subsidy, block granting the program would likely lower overall (not just federal) Medicaid spending and lead to some new efficiencies -- particularly since the budget calls for granting additional flexibility to the states. However, the reductions in spending are quite deep, and would therefore likely cause states to cut provider payment rates, scale back the benefits package, limit eligibility, and/or find additional money from other tax and spending changes.
  • Medicare Premium Support: Beginning for those who turn 65 in 2022, Medicare would be transformed into a premium support system. Beneficiaries would receive an $8,000 subsidy -- adjusted each year for inflation and age composition -- to be spent on one of a number of private insurance plans. The plans would all be required to comply with a standard for benefits package, accept all enrollees, and charge everyone of the same age the same price (HHS would manage various risk subsidies and transfers to avoid adverse selection problems). In addition, under the Ryan plan, subsidies would be reduced for higher earners, and lower earners would receive additional government funds through a Medical Savings Account. Though these changes will have no impact on the deficit over the next decade, they will result in substantial government savings over time -- savings which will come largely from higher beneficiary contributions since health spending is projected to grow far more quickly than the rate of inflation (which is roughly how fast the premiums grow).
  • Raising the Medicare Retirement Age to 67: In addition to changing the structure of Medicare, Congressman Ryan would increase the eligibility age for the program. Beginning in 2022, the plan calls for increasing it from 65 to 67 at a rate of 2 months every year (so that it reaches 67 by 2033). In isolation, CBO has estimated this measure would eventually reduce Medicare costs by 7 percent.
  • Medical Malpractice Liability Reform: Congressman Ryan's budget calls for comprehensive medical malpractice liability reform, or tort reform. According to CBO, a proposal like this could save $60 billion in total.
  • Health Reform Repeal: This move is an expected one, given continuous Republican calls to repeal the Affordable Care Act (ACA). However, in contrast to what some in his party have proposed, Congressman Ryan actually keeps most of the Medicare cuts from ACA and dedicates them to deficit reduction. Whatever one thinks of the merits of repealing the coverage provisions, Congressman Ryan deserves credit for doing so in a fiscally responsible way -- subtracting from rather than adding to the budget deficit. That said, the Congressman's repeal would axe two of the provisions with the most promise for "bending the cost curve": the excise tax on high-cost insurance and the Independent Payment Advisory Board (IPAB). In addition, he repeals the other revenue provisions (such as the Hospital Insurance surtax) at a time when we need more revenue, not less. Congressman Ryan would do better to keep IPAB and the revenue provisions, as well as the other Medicare cuts.
  • (Not) Paying for the Doc Fix: Like President Obama, Congressman Ryan calls for a "Doc Fix" to prevent a roughly 30 percent cut in Medicare physician payments. Also like the President, though, the Congressman relies on a "magic asterisk" to pay for this fix -- in other words he counts on savings which he doesn't specify. We criticized President Obama for relying on this gimmick for eight years of offsets; Congressman Ryan's budget goes the extra mile by relying on it for ten. Absent this gimmick, his debt numbers would be more than $350 billion (1.5 percent of GDP) higher in 2021.

With a few exceptions (such as the magic asterisk for the Doc Fix), Congressman Ryan deserves an incredible amount of credit for taking on the largest driver of our growing debt -- federal health spending -- head on. Not only would these changes reduce federal health spending substantially over the next decade, but they would also bend the federal health care cost curve in a way that makes these programs more than sustainable over the long-run.

CBO can attest to the magnitude of the changes. Under their extended-baseline scenario (current law extended beyond ten years), federal spending on health care programs grows from 5.5 percent of GDP in 2010, to almost 9 percent in 2030, and over 12 percent by 2050. Under Congressman Ryan's plan, it would grow to only 6 percent in 2030 and then decline to less than 5 percent of GDP in 2050.

Of course, it is important to recognize that a substantial portion of these savings will come from higher premiums for beneficiaries and higher costs to states. While it's true that both block granting and premium support have the potential to change incentives in a way that encourages efficiencies and slows cost growth, few if any analysts believe it is possible to slow per-capita health spending down to the rate of inflation; getting down to GDP+1 percent will be tough enough.

Those who would argue that this rate of growth is too slow have a fair point (Ryan-Rivlin allowed growth at GDP+1 percent), as do those who would prefer to control costs in alternative ways (the Fiscal Commission listed several). But we have to get health care spending under control, and to the extent we are more lenient on health care than Congressman Ryan, it's important to identify savings elsewhere in the budget (for example, from Social Security and defense spending) or new revenues (especially from tax expenditures) to make up at least the lion's share of the difference.

Even with substantial revenues and cuts elsewhere, though, federal health spending must be brought under control. Congressman Ryan has presented one way forward; now others must step up with alternatives.

Sen. Franken Introduces Measure to Pay for Future Wars

Today, Sen. Al Franken (D-MN) introduced legislation to require Congress to offset war costs with other tax or spending changes.

The bill, the Pay for War Resolution, would require Congress to pay for the costs of a future war over the subsequent ten-year window. With regards to the wars in Iraq and Afghanistan -- which have cost over $1 trillion so far -- the bill would allow continued spending at the levels requested by the President, requiring offsets for additional spending. Beginning in 2017, all war costs would have to be paid for, absent a waiver voted on by three-fifth of the Senate (60 votes).

In a statement on the floor, Sen. Franken said,

"We have to ensure that Iraq and Afghanistan remain anomalies in American history. And that’s what my resolution seeks to do. It will ensure that future wars don’t make our deficit and debt problem worse. It will ensure that Congress and American citizens must face the financial sacrifice of going to war. And it will force us to decide whether a war is worth that sacrifice."

We applaud Sen. Franken for authoring thoughtful legislation on an important topic. In the past, CRFB has supported measures to pay for war (see here and here). Absent an immediate and unforeseen emergency, there is no reason war funding should be exempt from the basic principles of budgeting. CRFB President Maya MacGuineas called the bill “a sensible approach to ensuring that we budget for war.” We wish the Senator the best of luck in passing the bill.

So Where Do the Savings Come From?

Yesterday, Congressman Paul Ryan released his budget proposal, which would bring the federal debt down to 67.5 percent of GDP by 2021, and significantly further thereafter.

Ideally, it is best to think about a proposal like this by looking at where takes future deficits and debt in absolute terms. However, it's also important to understand where the cuts come from, which means determining their magnitude relative to a "baseline".

Compared with current law, Congressman Ryan's budget would reduce deficits by $1.6 trillion over ten years. Compared to the President's Budget, it would reduce it by $4.4 trillion.

  Savings Compared to CBO Baseline
Savings Compared to President's Budget
Cut Non-Security Spending to FY 2006 Levels, Freeze, and Hold to Inflation
 $1,617  $923
Limit Growth in Security Spending and Assume $50 billion per year Plug for War Spending^ $830 $0
Block Grant Medicaid  $771  $735
Repeal Coverage Provisions and Tax Increases from PPACA $590 $590
Enact Medium-Term Medicare Savings
 $30  $18
Fully Extend 2001/2003 Tax Cuts*  -$3,820 -$812
Other Revenue Changes $0 -$415
Reduce and Block Grant Food Stamps $126 $129
Increase Contributions for Federal Retirement Program $123 $123
Reduce Agricultural Subsidies $28 $22
Other Mandatory Spending Policies $909 $1,734
     
Enact Doc Fixes -$298 $0
     
Interest Savings
$383  $885
Total Deficit Reduction $1,288 $3,932
     
Memo:    

Unspecified Offsets for Doc Fix and Transportation (Including Interest)

$361 -$499
Total Deficit Reduction, Including Unspecified Offsets
$1,649  $3,593

*Includes outlay effects from refundable portions of credits and deductions.
^Savings compared to CBO baseline largely reflect scheduled reductions in war spending, not deficit-reducing policies.

However you cut it, the largest savings in his plan come from reducing non-security discretionary spending, block granting Medicaid, and repealing the tax and coverage provisions of PPACA. Moving in the other direction, Congressman Ryan actually reduces revenues substantially relative to current law -- mainly by calling for the extension of all of the the 2001/2003/2010 tax cuts.

This is certainly a bold and honest way to bring the deficit under control. But getting bipartisan support will require putting defense and revenues on the table.

Between the ‘Line’s: Paths, Deadlines, Ceilings and Receipts

House GOP Budget Unveiled – On Tuesday, House Budget Committee Chairman Paul Ryan (R-WI) unveiled his fiscal year 2012 budget proposal, titled “The Path to Prosperity.” It is the Republican response to the White House budget released last month. The House Budget Committee will mark-up the bill today in an all-day session with the goal of voting on the House floor next week. House Budget Committee Ranking Member Chris Van Hollen (D-MD) says that Democrats will offer an alternative ahead of the House vote. The Ryan budget aims to reduce debt to 67.5 percent of GDP by 2021. It seeks to accomplish this goal by making steep cuts to non-security discretionary spending and substantial changes to Medicaid and Medicare. It leaves defense spending mostly untouched and makes significant reforms to the tax system without raising additional revenue. In a preliminary analysis of the proposal, CRFB praised it for its debt reduction goal and for undertaking entitlement reform, but called for defense and revenue to be on the table in order to achieve a plan with enough support to be enacted. Stay tuned for more analysis. Ryan's counterpart, Senate Budget Committee Chair Kent Conrad (D-ND), says he is holding off on his budget proposal to give the "Gang of Six" senators that he is a part of more time to develop a bipartisan, comprehensive fiscal plan.

Congress Faces Budget Deadline – While the debate is turning to the FY 2012 budget, Congress has yet to put away the FY 2011 budget. The current continuing resolution (CR) funding the federal government expires on Friday at midnight and further stopgap measures appear unlikely. President Obama summoned negotiators to the White House on Tuesday and promised to do so each day if progress is not made. He also stated that he will not approve another CR without a deal for the rest of the year. Speaker of the House John Boehner (R-OH) upped the ante by asking for $40 billion in spending cuts. So lawmakers face a basic choice: a deal to finance federal operations for the rest of the year or a government shutdown.

Blue Dogs Will Run with a Bipartisan Pack – Leaders of the Blue Dog Coalition of moderate and conservative Democrats on Monday sent a letter to President Obama calling for bipartisan compromise in the negotiations over spending for the rest of this year so that policymakers can move on to “a more serious conversation about the structural issues that plague our nation’s fiscal health.” They state “we believe that it is imperative that both Democrats and Republicans work together and make compromises to avoid a government shutdown.” This could signal that Speaker Boehner will have some Democratic support on a compromise to offset conservative Republicans who may refuse to back anything less than the $61 billion in cuts the House has already passed.

Treasury Details Limits of Avoiding Debt Limit – On Monday, Treasury Secretary Tim Geithner sent a letter to Congress providing the clearest picture yet for when the statutory debt ceiling will be reached and the limited options he has to delay a U.S. default if Congress does not increase the limit. Geithner said the debt limit will be reached "no later than May 16" and that he had authority to take “extraordinary measures” to delay a U.S. default on its debt obligations for only about eight weeks afterwards. He said he will have no more “headroom to borrow” after around July 8 if the limit is not increased before then and pointed out that the high deficit restricts his flexibility to act. Geithner also stressed that “[t]he longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations” and that “[d]efault would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Lots of Tax Reform Talk – With the April 18 deadline for filing federal income tax returns fast approaching, talk of reforming the tax code is accelerating. The Congressional Joint Committee on Taxation convened a roundtable discussion this morning with former Treasury Secretary James Baker III and former House Minority Leader Dick Gephardt to discuss reforming the tax code. The nonpartisan Tax Policy Center also hosted a tax reform event today examining whether eliminating the numerous breaks in the code will improve the system. Senators Ron Wyden (D-OR) and Dan Coats (R-IN) introduced fundamental tax reform legislation this week that abolishes many of these so-called tax expenditures while lowering tax rates, and the budget proposal from Rep. Ryan also calls for a similar approach, though he is less specific. Next week, the Moment of Truth Project, led by White House Fiscal Commission co-chairs Alan Simpson and Erskine Bowles, will host a tax reform forum in advance of Tax Day. The Fiscal Commission's debt reduction plan also included tax reform that repeals most tax expenditures and lowers rates while raising additional revenue to reduce the debt. See the CRFB paper on tax expenditures here.

Processing Budget Process Reform – As the seemingly endless FY 2011 budget deliberations continue and lawmakers gear up to go through it all again with the FY 2012 budget, fixing the dysfunctional budget process is gaining steam with a variety of ideas being floated. Rep. Mike Quigley (D-IL) recently introduced sweeping legislation to improve transparency in the process. The Senate GOP is rallying behind a balanced budget amendment to the U.S. Constitution, House Republican leaders are considering biennial budgeting, and the Ryan budget also includes some process reforms. The Peterson-Pew Commission on Budget Reform has provided a comprehensive set of reforms to enhance the budget process and advance the setting and implementation of fiscal goals through targets, triggers and transparency.

Tax Receipt Idea Gets Good Reception – One of the ideas promoted by Rep. Quigley and others is a receipt for taxpayers detailing how their taxes are spent by the federal government. The nonpartisan group Third Way has created an online Tax Receipt Calculator that shows an individual where their tax dollars have gone. Along with CRFB’s Stabilize the Debt online budget simulator, it is a useful educational tool to help Americans understand the budget.

Amendments Provide Opportunities – Popular legislation moving through the Senate to renew two small business programs is being used as a vehicle to get votes on a variety of proposals. Several amendments involving fiscal policy will get votes today. One is from Senators Tom Coburn (R-OK) and Mark Warner (D-VA), SA 273, that will call on the federal government to “eliminate, consolidate, or streamline Government programs and agencies with duplicative and overlapping missions” that were identified in a recent Government Accountability Office report.

Sens. Wyden and Coats Introduce Tax Reform Legislation

Today, Senators Ron Wyden (D-OR) and Dan Coats (R-IN) introduced bipartisan legislation to comprehensively reform the existing U.S. tax system in a revenue-neutral manner. The "Bipartisan Tax Fairness and Simplification Act of 2011" fundamentally reforms the U.S. tax code by eliminating many tax expenditures (but not some of the most popular ones like the mortgage interest deduction, charitable giving, the employer-provided health care exclusion, and the state and local tax deduction), reducing the number of individual income tax brackets from six to three, creating a single corporate tax rate, and creating a one-page tax form for most taxpayers.

Specifically, this bill--which is nearly identical to the bill sponsored by Wyden and former Senator Judd Gregg (R-NH) in the last Congress--would set three total tax brackets at 15 percent, 25 percent and 35 percent (changing the current brackets of 10, 15, 25, 28, 33, and 35 percent). The bill would also eliminate the Alternative Minimum Tax (AMT) and roughly triple the standard deduction. One major difference is that the newer version includes a temporary tax holiday that would allow multi-national American companies to bring overseas profits to the U.S. at a lower tax rate.

The bill also includes broader corporate tax reforms. It creates a single corporate tax rate of 24 percent through the reduction of various corporate tax breaks. Additionally, it creates a 100 percent deduction for all companies with annual gross receipts of less than $1 million to expense all equipment and inventory costs in a single year.

The new bill and its previous version represent important contributions to the vital tax reform conversation--that seems to be gaining steam--in that they highlight modernization and simplification of the tax code in a way that promotes economic growth. In particular, targeting tax expenditures for repeal and reform is a necessary step that has bipartisan support (see some ideas for reforming tax expenditures here).

Although Wyden-Coats offers an important starting point for reform, given the depth of our fiscal challenges the Senators must look beyond revenue-neutral reforms. Recent proposals, such as the Fiscal Commission's recommendations, show that lawmakers could be even more aggressive in tackling tax expenditures and reducing marginal tax rates while also contributing significant savings to deficit reduction. In a blog post last year on the Wyden-Gregg bill, we contended it did not go far enough in eliminating tax expenditures and we raised concerns over its deficit impact and made some suggestions for improvement.

There is widespread consensus that the tax code needs to be updated and streamlined. There is also growing agreement that fundamental tax reform will be an essential part of a much-needed comprehensive plan to get the U.S. on the right fiscal track. Everything, including increased revenue, will have to be on the table. 

Paul Ryan Unveils FY 2012 Budget

Today, Rep. Paul Ryan (R-WI), chairman of the House Budget Committee, unveiled his FY 2012 budget proposal. His budget would bring debt down to 67.5 percent of GDP by 2021 and would reduce the deficit by over $4.4 trillion over the next ten years when compared to CBO's score of the President's budget.

At the heart of this proposal are significant deficit reducing reforms to Medicaid and Medicare: the creation of a premium-support model for Medicare (although this has minimal effect over the 10 year window as it begins in 2022), changing Medicaid from an entitlement program to a block-grant funded program to the states, and repealing the coverage provisions and tax increases from health care reform. The Medicaid change would save over $700 billion over ten years. Ryan’s budget would also cap non-security discretionary spending at FY 2006 levels, freeze it for five years, and then holds security spending growth to inflation thereafter. On security spending, Ryan's proposal does very little--mirroring the President's request to reduce defense spending by $78 billion over five years.

On tax reform, Ryan assumes that the 2001/2003 tax cuts are extended throughout the decade. He also calls for fundamental tax reform via eliminating and reducing many tax expenditures and reducing marginal rates, but does so in an entirely revenue neutral manner. Ryan’s budget also calls for a special process to address Social Security if it is projected to be insolvent--which it certainly is (see here for more).

Irrespective of the policies, the budget succeeds in reducing yearly deficits and stabilizing and eventually reducing federal debt. Since the budget focuses on federal health spending both in this decade and beyond, federal deficits and debt are further reduced in the out-years and would be brought to more sustainbable levels-- debt is reduced to 48% in 2040 and 10% in 2050.

Deficits as a Percentage of GDP

Plan 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2021
CBO March Baseline 9.8% 7.0% 4.6% 3.6% 3.2% 3.3% 3.0% 2.9% 3.0% 3.1% 3.1% 3.7%
President's Budget 9.5% 7.4% 5.5% 4.4% 4.1% 4.4% 4.3% 4.3% 4.7% 4.8% 4.9% 4.8%
Rep. Paul Ryan's Budget  9.2% 6.3% 4.3% 2.9% 2.4% 2.5% 2.0%  1.8% 1.9% 1.8% 1.6% 2.7%

 

Rep. Paul Ryan's budget has signifigantly lower deficits than President Obama's budget under the same economic conditions with a deficit over 3.3 percentange points lower in 2021 and averages 2.1 percantage lower over the ten year window. As a result, the debt path is also on a better trajectory.

 

 

As CRFB President Maya MacGuineas said,

"This is a bold budget, and Congressman Ryan should be congratulated for putting forward structural budget reforms to address our unsustainable debt path. However, while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward.
 

All parts of the budget, including defense and revenues, will have to be part of a budget deal. Given the need to put a budget fix in place as quickly as possible, we need to turn our attention to developing a comprehensive plan that can garner broad-based support. Time is not on our side here.

We hope that Congressman Ryan's proposal will not generate attacks but rather lead to a larger discussion over how to move forward with a comprehensive solution. With lawmakers overly focused on a very small part of the budget, this is an important reminder of the tremendous fiscal challenges the country faces and that we should be looking to save not just billions, but trillions. Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward."

For a more detailed analysis, see our Press Release from today and for detailed analysis of the President’s Budget (click here to read our blog series on the President's budget). 

CBO Releases Long-Term Analysis of Ryan's Proposal

In response to Representative Paul Ryan's (R-WI) FY 2012 Budget proposal, CBO has released a long-term analysis of the proposal. The analysis, which includes the numbers reflected in Ryan's proposal released today, also goes into the policy effects of the various reforms he is offering and the long-term effects of his proposal.

Driving the long-term impact of Congressman Ryan's budget is a number of health care changes, including the block granting of Medicaid, the repeal of the coverage provisions of the Affordable Care Act, and the implementation of a premium support system for Medicare.

According to the analysis, debt would fall to 64 percent of GDP in 2030, 48 percent in 2040, and 10 percent in 2050. This is a substantial improvement from current law and from current policy.

  

Read CRFB's analysis of Congressman Ryan's proposal here.