October 2011
MY VIEW: Vic Fazio
Today's Roll Call included an op-ed by former Representative and current CRFB board member Vic Fazio. He discusses the need for fiscal reform right now, calling on his own party, Democrats, to address our fiscal challenges. He notes that the Super Committee may introduce recommendations that are painful for Democrats, but staying engaged in the process will lead to a plan that will be more agreeable to them. He also goes over the recommendations of the Bowles-Simpson report and Gang of Six recommendations and urges the Super Committee to heed their principles.
He writes:
- Maintain critical investments for future growth. A long-term plan can ensure that we are reducing the deficit on our own terms and not hindering our long-term growth by underfunding critical investments in education, infrastructure and innovation.
- Avoid disrupting a fragile economic recovery. The fiscal commission and gang of six provided for phasing in savings gradually, with significant spending cuts not beginning until 2013. At the same time, by putting in place a credible plan to stabilize the debt, the proposals would strengthen long-term economic growth by eliminating the risk of a fiscal crisis.
- Ensure revenue is part of the solution. Federal revenue is at its lowest percentage of gross domestic product since the Korean War, and going forward, we will need more if we want to reduce the debt as a share of the economy while adequately funding government in an era of increased longevity and rising health care costs. Under the gang of six proposal, revenues would increase from their current level of slightly more than 16 percent of GDP today to 20 percent by the end of the decade.
- Tax reform that eliminates special-interest tax breaks and preserves progressivity. The best way to grow revenue is an approach similar to the fiscal commission’s in which most tax expenditures are eliminated and the savings are used for deficit reduction and to help increase progressivity.
- Require defense savings for deficit reduction. A broad agreement must scrutinize every aspect of the federal budget — including defense spending. All discretionary spending should be on the table for consideration.
- Protect programs that serve low-income families. Any agreement must adhere to the principle that the most vulnerable in society be protected, especially since they have weathered the worst of the economic downturn. The fiscal commission report, as well as the gang of six proposal, upheld this principle, and for that reason, critical safety net programs were preserved and in some ways strengthened as part of the overall fiscal plan....
At the end of World War II, America’s debt exceeded its entire GDP. Yet, rather than throwing up their hands, our parents and grandparents whittled down their deficits. By the Kennedy administration, the ratio of debt to GDP was back down to where it was before the war. What lesson can we learn from the “greatest generation”? Simply this: Opportunity, not debt, is the legacy we owe to future Americans.
Click here to read the full Roll Call op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Line Items: Halloween Edition
Happy Halloween – Anyone with kids, or anyone who enjoys scaring kids, knows that today is Halloween; the day of the year it is acceptable to wear hideous outfits and ask strangers for candy. Anyone who truly wants to scare people should dress up as the national debt. The numbers are frightening and the really spooky thing is that they are growing. With the deadline fast approaching, people are wondering if the Super Committee will have a treat, as in a deal that addresses the debt in a substantive manner, or a trick, such as no deal or one with gimmicks.
Super Committee Haunted by Partisanship – Each party unveiled deficit reduction plans in the Super Committee last week, but each side saw the other’s proposal as a trick, not a treat. Neither plan in its entirety has been made public, but some details leaked out. The Democratic plan calls for $3 trillion in deficit savings over a decade by allowing the 2001/2003/2010 to expire for upper-income earners and cutting health care spending, among other things. The Republican proposal saves just over $2 trillion, raising some revenue through additional “fees” but not taxes, and cuts spending. Both parties apparently are open to switching to an alternative measure of inflation, the chained CPI, which will produce significant savings. [Read more in about how switching to chained CPI can reduce the deficit in this paper from the Moment of Truth project.] Each side quickly rejected the other’s offer. While it is encouraging that both plans exceed the Committee’s $1.2 - $1.5 trillion mandate and there is some overlap, it is time for both parties to work together for a comprehensive plan that can achieve broad support. The Committee will no doubt hear such a message on Tuesday when it holds a public hearing with the co-chairs of two prominent commissions that produced comprehensive plans with bipartisan support. Erskine Bowles and Alan Simpson will discuss the work of their White House Fiscal Commission and Alice Rivlin and Pete Domenici will discuss their Debt Reduction Task Force.
Go Big Gets Bigger – When more and more experts and organizations reach out their trick-or-treat bag, they are asking the Super Committee to put in a full-sized candy bar, not the mini ones that are often given. Support for the Super Committee to ‘Go Big’ and go beyond its mandate is gaining momentum. The corporate community is getting behind the effort. Letters last week from several business groups urged the Committee to not only reach an agreement, but to go beyond its mandate. Support is also growing within Congress. A bipartisan group of at least 80 members in the House is circulating a letter asking the Super Committee to find $4 trillion in cumulative deficit savings. And a smaller group of House members sent a letter Friday also recommending a $4 trillion solution for our debt challenges. The $4 trillion figure is in line with what CRFB said it hopes to see from the Super Committee. For further information, read our analysis on why going big will actually make it easier for the Committee to reach a deal compared to a small-scale approach. And see our Go Big page to see who else supports the concept.
Will the Minibus Leave the Depot? – The Senate is back from recess this week and will get back to considering the FY 2012 Agriculture, Commerce-Justice-Science, and Transportation-Housing and Urban Development spending bills in one package. Several amendments must be voted on before a vote on final passage of the bill. If successful, expect more minibus bills. Regardless, another continuing resolution likely will be needed to keep the government operating after the current CR expires on November 18. Like the monster in a bad horror movie, the threat of a government shutdown keeps coming back.
Key Upcoming Dates (all times ET)
November 1
- Joint Select Committee on Deficit Reduction (Super Committee) holds a hearing with Erskine Bowles, Alan Simpson, Alice Rivlin and Peter Domenici at 1 pm.
November 2
- European Affairs Subcommittee of the Senate Foreign Relations Committee hearing on the European Debt Crisis at 9:30 am.
November 9
- GOP presidential debate in Rochester, MI sponsored by CNBC exclusively on the nation's economic challenges including the national debt, jobs and taxes at 8 pm.
November 12
- GOP presidential debate in Spartanburg, SC sponsored by CBS News and the National Journal at 8 pm.
November 15
- GOP presidential debate in Washington, DC sponsored by CNN, the Heritage Foundation and the American Enterprise Institute at 8 pm.
November 18
- Continuing resolution (CR) currently funding federal government operations expires.
November 23
- The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
December 1
- GOP presidential debate in Arizona sponsored by CNN at 8 pm.
December 2
- The Super Committee report and legislative language must be transmitted to the President and Congressional leaders by this date.
December 9
- Any Congressional committee that gets a referral of the Super Committee bill must report the bill out with any recommendation, but no amendments, by this date.
December 10
- GOP presidential debate in Des Moines, IA sponsored by ABC News at 9 pm.
December 15
- GOP presidential debate in Sioux City, IA sponsored by Fox News at 9 pm.
December 19
- GOP presidential debate in Johnston, IA sponsored by PBS NewsHour, Google and YouTube at 4 pm.
December 23
- Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.
January 3, 2012
- Iowa Caucuses.
January 10, 2012
- New Hampshire Primary.
January 21, 2012
- South Carolina Primary.
January 31, 2012
- Florida Primary.
Business Support for Go Big Grows
Going big is getting bigger. A letter to the Super Committee today from a coalition of business organizations that spans numerous industries underscores the growing support from the corporate community for the panel to go above and beyond its mandate. The letter garnered the support of 200 business organizations. A similar letter in September had 155 signatory organizations.
Specifically, the new letter addresses the need for a credible long-run debt reduction plan in order to secure the long-term health of the economy:
“What’s needed is a fiscal plan that stabilizes our debt level and then begins a process of reducing debt levels. The lack of a plan and path forward only brings more uncertainty with it and deficits today result in greater debt levels tomorrow, which left unchecked will result in future tax increases.”
The letter comes as time is running short for the Super Committee and concern is mounting over the economic implications of a failure of the Committee to act decisively. Check out CRFB’s Go Big page and videos for more voices supporting a comprehensive approach.
The Results Are In
Rick Perry's tax reform plan has inspired a lot of discussion in the past week, but it left people wondering how much revenue it would raise. He recently had a consulting firm run the numbers on his plan using both static and dynamic analyses. Here we will focus more on the static numbers. In a perfect world dynamic scoring would be the way to go, but there remains too much disagreement on how best to do it. And the analysis memo doesn't give enough insight into its methodology for us to judge.
First, let's re-list the major pieces of Perry's tax plan. Perry would create a new semi-flat tax of 20 percent on individual and corporate income -- "semi-flat" because he would retain a handful of exemptions and deductions. On the individual side, people making less than $500,000 would enjoy a sizeable standard deduction, and they would also still be able to take deductions for mortgage interest, state and local taxes paid, and charitable contributions. In addition, capital gains and dividends taxes would be eliminated, along with the estate tax. Taxpayers could choose between paying under this system or stick with the current system, but it seems that once they choose a system, they can't switch to the other one, though that is unclear.
On the corporate side, businesses would be able to deduct R&D expenditures and capital investments. For already-purchased capital equipment that has not yet been depreciated, it would receive a five-year depreciation starting in 2014. Perry would also switch to a territorial tax system and allow companies to repatriate earnings in 2014 at a tax rate of only 5.25 percent.
The static estimate, which takes into account taxpayer behavioral responses but not macroeconomic effects, shows that the plan would raise $4.7 trillion less revenue than current law from 2014-2020, or $1.6 trillion less revenue than current policy (tax cuts and AMT patches extended).
According to the analysis, as a percent of GDP, Perry's plan raises less than 17 percent of GDP through 2018; in 2019 and 2020, the plan raises about 18 percent of GDP due to a surge of corporate tax revenue in 2019. Presumably, this is because the stopgap five-year depreciation for already-made capital purchases would run out by then.
In short, using the static estimate, Rick Perry's tax reform would raise less revenue than a tax-cuts-extended baseline.
Another Bipartisan Letter Calls for “Go Big” Approach
In addition to the letter from a large, bipartisan group of House members that is still being circulated for signatures, Go Big gained further momentum today as yet another bipartisan letter from members of the House of Representatives was sent to the Super Committee, urging them to create a plan that achieves $4 trillion in deficit reduction.
The letter, signed by Reps. John Carney (D-DE), Jim Rennaci (R-OH), Patrick Meehan (R-PA), Mike Quigley (D-IL), and Peter Welch (D-VT), cited both the Fiscal Commission’s and the Gang of Six’s reports on the need for $4 trillion in savings to stabilize the debt. In the letter, they specifically call for a Go Big approach and even echoed our political calculus regarding a smaller deal:
“We urge you to use this opportunity to go big and reduce our deficit by $4 trillion and make a historic and lasting impact on our deficit and debt. Our constituents are demanding bold action and, given the gridlock experienced in Washington this year, it is likely that a smaller deal will entrench stakeholders rather than bring them together.”
In addition to urging a Go Big plan, they also suggest a plethora of reforms to the congressional budget process. For example, they call for a bi-annual budget process, switching to an accrual accounting system, regular reviews of all tax expenditures, and analysis of the second decade budget impact of bills, as opposed to simply the first ten years as is currently common practice. Ideas like more oversight of tax expenditures were recommended by the Peterson-Pew Commission on Budget Reform in the report, Getting Back in the Black.
We find this letter to be yet another encouraging example of the viability, demand and bipartisan support for a Go Big approach, especially given the statement that “our constituents are demanding bold action.” As the Super Committee proposal deadline fast approaches, these letters and over 30 sets of recommendations will go a long way towards encouraging the Super Committee to Go Big and to set in place a plan to get our fiscal house in order.
Medicare Premium Increases Announced and Medicaid Glitch Fix Passes House
Last week the federal government announced that 2012 Medicare premiums will increase for most participants by $3.50 per month from $96.40, making 2012 premiums $99.90 a month. The percent increase is roughly equivalent to the 3.6% COLA increase for Social Security announced recently, but much less than the $39 per month amount of the Social Security COLA. The Social Security COLA, the first since 2009, actually made the Medicare premium increase possible due to a law preventing most Medicare premiums from rising when Social Security payouts remain constant. The premium up-tick was significantly less than the $10 increase predicted by Medicare trustees earlier this year, which would have amounted to a 10.4% escalation.
In other related health care news, the Affordable Care Act received a small make-over yesterday when the House passed a bill to fix a widely criticized glitch in Medicaid payments. The glitch effectively would have allowed couples earning up to $64,000 a year into the payout system. Earlier in the week, the White House voiced its support for the bill, which ultimately passed 262-157 in the House, although it still has to clear the Senate. The fix will result in about $13 billion in savings, which is a step in the right direction towards reducing unnecessary contributors to the deficit. See some ideas for health care savings here.
Competing Outlines Emerge from the Super Committee
We talked yesterday about a roughly $3 trillion plan offered by Democrats on the Super Committee that would represent a "go big" approach to debt reduction. Now, the Republicans have made a slightly smaller offer, but one that would still exceed the Committee's mandate.
As with the Democratic plan, details are not available for the Republican offer; only broad outlines of savings in each category are available. Overall, the plan would save about $2.2 trillion according to a Politico article, or about $2 trillion if higher revenues from possible dynamic effects of future tax reform are excluded.
The plan counts $640 billion for revenue, but none of it appears to be "traditional" revenue increases or tax expenditure cuts. According to Politico, $440 billion of that total comes from increased "government fees" that could include various user fees and/or possibly higher health care premiums, and the remaining $200 billion comes from assuming additional revenue from the dynamic macroeconomic effects of some type of revenue-neutral tax reform. As we've argued before, dynamic scoring would be ideal in a perfect world, but unfortunately it requires a number of assumptions where there is not yet a clear consensus among economists. Budget proposals should be scored based on existing methods and as accurately as possible, and any additional savings from dynamic effects should be a bonus.
Other savings come from discretionary spending, where Republicans are reportedly seeking $250 billion in savings from "reducing personnel costs." Republicans would also save about $400 billion from other mandatory programs and $200 billion from switching to the chained CPI. Things are looking good for the chained CPI -- it appears to have been proposed in both the Democratic and Republican offers! On health care, the amount of savings is unspecified, but reportedly would be larger than the Democrats' proposed savings of about $500 billion.
The numbers from the Democrats are becoming clearer as well, although very few policies are specified. The plan would raise $1.3 trillion in revenue, including more than $800 billion from the expiration of the 2001/2003 tax cuts for upper-income earners. On the spending side, the plan contains $500 billion of health care savings, $400 billion of discretionary spending cuts -- half from defense and half from non-defense, and about $450 billion of other mandatory savings (including savings from the chained CPI). The plan also includes the American Jobs Act, which reduces the total savings to about $2.7 trillion.
Now with some offers on the table, we hope the Super Committee can work toward a bipartisan agreement to put debt on a downward path. It will be interesting to see exactly what these plans contain as more details hopefully emerge. Be sure to check back regularly to The Bottom Line for any new developments.
Note: The initial post cited a $575 billion estimate for health savings in the Democratic offer, but other reports (here and here) put the estimate closer to $500 billion.
Business Roundtable and Partnership for New York City Urge Super Committee to Go Big
Two business groups today urged the Super Committee to not only approve of a deal before its deadline next month, but to also go beyond its mandate of $1.2 to $1.5 trillion in deficit reduction over the next decade and advance a more comprehensive approach.
From the national business group, Business Roundtable:
"While reaching the statutory goal of deficit reduction must be the priority, BRT encourages this Committee to 'go beyond' and provide recommendations to Congress outlining a multi-year growth and deficit reduction strategy."
We couldn't agree more. We have been urging the Super Committee to go beyond its mandate through our Go Big initiative.
And from the Partnership for New York City's statement:
“A bipartisan deal that significantly reduces the budget deficit and results in a path to entitlement and tax reform will put this nation back on track,” said Kathryn Wylde, President & CEO of the Partnership for New York City. “It will send a powerful signal that partisan gridlock is finally giving way to real solutions that will improve the economy.”
Additionally, the Partnership, in a position statement, indicated their support for a two-stage process, something that Democratic Minority Leader Steny Hoyer (D-MD) seemed to also support recently. In the Partnership's statement, they note:
- "Reach bipartisan consensus on $1.2 to $1.5 trillion in deficit reduction actions before the November 23rd deadline. This will send a strong message to employers and signal the markets that the country is getting its fiscal act together. It will represent the immediate action necessary to move the needle on hiring and investment.
- Agree on a schedule and process for comprehensive reform of the tax code and for restructuring unsustainable entitlement programs, focusing on containment of the growth in health care costs and reduction of federal obligations under the Medicare and Medicaid programs."
These two letters, which join other statements and letters, are a continued reminder of the support for the Super Committee to Go Big and truly fix our fiscal problems.
Super Committee Democrats Offer (Possible) "Go Big" Plan
Recently, there have a plethora of media accounts and interviews asking policymakers whether they believe the Super Committee will be able to achieve or even exceed its current mandate. Given the gravity of our fiscal situation, the real potential for another downgrade if lawmakers can't agree to significant reforms soon, and the unique opportunity lawmakers have right now, attention has rightly focused on the Super Committee. While we continue to push for a Go Big approach (and as we recently showed, a big package could actually improve the chances of the Super Committee succeeding), congressional leadership and members of the Committee appear to still be working hard.
One new development is a proposal that Democratic panel members have offered a $3 trillion plan, which could constitute a "Go Big" plan (depending on whether or not the package relied on real savings or incorporated various gimmicks to inflate the savings). Details are scarce, but the plan is reported to be about an even mix between spending and revenue and has some additional discretionary cuts, including to defense, with about $500 billion in Medicare and Medicaid savings.
There are reports of Congressional leaders getting more involved in negotiating with one another over potential packages, with Senate Majority Leader Harry Reid (D-NV) talking with House Speaker John Boehner (R-OH). There has been scant news about what exactly is going on behind the closed doors of the Super Committee, but according to Democratic House Whip Steny Hoyer (D-MD), this is deliberate and "there is an honest working effect that makes one hopeful [for a deal]." This sentiment has been echoed by Republican Co-Chair of the Committee Rep. Jeb Hensarling (R-TX):
"I remain encouraged that the members of the Joint Select Committee know how serious the situation is. I believe they are all committed to achieving the goal and until the stroke of midnight on November 22nd, we still have plenty of time to do the committee's work."
And his Democratic counterpart, Sen. Pat Murray (D-WA):
"We aren't there yet, but I am confident that we are making progress. And I'm hopeful that we're moving quickly enough to meet our rapidly approaching deadline."
One possible way for the Super Committee to achieve a larger package, while under the current time crunched time window, would be, as Hoyer notes, go to a "two stage process" whereby the Super Committee agrees to serious reforms to spending and tax programs upfront in addition to a blue-print for any broader reforms still needed to allow the relevant congressional committees fill in the details. But there's still plenty of time to forge a comprehensive agreement. Just take a look at all the existing areas of the agreement!
Elmendorf Joins the Announcement Effect Club
At today’s Super Committee hearing, each of the twelve members had the chance to address CBO Director Doug Elmendorf on issues related to discretionary spending and the budget at large, and in it, Director Elmendorf made some very important statements regarding our fiscal challenges and the benefits of addressing them. In the process, he joined CRFB's Announcement Effect Club by saying that agreeing to future debt reduction can have positive effects on confidence and the economy in the near-term.
In one memorable segment, Senator John Kerry (D-MA) asked Elmendorf about the short-term impacts of achieving savings beyond the mandated $1.2 trillion in savings, to which, Elmendorf responded:
“Just looking at the aggregate deficit reduction, I think it is clear that larger reductions, coming from the work of this committee, would have a positive effect on current spending and on current output and employment and conversely, that a failure of this committee to reach an agreement or for Congress to enact an agreement reached by this Committee, would have a negative effect on confidence and thus on spending.”
Elmendorf’s response highlights the incredible importance of the Super Committee’s actions: failure to achieve its mandated savings would likely have a negative effect consumer confidence and further stifle aggregate demand, not to mention that failure might even lead to another downgrade. Elmendorf also noted that greater savings levels, especially a “Go Big” approach, would have even larger economic benefits over the medium and long-term as the crowding-out of private investment was reduced. In response, Kerry noted some more negative consequences of achieving just the mandated savings:
“And if we do simply $1.2 trillion or $1.5, which is the targeted goal and that is all we do, isn’t it a fact that we will be back here in a year or two or three at maximum dealing with the very same issues that are on the plate now about the unsustainability of our budget?”
Elmendorf agreed that lawmakers would ultimately have to come back to the table at some point in the future if they don't succeed in putting debt on a downward path.
This exchange between Kerry and Elmendorf vivifies a number of positive benefits of a “Go Big” approach. Should the Committee succeed in only achieving $1.5 trillion in savings, these measures will act as merely another band-aid, only to be ripped off a few years down the line, exposing our fiscal wounds and forcing us to once again address our fiscal challenges and the tough politics they involve.
We hope this exchange caught the ears of the other Committee members and will help guide their discussions towards a “Go Big” approach, and we welcome Dr. Elmendorf to the Announcement Effect Club.
Super Committee Makes a Public Appearance
Today, the Super Committee will hold its first public hearing in over a month. As the weeks have gone by, anticipation has built about the prospects for the Super Committee to achieve its mandate. With just under a month to go, we hope the push for “Go Big” along with the trove of submissions, have taken root in the Super Committee’s negotiations and will continue to support the Committee's efforts to Go Big.
The meeting will be held at 10 a.m. and will feature remarks from Congressional Budget Office director Douglas Elmendorf who testified at the September 13th meeting on the history of the nation’s debt. His testimony today will address security and non-security discretionary spending. Additionally, the Super Committee has announced plans to hold another public hearing next Tuesday, November 1, with co-chairs of the Fiscal Commission Alan Simpson and Erskine Bowles, as well as leaders of the Bipartisan Policy Center's Debt Reduction Task Force Alice Rivlin and Pete Domenici.
You can watch the meeting here this morning at 10 a.m.
Rick Perry's Plan for Taxes and Economic Growth
Earlier today, Texas Governor and Republican presidential candidate Rick Perry announced details of his "Cut, Balance and Grow" plan for spending and tax reform. According to the op-ed penned by Perry announcing the plan, it would, “scrap the current tax code, lower and simplify tax rates, cut spending and balance the federal budget, reform entitlements, and grow jobs and economic opportunity.” Key elements of the plan include a 20 percent flat income tax (both individual and corporate) and a cap on federal spending at 18 percent of GDP.
There is a lot to this plan, including significant proposed changes to Social Security and Medicare. This blog concentrates mainly on the tax proposals in the plan.
While proponents extol the simplicity of a flat tax, the Perry plan adds several wrinkles that make it less than simple. Perry's plan for a flat tax includes a number of caveats. First off, as proposed the plan would allow taxpayers to either stay with the current tax code, or choose Perry’s alternative. Though some would likely not bother with the burden of that step, it is hard to imagine that the many who did go through the process of calculating the comparison would choose to pay the higher level of taxes from the two choices.
Secondly, under the new flat tax system, Perry also proposes keeping various tax expenditures under the current tax code, including the mortgage interest deduction and for charitable donations.
While this new tax proposal would be much simpler on it own than the current code, it's not clear that this approach would simplify the code in its entirety with two separate systems. It is also difficult to imagine that Perry’s plan could be revenue neutral compared to what would be the case under current law if taxpayers could choose under which system they wanted to pay taxes.
In addition to the Flat Tax, components of the plan include:
- A temporary tax holiday for repatriation of foreign-held earnings at the rate of 5.25%;
- Transition to a “territorial” tax system;
- Along with a corporate rate of 20%, a phaseout of corporate tax "loopholes";
- A number of reforms to Social Security and Medicare, including allowing younger workers to open personal retirement accounts and indexing the retirement and Medicare eligibility ages to longevity increases;
- Passage of a balanced budget amendment that would freeze federal civilian hiring and salaries until budget balance is achieved, and that would rule out increased revenues as part of achieving balance;
- Elimination of the estate tax, and taxes on qualified dividends and long-term capital gains;
- Repeal of the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Section 404 of the Sarbanes-Oxley Act of 2002;
- Increase the standard exemption for individuals/dependents to $12,500, and;
- Phase-out standard exemptions and other deductions for filers with annual incomes above $500,000.
Perry is to be commended for offering specific proposals for addressing the country’s growing federal debt and his ideas for spurring economic growth.
Note: This blog has been updated from its original posting.