In last year's State of the Union speech, President Obama promised to reorganize the government by consolidating agencies that had duplicative functions or otherwise overlapped. Of course, that plan fell by the wayside after the Administration spent much of the next six months in budget negotiations involving appropriations and the debt limit. After that was over, there were no mentions of the reorganization plan, and it seemed to have been abandoned...until now.
As part of a push for Congress to allow the President a fast-track authority to reorganize the executive branch, President Obama announced a plan today to merge six semi-related offices/agencies in the Commerce Department. The Administration estimates the changes would save $3 billion over ten years on overhead and could eliminate the need for about 1,000 federal jobs. The specific offices are: Commerce Department core functions, the Small Business Administration, the Export-Import Bank, the U.S. Trade Representative, the Overseas Private Investment Corporation, and the Trade and Development Agency.
In light of the tight limits we have imposed on discretionary spending, efforts that make the government run more efficiently while preserving necessary functionality are welcome. Just as we said about the IRS yesterday, reducing the necessary expenses to run the government will free up funds to spend on other priorities.
CRFB board member Roy L. Ash passed away last month at his home in Los Angeles. Mr. Ash was 93 years old and died of Parkinson's disease.
Mr. Ash co-founded Litton Industries, where he served as its director and president until 1972. He later became chairman of the President's Advisory Council on Executive Organization, which led to the creation of the Office of Management and Budget. From 1972-1975, he served as OMB director during the Nixon and Ford administrations.
After leaving the federal government, Mr. Ash led Addressograph-Multigraph (later AM International) from 1976 to 1981. He also served as vice chairman of the Los Angeles Olympic Organizing Committee from 1980 to 1985 and was a director of the U.S. Chamber of Commerce from 1979 to 1985.
Mr. Ash will be greatly missed, and all of us here at CRFB offer our deepest condolences to the Ash family.
The Internal Revenue Service report on the 2006 tax gap, showing $385 billion (about 15 percent) of missing revenue, has made its rounds, sparking debate about the IRS budget. Just yesterday, National Taxpayer Advocate Nina Olson weighed in, saying that the IRS was over-burdened and under-funded for the job it was trying to do.
We know, for example, from the Senate version of the Budget Control Act that an increased IRS enforcement budget can reduce the deficit (the Senate's BCA provided $13.6 billion for enforcement, with an estimated revenue return of $43.6 billion). However, Congress may find it difficult to keep the IRS's budget at a high level with the discretionary spending caps in place. Still, they haven't been doing the IRS any favors otherwise, significantly adding to the complexity of the tax code by using it as a substitute for direct spending programs. Just look at the current $1.1 trillion of tax expenditures, whose number and size have only been growing since the most recent tax gap estimate in 2006.
|Tax Gap Numbers (billions)|
|Tax Year 2001||Tax Year 2006|
|Total Tax Liability||$2,112||$2,660|
|Gross Tax Gap||$345||$450|
|Enforcement and Late Payments||$55||$65|
|Net Tax Gap||$290||$385|
An increased budget is one way to tackle the tax gap, but another way is to simplify the tax code. Undertaking comprehensive tax reform would drastically reduce the size and number of tax expenditures and it would reduce errors (since it would be easier for people to figure out their tax liability), both of which would likely have the effect of reducing the tax gap. Also, by only having a few tax expenditures to administer--many other complex rules and carveouts having been eliminated--the IRS wouldn't need nearly as many resources as it would to adequately enforce the current system. Not only would tax reform reduce the tax gap, but it would also free up money that would otherwise go to the IRS budget for other spending programs.
A simpler tax code is certainly an improvement over the current system at any time, all else being equal. But, on the margins, it may be especially fitting for a time of strictly limited resources, when spending money to enforce an extremely complicated tax code takes away from other priorities.
The most recent focus of President Obama's initiatives has been on "insourcing," or providing incentives to companies to bring jobs back to the US from overseas. According to CNN's article, the proposal, which will come in a few weeks and surely be included in the President's budget, will work on both sides of the equation: providing incentives to companies who bring business back home and eliminating incentives for companies that do the opposite.
Past Obama proposals have already included the latter half. His budgets have offered a number of changes to the international corporate tax system, moving it more towards a "worldwide" system where foreign-based income is taxed as it is earned. The international tax proposals in his submission to the Super Committee, affecting both individuals and corporations, would raise about $115 billion over ten years.
What the incentives will be is more uncertain. A repatriation holiday, which would allow companies to bring earnings back home at a drastically reduced or 0% tax rate, has been a popular proposal in Congress; however, it does not seem likely that President Obama would go this route. The concerns with these types of incentives are how they determine who qualifies and if these incentives will simply benefit companies who would have "insourced" anyways.
Over the past couple of years, we've been arguing that raising the Social Security and Medicare ages could be an important part of a fiscal reform agenda. In prior posts, we've showed that increasing the Medicare age would protect--and indeed increase benefits -- for the most vulnerable, increasing the Social Security normal retirement age is actually somewhat progressive, and increasing the Social Security early retirement age can help increase benefits for older workers. We've also shown that these policies could lead to substantial budgetary savings and could help grow the economy by encouraging work and savings.
But now readers no longer need to take our word for it, since CBO just released their own report on Raising the Ages of Eligibility for Medicare and Social Security. In evaluating the effects of various age increases, the report finds that raising the Social Security earliest eligibility age (EEA) and normal retirement age (NRA) and raising the Medicare eligibility age (MEA) would reduce the deficit, encourage work, and increase the size of the economy.
|Effects of Raising Retirement Ages|
|Policy Option||Budgetary Savings||
|| GDP Increase
||2060 (GDP)|| 2035
|Raise MEA to 67 by 2025||$113||0.3%||Unk||1 month||0.1%||Unk|
|Raise EEA to 64 by 2025||$144||Negl.||Slight Loss||8 months||1.0%||Unk|
|Raise NRA to 70 by 2035||$120||0.2%||0.7%||8 months||1.0%||Unk|
Total Combined Effect
*Includes effects of changes on GDP and revenue;
#CBO cannot determine size or direction of interactions
Increasing the Medicare Age
In its report, CBO looks at raising the Medicare age by 2 months a year beginning in 2014; to 67 by 2027. According to their estimates, this change would reduce Medicare outlays by $148 billion over ten years, and reduce the deficit by $113 billion on net as a result of other spending. The difference stems mainly from Medicaid and exchange subsidy spending associated with PPACA (health reform) -- which bills such as Coburn-Lieberman require to remain in place for the age increase to occur.
This policy would also give some people an incentive to remain in the workforce a month longer on average, which CBO estimates would increase the size of the labor force and GDP by 0.1 percent. The effect is relatively modest since "virtually everyone affected would have access to health insurance" so long as PPACA remains in place (CBO notes that the labor effects would be greater if the Affordable Care Act health exchanges do not go into effect).
But what would happen to beneficiaries? CBO projects that about five percent (roughly 250,000 in 2021) of those effected would become uninsured, about half (about 2.8 million) would obtain employer-based coverage, and the remaining 2.3 million would obtain coverage from Medicaid, the health exchanges subsidies, or other government sources. These estimates are somewhat similar to a recent Kaiser study, which according to our analysis found that health care costs would be reduced for most seniors making less than 300 percent of the poverty line -- though total national (public and private) health spending would go up.
Increasing the Social Security Ages
CBO also looks at raising the Social Security retirement ages. Specifically, it looks at raising the early retirement age from 62 to 64 by 2025 for $144 billion in savings through 2021 (but negligible long-term savings) and raising the normal retirement age from 67 to 70 by 2035 for $120 billion in savings. It is worth noting that these changes are quite aggressive compared to what is in the political discussion; but while many current policy proposals would increase the ages more slowly, they also tend to continue age increases rather than halting them at a certain level.
Raising these ages would have a much larger effect on beneficiary behavior than the Medicare age, with each causing people to delay retirement by eight months on average. In the case of the EEA increase, those who would otherwise retire before age 64 are estimated on average to work 11 months longer. As a result, raising the two ages would increase the size of the labor force and therefore GDP by one percent each by 2035 and more thereafter. (CBO does not attribute any growth impact which might occur from increased savings resulting from the higher retirement ages).
At the same time, CBO does show that increasing the ages will reduce Social Security's safety net relative to scheduled benefits (although we've shown that this scenario is unsustainable since Social Security is not solvent over the long-run -- and current law calls for a 23 percent cut in 2036 for all beneficiaries in that year as a result). Raising the NRA would effectively reduce benefits for any given age of retirement since continuing to retire at, for example, 67, would result in a "actuarial reduction" in benefit levels.
Raising the EEA to 64 could also be burdensome for some seniors, since it would no longer be possible to retire at age 63 or 64 without a disability. On the other hand, this delay in collection will actually increase annual benefits (by 10 percent for a person who would have retired at 62) since individuals would face smaller “actuarial reductions.” In addition, to the extent retirees work longer, they will likely have more retirement savings which could further enhance their retirement security.
CBO does suggest that DI and SSI eligibility could be expanded to accommodate those under 64; a hardship exemption such as the one proposed by the Fiscal Commission might be a possible alternative as well.
The Effects of Raising all Three Ages
The fiscal and economic effects of raising the EEA, NRA, and MEA are quite pronounced according to CBO. Taken together, these changes would increase GDP and the size of the labor force by 2 percent by 2035 and 3 percent by 2060. Using a rule of thumb, they find that this would increase revenue by 0.5 percent of GDP in 2035 and 0.75 percent in 2060 -- in addition to the savings on the spending side of the ledger. These estimates come with the caveat that the actual behavior response to doing all these options at the same time can vary from the sum of their individual responses.
Using CBO's numbers in the report, we were able to reproduce debt held by the public numbers out to 2060 both including and excluding the economic effects. Note that these estimates are very, very rough, so we would definitely not consider them a pinpoint representation of where debt would be, but rather an approximation.
According to our estimates, increasing all three ages and excluding economic effects would reduce the debt by about 10 percent of GDP by 2035 and 40 percent of GDP by 2060. Assuming the higher GDP and higher revenue which CBO estimates would occur from these policies, those numbers nearly double -- leading to debt reduction of about 20 percent of GDP in 2035 and 80 percent of GDP in 2060. And even this could be an underestimate since it assumes no economic gains from individuals saving and therefore investing more.
Not a solution to all of our problems, to be sure, but also not a bad place to start.
Note: Updated 1/19 to incorporate information that raising the EEA would slightly increase outlays in the second half of the century
Readers of this blog will be familiar with the Zero Plan from the Fiscal Commission's tax reform effort. An article in the newest issue of Health Affairs details (subscription needed for full article) the effects of the Coke Zero Plan (our name, not theirs): imposing a tax on sugar-sweetened drinks, more commonly known as a "soda tax." The study measured the effects of a one cent per ounce sugary drink tax (12 cents for a 12 ounce can, etc.) on the consumption habits and health of people between the ages of 25 and 64.
According to the authors, the tax they studied would raise on average $13 billion per year, which is in line with the Domenici-Rivlin plan, whose similarly-sized excise tax would raise $156 billion through 2020. What is more interesting than the revenue effects, though, is the effects they estimate the tax will have on beverage consumption and health costs.
The authors estimate that the one cent per ounce tax would reduce consumption of sugar-sweetened drinks by a pretty sizeable 15 percent. This reduction in consumption would result in modest but positive health effects, reducing diabetes incidence by 2020 by about 3 percent and average weight by about a pound. Also, the incidence of strokes and heart attacks would be reduced. As a result, they estimate, national health spending (public and private) would drop by $17 billion through 2020 (a portion of this savings would come from federal spending, though it is not clear how much nor what would happen over the longer run). Longer term effects, at least on total national health spending, could be more significant.
|Health Effects of Excise Tax|
|Without Tax||With Tax||Diabetes reduction||Weight reduction (lbs.)|
As policy makers debate the various policies to reduce the deficit, they should be looking for win-wins which include non-budgetary benefits. Reducing the deficit while lowering private health costs and improving overall health would certainly fall in that category.
Yesterday, in the preliminary assessment of its 2011 balance sheet, the Federal Reserve reported that it would be sending $77 billion in 2011 profits back to the U.S. Treasury. While this is down slightly from the record high of $79 billion sent to Treasury in 2010, it is still a much larger return than in any other year in the 2000s, and more than double the average annual remittance of $36 billion over the 2000-2011 period ($28 billion average if 2010 and 2011 are excluded).
The amount remitted to Treasury each year is less than its total interest income, reportedly $83.6 billion for 2011. The difference represents operating expenses of the Fed and its 12 Reserve Banks, and other costs that include operation of the Consumer Financial Protection Bureau and Office of Financial Research, both created by the Dodd-Frank financial reform act.
Recently, a decent-sized chunk of that income is coming from the Fed’s activities to reduce business and individual borrowing costs, and through Operation Twist. Under these efforts, the Fed is keeping interest rates low by buying up Treasuries. Critics say that this circular strategy – the Fed buys Treasuries, garners interest income, and remits most of those profits back to the Treasury – is somewhat nonsensical. The Fed argues that it is one of the best strategies they have to keep interest rates low without any of the profits leaking out of the country to foreign investors.
Further, while the Fed’s income and profits have increased substantially in recent years, there are fears that future interest rate increases could hurt the Fed’s bottom line if payments to banks on their reserves exceeded the Fed's income on its holdings.
That said, the Fed is not, and does not claim to be, in the business of turning a profit. And with real (inflation adjusted) interest rates currently around 0 percent, the Fed continues to employ some complicated and extraordinary methods in its efforts to use monetary policy to support the economy and encourage individuals and businesses to get their dollars back into the economy as well.
You may have already read the news yesterday, but current OMB director Jack Lew will be replacing Bill Daley as President Obama's chief of staff at the end of January. The move is a good indication that the various budget negotiations--over expiring provisions and reaching a deal on a fiscal plan before the sequester hits--will be near the top of the agenda in 2012. It will certainly be a demanding job and we wish him all the best in his new position.
Of course, that leaves the OMB director spot open. There doesn't seem to be any chatter yet about who will fill the position, but as the Washington Post's Ed O' Keefe notes, whoever does will be taking over at a good time for transition (assuming that happens relatively soon). Most of the "legwork" has already been done for the FY 2013 President's budget, so the new director will just have to be explaining and defending it until the budget-writing process for FY 2014 starts later this year.
Again, we wish Jack Lew luck in his new position and we eagerly await the next OMB director.
In 2009, President Obama created the SAVE Award (Securing Americans Value and Efficiency), which is given each year to the federal employee who submits the best idea to increase government efficiency and ensure that taxpayers' money is being spent wisely.
This year's winner is Matthew Ritsko, a Financial Manager at NASA's Goddard Space Flight Center from Crofton, MD. Matthew proposed creating a tool repository for all specialized tools purchased by NASA employees for building and developing flight projects. This "lending library" could cut down on waste and duplicative purchases by keeping better track of tools, instead of having them lost and forcing NASA to buy new ones.
According to OMB:
It’s a simple, intuitive idea that will have a real impact. In fact, NASA estimates that building this type of lending library will save millions of dollars in the years to come. And Matthew has heard from other Federal employees across the Administration interested in implementing his idea in their own agencies.
PS: Click here to read about last year's SAVE Award Winner.
Remember when we said last November that Congress had a lot to do by the end of the year? Well, they took care of FY 2012 appropriations, but everything else is now left to be determined or temporarily extended by the end of February (at least they have an extra day). The payroll tax cut, unemployment insurance, and doc fix extensions that passed will expire by February 29 and there could even be pressure to extend the AMT patch and the "tax extenders" that were neglected last month.
The AMT patch is something that readers of this blog will be familiar with, but the extenders are less well-known. Conveniently, CNN has an article talking about these tax extenders that are rarely looked at closely or individually. Many of these extenders are on the corporate income tax side, headlined by the R&D tax credit but also including benefits for narrow interest groups (like ethanol producers or NASCAR, for example). There is also the full expensing of capital investments that was passed last year. The CNN article, however, focuses more on individual tax breaks.
It focuses on these five extenders:
- State and local sales tax deduction, the cousin of the regular (and much larger) state and local income tax deduction. This tax expenditure makes the deduction available for people who make too little to pay state or local income taxes or who live in a state with no income tax.
- Mortgage insurance deduction, not to be confused with another MID, the mortgage interest deduction. This extender allows taxpayers who make less than $110,000 to treat their mortgage insurance premiums as deductible interest.
- Teacher classroom expense deduction, which allows teachers to deduct the cost of up to $250 worth of school supplies that they buy for their classroom.
- Qualified education expense deduction, which allows students to deduct up to $4,000 for tuition and other higher education-related expenses.
- Expanded mass transit deduction, which allows commuters who take mass transit to receive as large a maximum deduction for their expenses as those who must pay for parking during the work day ($240 per month). Without this extender, the maximum benefit for mass transit users is cut in half.
- AMT patch, an increase in the exemption amount for the AMT so that millions of middle- and upper-middle income taxpayers don't get hit by it.
The reason why nobody panicked over inaction on the extenders and the AMT -- unlike the other pieces that got short-term extensions -- is because these extensions often come retroactively, as occurred in last year's December 2010 tax cut package.
Since all of the expiring provisions are still left to be dealt with, our paper on them from last month still applies. Lawmakers should not try to squeeze through all these extensions without offsetting the costs or by using gimmicks.
As the GOP primary season moves along to New Hampshire, we continue to look for signs that the candidates are at least as concerned with the country’s fiscal fiasco as voters are. The budget deficit was high on the list of concerns of Iowa caucus goers, according to exit polling, with slightly more than a third of people polled saying it was the most important issue for them.
Unfortunately, as we wrote a few weeks before the Iowa caucus, none of the candidates seem to hold the budget deficit issue very high on their list of concerns, as the word cloud in this blog makes clear.
In the most recent debates over the weekend leading up to the New Hampshire primary, candidates paid slightly more attention to fiscal issues, as words such as "taxes" and "spending" came up more often. And where the words "budget" and "debt" didn’t make an appearance in the Iowa debate, they at least garnered mention in New Hampshire - although you'll still need to search a bit to find the words.
That said, given the size of the problem of our deficit and growing debt levels, the candidates' near silence on this issue remains concerning. We will continue to draw attention to this shortcoming, and urge all candidates to pay heed to our 12 Principles of Fiscal Responsibility for the 2012 Campaign over at U.S. Budget Watch, a project of CRFB to raise awareness of fiscal issues in this year's presidential race.
Below is the wordle for the Saturday and Sunday New Hampshire debates.
Happy New Year? – A New Year has been rung in, and most of the public confidence in Congress has been wrung out. The latest poll shows that only 5 percent of likely voters rate Congress as doing a good or excellent job. No doubt that the failure of the Super Committee and the brinkmanship over the debt ceiling and government funding in 2011 contributed significantly to the historically low standing. There will be opportunities for Washington to turn things around in 2012 and find comprehensive, bipartisan solutions. The expiration of the 2001/2003/2010 tax cuts will offer an opportunity for fundamental tax reform and the impending sequester triggered by the inability of the Super Committee to agree on deficit reduction can prompt policymakers to agree on a bipartisan “Go Big” fiscal plan in order to turn the sequester off. However, with 2012 being an election year with control of Congress and the White House at stake, the tendency to continue the partisan bickering will be great.
Brief Respite for Payroll Tax Holiday – Congress managed one more nail-biter at the end of the year when it approved of an extension of the 2 percent payroll tax cut, expanded unemployment benefits and a doc fix for two months just before Christmas. Lawmakers now have until the end of February to agree on longer-term extensions. Paying for the extensions remains the key sticking point between the two parties. A recent CRFB paper laid out the costs involved and offered ideas for dealing with the extensions in a fiscally responsible manner.
Campaign 2012 Officially Under Way – The beginning of the year brought the beginning of the election season. After months of debates and intrigue, people are finally voting. Iowa held its caucus last week and the New Hampshire Primary is Tuesday. Fiscal issues will figure prominently in this campaign; thirty-four percent of Iowa Caucus participants said that the budget deficit was the top issue. To help make the campaign debate over fiscal policy constructive, CRFB has re-launched its US Budget Watch project with 12 principles for fiscal responsibility that voters should demand from candidates. We have also provided questions that candidates should answer on fiscal policy.
Key Upcoming Dates (all times ET)
January 10, 2012
- New Hampshire Primary.
January 16, 2012
- South Carolina GOP debate sponsored by Fox News at 9 pm.
January 17, 2012
- The House of Representatives commences the Second Session of the 112th Congress.
January 19, 2012
- South Carolina GOP debate sponsored by CNN.
- Dept. of Labor's Bureau of Labor Statistics releases December 2011Consumer Price Index data.
January 21, 2012
- South Carolina Primary.
January 23, 2012
- The Senate convenes for the Second Session of the 112th Congress.
- Florida GOP debate sponsored by The St. Petersburg Times, NBC News, and The National Journal.
January 24, 2012
- President Obama will give the State of the Union Address.
January 26, 2012
- Florida GOP debate sponsored by CNN.
January 27, 2012
- Dept. of Commerce releases 2011 fourth quarter GDP data.
January 31, 2012
- Florida Primary.
February 3, 2012
- Dept. of Labor's Bureau of Labor Statistics releases January 2012 employment data.
February 4, 2012
- Nevada Caucus.
February 6, 2012
- The President must submit his FY 2013 budget request to Congress by this date.
February 7, 2012
- GOP presidential contests in Colorado, Minnesota and Missouri.
February 17, 2012
- Dept. of Labor's Bureau of Labor Statistics releases January 2012 Consumer Price Index (CPI) data.
February 22, 2012
- Arizona GOP debate sponsored by CNN at 8 pm.
February 28, 2012
- GOP presidential contests in Arizona and Michigan.
February 29, 2012
- The temporary payroll tax cut, unemployment insurance, and doc fix extensions will expire.
- US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.