On Tuesday, the Government Accountability Office (GAO) released a report on possible duplication and overlap by government agencies. This is the second annual report released by GAO, a result of an amendment from Sen. Tom Coburn (R-OK) to the debt ceiling increase in January 2010. The report not only identifies areas of government duplication, overlap and fragmentation, but also other cost saving opportunities beyond its original mandate. Such examples identified by GAO are not necessarily the same thing as "waste," since some complex problems may require overlap or duplication among agencies; however, these are areas where GAO believes there could be more coordination or consolidation.
First, the report cites 32 possible instances of overlap, from using different electronic systems for the $1 billion spent on federal background checks to 15 different financial literacy programs. The report also noted some instances in which cooperation between agencies was found to be useful. The second section of the report listed 19 other possible ways for particular agencies to reduce spending. The report's recommendations were also wide-ranging, from the Air Force renegotiating food contracts to the Treasury Department replacing the $1 bill with a $1 coin. Below are some of the areas of duplication that GAO has identified.
|Sample GAO Recommendations|
|Identified Inefficiencies||Possible Solutions|
|Food and Agriculture Protection||More centrally coordinated food safety and food and agriculture protection, rather than the current fragmented system|
|Unmanned Aircraft||Consolidate 15 acquisition programs into one body responsible for keeping track of unmanned aircraft purchases and needs|
|Counter-IED Efforts||Develop a database of all counter-IED programs to better track all efforts being taken|
|Surface Freight Transportation||Develop a coordinated strategy for surface freight transportation, instead of the many programs that are spread among surface transportation|
|Health Research Funding||Have NIH, DOD, and VA share information better to avoid duplication of research|
|Homeland Security/Law Enforcement|
|DOJ Grants||Examine possibility of consolidating grant programs and coordinate better across programs to avoid making multiple awards to the same recipient|
|Diesel Emissions||Collaboration between agencies about the need for various programs for reducing diesel emissions and consolidation of tax expenditures with that purpose|
Along with the 2012 report, GAO released an assessment of the progress being made a result of its 2011 report. Of the 81 areas identified in last year’s report, 4 were completely addressed (5 percent), 60 were partially addressed (74 percent), and 17 (21 percent) had not been addressed at all (as a result, at least a few of the report's recommendations are reprised from last year). It seems that the existence of this annual report from GAO may be having a useful effect in shifting the focus to reducing inefficiencies.
For example, the Office of Management and Budget (OMB) stated that 21 areas mentioned in the 2012 report were addressed in the President’s budget and that three-quarters of last year's recommendations that could be dealt with through executive action have been addressed. Also, the transportation bill still in the works in Congress may consolidate 70 of the over 100 programs involved in surface transportation fragmentation that was identified in last year’s report.
GAO estimated that if all the actions from the 2011 and 2012 reports were implemented, tens of billions of dollars could be saved each year. Still, eliminating inefficiencies will not pull us out of our budget hole; only difficult substantive changes can do that. But it certainly is a step in the right direction.
Last week, we released our in-depth analysis of the debt impact of the four Republican candidates’ budget proposals, a report that received a significant amount of media attention and brought some attention to the fiscal side of the campaign. The report has been covered in most major publications and on other media across the Internet. While the headlines have been highlighting candidates' deficit impacts in the intermediate-debt scenario, we also scored low-debt and high-debt scenarios based on different assumptions about the candidates' policies. By using these three estimates, similar to a confidence interval, we can provide a range of the likely budget impact based on varying assumptions.
One of the difficulties of scoring a candidate’s budget plan is that some proposals are highly specific, while others contain less detail. We account for the variation in specificity using the three estimates. A specific policy to reduce the deficit is included in all three scenarios. However, when a candidate proposes to reduce spending in an area more generally, such as reducing discretionary spending by a certain amount, it is included in the low- and intermediate-debt scenarios, but not in the high debt scenario. Finally, a top line reduction, such as reducing overall spending by a certain amount, is credited only in the low debt scenario.
Often, the campaign has different numbers from official source estimates of the impact of a candidate’s policies. In these cases, we use the campaign estimates for our low debt estimate, and the official estimate for the other two. For example, a few candidates who proposed repealing the Davis-Bacon Act gave much higher savings estimates than CBO had scored. In these cases, we gave the candidates credit for their numbers in the low-debt scenario, but used the CBO score in the other scenarios.
While a candidate’s policy may be detailed, the time horizon for the policy to be implemented may be unspecified. Consequently we assume a rapid phase-in for our low debt estimate, and a slow phase-in for our high debt estimate.
There are also policies for which we had to produce our own estimates that relied on varying assumptions about its parameters. For example, with Rep. Ron Paul's (R-TX) tax subsidies for medical expenses, we calculated the cost of the subsidy based on out-of-pocket health spending and assumed that 50 percent of the tax subsidy would be utilized in our low- and intermediate-debt scenarios. In the high-debt scenario, we assumed that the entire available tax subsidy would be utilized.
Projections often use a confidence interval to improve precision, and our three different scenarios provide a range of the likely effect of a candidate’s current plan on the budget. As predictions are only as valid as the assumptions that they make, the three curves ensure that the estimates produce a fair and objective analysis to the best of our ability.
On Monday, House Democratic Whip Steny Hoyer (D-MD) gave a speech calling for Congress to "Go Big" on deficit reduction.
Hoyer opened by making the case--as we have many times in the past--that there is no conflict between addressing the short-term economic situation and putting the debt on a sustainable path. As he explained:
Our number one priority must continue to be creating jobs and setting our economy back on a course toward sustainable growth that creates opportunities for our middle class. Federal Reserve Chairman Ben Bernanke told the House Budget Committee earlier this month that growth must take precedence over deficit reduction. I agree. However, putting our fiscal house in order by reining in deficits and getting our debt under control is a critical part of ensuring sustainable economic growth, and so it is essential for us to have a plan to reduce deficits once the economy has further recovered.
According to Hoyer, the plan to address longer-term deficits should be one that builds upon the major bipartisan fiscal plans that are out there. He expressed hope that the trigger would live up to its name and force both parties to come together around a plan along that framework.
Simply walking away from sequestration would be waving the white flag in the face of CBO’s projection of a dismal fiscal future. However, sequestration remains an irrational response. It was the blunt instrument established to force both sides to the table and keep them there. It is not a solution in itself. Sequestration should have provoked compromise and fiscal common sense. Unfortunately, it did not. It should be replaced – but replaced only by the kind of big, balanced solution the Joint Select Committee was supposed to have produced.
He added that addressing our debt problem would help increase business and investor confidence and public confidence in our political institutions.
It would show the American public that our country is on the right track again. Internationally, it would demonstrate that America can lead not only on issues of global security but also lead by example in exercising much-needed fiscal responsibility. Furthermore, I believe it would also provide the biggest single stimulus to the economy we could achieve. Setting our economy back on a sustainable, predictable fiscal path will help us create jobs by restoring certainty for businesses and enabling them to plan for a future without the brinksmanship that has characterized this Congress.
He concluded by saying that our problems would need to be solved by coming together, in contrast to the partisanship that has characterized the current Congress.
One party isn’t going to get us out of this, and it won’t be done by waiting for another election to pass. It will require compromise by both political parties – and contributions from all Americans. Turning our deficits around and getting America back on the right track won’t be easy, but – then again – important steps are never easy. I pray that we can summon the political courage and will and wisdom this challenge requires of us. America’s future and the quality of life for our children and future generations depends on it.
(Go) Big Events – The Academy Awards and the NBA All-Star Game competed for attention Sunday night. Both events are more about showmanship than substance. The same can be said about the fiscal debate, except without Billy Crystal or Kobe Bryant. There were some big budget policy events last week as well that advanced the "Go Big" message for a comprehensive fiscal plan. While there were no slam dunks or musical numbers, support is definitely growing for real solutions. Taking a cue from another big event, the Daytona 500, this blog was delayed for a day; hopefully, there won’t be any fiery crashes.
Scoring the Candidates – The Republican presidential primary has been more drawn out than the Oscars ceremony, with virtually everyone involved getting a chance to give an acceptance speech. Primaries Tuesday in Arizona and Michigan may or may not clear things up. In order to better inform the debate over fiscal issues in the campaign, CRFB’s U.S. Budget Watch project unveiled at a forum in Washington, DC a new report last week, “Primary Numbers: The GOP Candidates and the National Debt,” that examined how the policy proposals of the four main candidates would impact the federal budget. The report garnered a great deal of attention. See for yourself how the candidates fared and stay tuned for more. U.S. Budget Watch is an ongoing project and President Obama will be addressed in a forthcoming study.
Hearing a Lot about the Budget – Congress is back in session this week after a week-long recess and the President’s FY 2013 budget request is high on the docket with a slew of hearings on both sides of the Capitol. Read our analysis of the President’s budget. While there will be lots of talk, not much action is expected. The House leadership has promised to produce a budget resolution, but the Senate has already closed the door on floor consideration, though the Senate Budget Committee may mark up a budget resolution. Once again Congress will fail to produce a budget. Time for budget reform. Yes, it really is.
Tax Reform in the Spotlight – Both President Obama and former Governor Mitt Romney gave tax reform a boost last week with reform proposals. President Obama unveiled a corporate tax reform plan that would lower tax rates while broadening the base by eliminating some tax expenditures. Governor Romney put forth a broad tax reform plan lowering corporate and individual rates while also eliminating some tax breaks. We did a preliminary analysis of the Romney plan as an addendum to the U.S. Budget Watch report. Both plans took a page from the Simpson-Bowles fundamental tax reform proposal that lowered rates and simplified the tax code by eliminating many tax expenditures, although neither got specific about which ones would be on the chopping block.
"Go Big" Goes to Harvard – CRFB’s National Debt Tour kicked off last week with its first stop at the Institute of Politics at Harvard University. Sen. Mark Warner (D-VA), former Rep. Vin Weber (R-MN), Honeywell International Chairman and CEO David Cote and CRFB’s president Maya MacGuineas discussed the fiscal challenge facing the country and how to resolve it. The event was moderated by Fortune's Nina Easton.
Hoyer Wants to Go Big This Year – Minority Whip Steny Hoyer gave a speech Monday at the centrist think tank Third Way, where he made the case that Congress can and should enact a “Go Big” deficit reduction plan this year. He stated, “[c]ontrary to what some believe, we cannot afford to set this work aside. I’m here to give urgency to the pursuit now of an agreement designed to achieve fiscal sustainability over the long-term.”
Buffett Wants Simpson-Bowles Vote – Investor Warren Buffett said on CNBC’s Squawk Box Monday that he hopes the Simpson-Bowles' plan gets drafted into legislation and gets a vote in Congress this year, saying the election should not be a barrier. “The American people, I think, are entitled to have that happen.”
Key Upcoming Dates (all times ET) (Note: Previous version of this blog had incorrect dates for Senate Appropriations hearings)
- House Appropriations hearing on the budget request for Commerce, Justice, Science and Related Agencies with Attorney General Eric Holder at 9:00 am.
- House Appropriations hearing on the budget request, Indian Health Service for Interior, Environment and Related Agencies at 9:30 am.
- House Appropriations hearing on the budget request for Agriculture, Rural Development, Food and Drug Administration and Related Agencies at 10:00 am.
- House Appropriations hearing on the budget request, Transportation Security Administration, for Homeland Security with John Pistole, Administrator, Transportation Security Administration, at 11:00 am.
- House Appropriations hearing on the budget request, Bureau of Indian Affairs for Interior, Environment and Related Agencies at 1:00 pm.
- Senate Budget Committee hearing on the President’s FY 2013 budget request for Defense at 9:30 am.
- House Budget Committee hearing on health and retirement security at 10 am.
- Senate Energy and Natural Resources Committee hearing on the FY 2013 Interior budget request at 10 am.
- House Ways and Means Committee hearing on the Health and Human Services budget request at 1 pm.
- House Appropriations hearing on the budget request for Energy and Water Development and Related Agencies with Energy Secretary Steven Chu at 2 pm.
- Senate Foreign Relations Committee hearing on national security and foreign policy priorities in the FY 2013 budget at 2 pm.
- GOP primary contests in Arizona and Michigan.
- Senate Budget Committee hearing on “Putting Health Care Spending on a Sustainable Path” at 10 am.
- House Appropriations hearing on the budget for State, Foreign Operations and Related programs with Secretary of State Hillary Clinton at 10 am.
- House Appropriations hearing on the budget, Customs and Border Patrol, for Homeland Security, with Michael Fisher, Chief, US Border Patrol at 10:00 am.
- House Appropriations hearing on the budget for Energy and Water Development and Related Agencies, with Thomas D'Agostino, Administrator, National Nuclear Security Administration, at 10:00 am.
- House Appropriations hearing on the budget for Agriculture, Rural Development, Food and Drug Administration and Related Agencies, with Margaret Hamburg, M.D., Commissioner, Food and Drugs, FDA, at 10:00 am.
- House Appropriations hearing on the budget, EPA, for Interior, Environment and Related Agencies, with Lisa jackson, Administrator, EPA, at 1:00 pm.
- House Appropriations hearing on the budget for Commerce, Justice, Science and Related Agencies, with the Honorable John P. Holdren, Director, Office of Science and Technology Policy, Executive Office of the President, at 2:00 pm.
- House Appropriations hearing on the budget for Agriculture, Rural Development, Food and Drug Administration and Related Agencies, with Phyllis Fong, Inspector General, Department of Agriculture, at 2:00 pm.
- House Budget Committee hearing on the FY 2013 Defense budget request at 2 pm.
- US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.
- House Appropriations hearing on the budget, Fish and Wildlife Service, for Interior, Environment and Related Agencies, with Dan Ashe, Director, U.S. Fish and Wildlife Service, at 9:00 am.
- House Appropriations hearing on the budget for Commerce, Justice, Science and Related Agencies, with the Honorable David J. Kappos, Under Secretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office, at 10:00 am.
- House Appropriations Budget Overview Hearing for Military Construction, Veterans Affairs and Related Agencies, at 10:00 am.
- House Appropriations hearing on the budget for Agriculture, Rural Development, Food and Drug Administration and Related Agencies, with Dallas Tonsager, Under Secretary for Rural Development, Department of Agriculture, 10:30 am.
- House Appropriations hearing on the budget, Navy/Marine Corps, for Defense, at 1:00 pm.
- Senate Appropriations hearing on impact of the Continuing Resolution on the Department of Defense
- Washington Caucus
- Super Tuesday - presidential contests in Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia.
- Wyoming Caucus
- Dept. of Labor's Bureau of Labor Statistics releases February 2012 employment data.
- Presidential contests in Kansas and the Virgin Islands
- Presidential contests in Alabama, Mississippi, and Hawaii
- Dept. of Labor's Bureau of Labor Statistics releases February 2012 Consumer Price Index (CPI) data.
- Missouri Caucus
- Puerto Rico primary
- Oregon GOP Debate sponsored by PBS at 9 pm.
- Illinois primary
- House Appropriations Hearing on the budget, Military Construction, Veterans Affairs and Related Agencies, with Eric Shinseki, Secretary of Veterans Affairs.
- Louisiana primary
- US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.
- Presidential contests in DC, Maryland, Wisconsin, and Texas
- Dept. of Labor's Bureau of Labor Statistics releases March 2012 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases March 2012 Consumer Price Index (CPI) data.
- Tax Day! Federal income tax returns are due.
Last year, our Spotlight on the States series highlighted many contentious battles to eliminate budget shortfalls in state capitals across the country. Of course, the states have been in budget-cutting mode for a few years now as the recession has led to steep drops in state revenue. However, with the economy recovering slowly and structural reforms from previous budget cycles having taken effect, projected shortfalls for FY 2013 have fallen significantly since their peak in 2010, according to a recent Center on Budget and Policy Priorities report.
The projected shortfall for FY 2013 for all states sits at $47 billion, down from $106 billion last year and the peak of $191 billion in FY 2010. Of the $47 billion total shortfall, $27 billion has already been addressed by states that are operating under a FY 2012-2013 biennial budget; in other words, these states had shortfalls for FY 2013 but closed them in the budgets that went into effect at the beginning of FY 2012. The remaining $20 billion are 2013 shortfalls that states have not yet addressed and which must be eliminated by July 1. Of the 29 states that make up this shortfall, 10 have fully eliminated their FY 2013 deficit, while the other 19 still have work to do over the next four months.
Though the states' fiscal outlook has improved significantly since 2010, CBPP does not think that the states are out of the woods yet. Budget shortfalls, as the chart above shows, tend to last much longer than the recessions that precipitate them; for example, the recession in the early 2000s technically ended in 2001, though shortfalls continued for several years afterward. Although revenue is recovering and many states have closed their shortfalls for the coming year, some states will still need to go through the painful process of again balancing their budgets.
They said that the index better measures inflation because it accounts for upper-level substitution bias. While the traditional CPIs account for consumers substituting one good for another in the same category when the price of the first good rises (say, switching from Granny Smith to Red Delicious apples), it does not account for substituting between goods from different categories (for example, apples and oranges). The chained CPI accounts for the latter case--upper-level substitution bias--and thus better accounts for the purchasing habits of consumers. You can read more on the technical case for switching to the chained CPI in the Moment of Truth Project paper "Measuring Up."
Since 1996 — partly in response to the recommendations of the Advisory Commission to Study the Consumer Price Index— the Bureau of Labor Statistics (BLS) has made numerous improvements to the official CPI that have caused it to rise more slowly than it otherwise would have. In addition, BLS began publishing an alternative, "chained" CPI to address the commission's concerns about what is called "upper-level substitution bias. That change in methodology, however, did not apply to the official CPI, which continues to suffer from upper-level substitution bias.
CBPP also rejected using the Experimental Consumer Price Index for the Elderly (CPI-E), which weights health care and housing more, as an alternative measure for elderly benefit programs. They noted that since the CPI-E is usually higher than the CPI-W, using it for cost-of-living adjustments (COLAs) would worsen Social Security's future financing problems (although the CPI-E has been lower on occasion, including for this year's COLA). In addition, they said that the CPI-E is an incomplete measure at this point, and that to seriously consider using the index, the Bureau of Labor Statistics (which calculates price indices) should first expand on the index and develop a chained version to make it more methodologically robust. Still, they felt that using the index would not be a move in the right direction.
|Average Cost-of-Living Adjustment With Different Indices|
|Last 20 Years||2.6%||N/A||2.7%|
|Last 10 Years||2.5%||2.2%||2.5%|
|Last 5 Years||2.3%||2.0%||2.1%|
|January 2012 COLA||3.6%||3.4%||2.9%|
However, since the chained CPI has widespread effects on benefits, CBPP worried about the effects of the switch on Supplemental Security Income beneficiaries, older seniors, and seniors with unusually high medical expenses. In all of these cases, they had ways of mitigating the effects for these three populations.
Unintentionally, these distributional concerns show one major advantage of a comprehensive fiscal plan: when you "Go Big", you have room to address concerns about individual policies through changes elsewhere in the federal government. Nowhere is this more apparent than with the chained CPI, a policy that has such wide-reaching effects. A comprehensive plan allows for lawmakers to consider the overall distributional effect of the entire package, rather than the effect of individual policies. This would take away the need for one-off exemptions or other carveouts that may undermine a policy or make it more complex.
It is notable that with regards to the last two populations that CBPP mentions, comprehensive fiscal plans have enacted changes that would mitigate the chained CPI's effects on them. Both the Fiscal Commission and Domenici-Rivlin plans would bump up benefits for Social Security beneficiaries from ages 80-85, and they would introduce a catastrophic cap on out-of-pocket Medicare expenses. In a nickel-and-dime plan, these changes likely would not be considered because they would be netting against a relatively small amount of savings and would likely be delving into areas that the plan would not touch otherwise. The chained CPI's roughly $200 billion in savings might not be worth it to lawmakers if it would involve enacting other policies to mitigate, for example, distributional concerns.
Being able to address concerns with individual policies is one big reason why we believe that trying for a comprehensive fiscal plan can actually increase the chances of succeeding in getting our debt on a sustainable path.
The U.S. Budget Watch report "Primary Numbers: The GOP Candidates and the National Debt" has generated a lot of buzz since its release last Thursday. Many major publications have reacted to the report's findings on the effect each of the major GOP candidates will have on the federal budget (see here and here for examples).
Much of the focus on the numbers in the report involves the 2013-2021 deficit impact and where debt as a percent of GDP ends up in 2021. But what about the numbers in 2017, the theoretical end of the first Presidential term for one of these candidates?
As with with their 2013-2021 numbers, all the candidates reduce both taxes and spending relative to the CRFB Realistic baseline (see box 1 of the report for more about the baseline). The table below shows the total cost/savings from their tax, spending, and cross-cutting policies and subsequent changes in spending on interest and debt in 2017 alone. For context, debt as a percent of GDP is 80 percent in the Realistic baseline.
|Effect of Candidates' Plans, 2017 (billions)|
|Debt as Share of GDP in 2017||95%||75%||81%||92%|
Note: Numbers may not add up due to rounding. Positive numbers indicate increases in deficits, while negative numbers indicate decreases in deficits.
Were it not for the growth in spending on Medicare, Medicaid, and Social Security, the United States wouldn't have much of a budget problem. The two biggest programs—Social Security and Medicare—are retirement programs that are extremely popular politically. Both need to be reformed, but they cannot be cut abruptly and they cannot be cut drastically. Consequently, it's hard to avoid concluding that some revenue increases will be needed to solve our fiscal problems.
Once that need is accepted, we have to ask, "What kind of revenue increases?" The least desirable approach would raise income tax rates in the current system without fixing its complications, inefficiencies, and inequities. If raising rates is rejected, we must either create a new tax— such as a value-added tax or an energy tax—or design a significant, revenue-raising tax reform.
A VAT or an energy tax is probably a nonstarter politically. Republicans see a new tax as a money machine that would finance a much larger government. Democrats worry about the complexity of making such taxes sufficiently progressive.
The Bowles-Simpson presidential fiscal commission showed that there are income tax reforms that can raise revenues progressively and efficiently. In one option, they got rid of a host of special tax provisions while limiting, but not eliminating, some of the most politically sensitive, such as the charitable and mortgage-interest deductions. That allowed them to lower the top rate for individuals to 28 percent while still raising $80 billion more in 2015. With three rates—12.7 percent, 21 percent, and 28 percent—the top 0.1 percent of the income distribution lost 11.8 percent of its after-tax income and the top 1 percent lost 7.8 percent. The middle three quintiles lost less than 2 percent.
Erskine Bowles and Alan Simpson achieved a high degree of progressivity by taxing capital gains and dividends at ordinary income tax rates. That imposes a very high double tax on corporate profits. A more radical option would limit the double tax by integrating the corporate and individual tax systems. An even more radical change would move toward a progressive consumption tax. Capital gains and dividends wouldn't be taxed if reinvested, but would be hit if used to finance consumption.
None of this discussion implies that radical tax reform is easy. The revenue-neutral reforms of 1986 were anything but. A revenue-raising reform greatly increases the ratio of losers to winners. Accomplishing reform seems easy only when compared to persuading Americans to accept a VAT or new energy tax.
"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.
True to this year's State of the Union address, the Obama Administration released a proposal Wednesday that seeks to lower the corporate tax rate from 35 percent to 28 percent while eliminating many loopholes and broadening the base.
A special emphasis was placed on the manufacturing sector in particular. The deduction for domestic production activities, which mainly benefits manufacturers, would be narrowed and increased from nine percent under current law to 10.7 percent (and doubled for advanced manufacturers, per his President’s budget), with the intention of creating a 25 percent effective marginal rate for manufacturers. Presumably, the "narrowing" aspect would be their previous proposal to disallow the deduction for fossil fuel-related activities. Other tax expenditures in the President’s proposal include making the R&E tax credit permanent and increasing it from 14 to 27 percent and making permanent and refundable the tax credit for renewable electricity production.
In terms of revenue-raisers, the proposal largely reprises ones from the President's budget, such as ending "last-in-first-out" accounting for inventory, taxing carried interest as ordinary income, and eliminating accelerated depreciation for corporate jets. Beyond that, the proposal simply gives principles for further reducing tax expenditures: addressing (apparently, lengthening) depreciation schedules, reducing the bias towards debt financing, and establishing greater parity between large corporations and large non-corporate counterparts.
The President also outlines the global minimum tax on multinationals’ foreign earnings and remove deductions for moving operations abroad, policies that were mentioned in the State of the Union speech. The minimum tax is in contrast to the Fiscal Commission proposal and a draft proposal from House Ways and Means Committee chairman Dave Camp (R-MI) to switch to a territorial tax system, which would not tax income earned outside the country. Details of the proposed minimum tax, such as the rate, were not given, but it draws a clear area of disagreement in the political spectrum over how to approach international taxation.
In addition to the minimum tax, the Administration would defer the interest expense deduction related to overseas investment until that income is taxed in the US, and it would tax excess profits associated with transferring intangible assets (such as intellectual property) to affiliates, both prior used policies. The combination of these revenue-raisers and the minimum tax is to bring the tax code more towards a system of worldwide taxation, where businesses are taxed on income regardless of where it is earned.
The plan also includes provisions for small businesses that have been proposed before, such as increasing the amount of investments they can expense from $500,000 to $1 million, doubling the deduction for start-up costs and making the health insurance tax credit for small businesses under the Affordable Care Act more generous.
|Elements of the Corporate Tax Plan (billions)|
|Reduce Top Rate to 28 Percent||~-$750|
|Extend and Increase R&D Credit||-$110|
|Extend and Expand Certain Clean Energy Incentives||-$4|
|Double Deduction for Start-Up Costs and Expand Small Business Health Insurance Credit||-$17|
|Eliminate LIFO Accounting||$73|
|Tax Carried Interest as Ordinary Income||$13|
|Eliminate Fossil Fuel Tax Preferences||$30|
|Reform Treatment of Insurance Industry and Products||$20|
|Defer Interest Expense Deduction for Foreign Income||$37|
|Tax Excess Returns Associated With Transfer of Intangible Property||$23|
|Eliminate Accelerated Depreciation for Corporate Jets||$2|
|Change Tax Treatment of Business Moving Expenses||Unk|
|Reform Domestic Production Deduction||Unk|
|Institute a Global Minimum Tax||Unk|
Source: President's budget except the rate cut, which comes from JCT.
The Obama Administration states that the proposal is designed to be revenue-neutral, or (put another way) designed so that expiring corporate tax provisions do not add to the deficit. However, he has yet to spell out all of the base broadening, naming only the specifics above and suggesting that remaining savings could come from changing depreciation schedules, modifying the tax treatment of interest, or making other changes.
It is good to see corporate tax reform on the table, since we need to be making smart changes that help boost the economy while we also reduce the debt. Still, this proposal includes a lot of lost revenue without a solid plan for paying for it within ten years (at least so far). We have said in the past that lawmakers should at the very least not add to the deficits, and should be part of a tax reform or deficit reduction package which substantially improves our current debt trajectory.
To see expert reactions to the proposal, click here.
Several developments this week give us hope that this election season will offer some much-needed focus on fiscal policy. Although exit/entrance polls from each state that has voted in the primaries so far have indicated that the federal budget deficit is the number two most important issue for voters behind the economy/jobs, there has yet to be much substantive discussion of the topic on the campaign trail. But that might be changing.
First of all, both President Obama and former Massachusetts Governor Mitt Romney offered tax reform proposals this week. Both plans involve eliminating some tax expenditures and lowering rates. Though neither new plan seeks to reduce the deficit, they both were obviously influenced by the Bowles-Simpson proposal which jettisons tax expenditures to broaden the tax base, which would allow rates to be reduced while still providing more revenue towards deficit reduction.
Secondly, Wednesday night’s Arizona Republican presidential debate saw more discussion about fiscal issues than previous debates, while also illustrating the need for a more informed and constructive campaign discourse on the subject. The first question from an audience member was about how the candidates would reduce the national debt. The contenders then spent the first part of the debate arguing over who would cut federal spending the most and who was more pure on earmarks. The word cloud below based on the debate transcript shows that the terms “budget” and “spending” are prominent. Compared to previous debates (see here and here) fiscal topics definitely manifested themselves more. “Debt” and “taxes” are also there, but are less pronounced.
While addressing federal spending is important, it is only one part of the equation. Former OMB and CBO Director Alice Rivlin put it well at Thursday’s CRFB event when she said that the key question is if candidates’ proposals will make deficits and debt worse or not, which brings us to the third promising development this week.
On Thursday, CRFB’s U.S. Budget Watch project released a new report, Primary Colors: The GOP Candidates and the National Debt. The study assessed how the policy proposals of the four major Republican presidential candidates would impact deficits and debt. Judging from the enormous media and public attention it has already received, this analysis was urgently needed. At the release event, CRFB president Maya MacGuineas emphasized that the intent of U.S. Budget Watch, which neither supports nor opposes any candidate for office, is to help inform voters on fiscal issues. President Obama will be included in an upcoming analysis.
U.S. Budget Watch also produced The 12 Principles of Fiscal Responsibility for the 2012 Campaign to help promote an informed and constructive debate this campaign season on the fiscal challenge facing the country and how to address it. And U.S. Budget Watch will continue to assess the budget impact of campaign proposals.
This morning, CRFB’s U.S. Budget Watch project will unveil Primary Colors: The GOP Candidates and the National Debt, a study of the policy proposals of the four major Republican presidential candidates and their impact on the national debt. President Obama will be included in a forthcoming report. (For an addendum on Governor Romney's 2/22 tax plan, click here).
The big event releasing the new report begins at 9:30 am. If you are in DC, come check it out. If not, you can watch the live webcast below. You can also follow the action on Twitter with the #BudgetWatch hashtag.
CRFB President Maya MacGuineas will present the findings of the report. She will also moderate a discussion featuring CRFB board members former Rep. Bill Frenzel (R-MN); former Rep. Vic Fazio (D-CA); and Alice Rivlin, former OMB and CBO director.
The goal of U.S. Budget Watch is to encourage an informed and constructive debate on the U.S. fiscal situation during the election season. The new guide to the candidates is a key step in that effort. U.S. Budget Watch also produced 12 Principles of Fiscal Responsibility for the 2012 Campaign.
U.S. Budget Watch neither supports nor opposes any candidate for office.
See a live stream of the event here:
President Obama’s campaign made a splash this morning with their claims that Rick Santorum and Mitt Romney would dramatically increase the national debt as president.
We’re excited to see budget issues take center stage in the 2012 election. To help inform the discussion, the Committee for a Responsible Federal Budget has compiled the first comprehensive analysis of the budget impact of campaign proposals made by the Republican presidential candidates (with an analysis of President Obama’s plans to follow shortly). This will be the first detailed, non-partisan assessment of how the platforms of Newt Gingrich, Ron Paul, Mitt Romney and Rick Santorum would affect the national debt.
Please join us on Thursday, February 23 from 9:30-11:00 AM for the release of Primary Numbers: The GOP Candidates and the Federal Debt, as well as a conversation about how this election can promote a constructive debate on the fiscal challenges facing the country. Breakfast will be served.
Click here for more event details.
To RSVP, contact Emmanuel Holder at email@example.com.