Former Oklahoma 1st District Congressman and CRFB Board Member Jim Jones penned an op-ed in today's Tulsa World calling for policymakers to put everything on the table for a plan to replace the fiscal cliff. Many members of Congress have just come off tough races, but as we saw yesterday the leadership in both chambers appears to be looking for a compromise. Jones believes that compromise is both needed and possible given the tremendous fiscal challenges faced by our country.
For almost a decade and a half, I was honored to serve the great people of northeastern Oklahoma in Congress. Today, a centrist Democrat in Congress may be about as rare as a polar bear in northeastern Oklahoma, but through my experience as a fiscally-conservative Democrat on the Ways and Means and Budget Committees, I was able to see how much agreement there was between the two parties, and how deals can be struck when there's a common interest. Even in today's climate of hyper-polarization, this remains true, and even for this era's most important issue: the national debt.
Having hit $16 trillion with no signs of slowing, the national debt promises to eat away at your favorite government policy, regardless of your party or politics.
Whether you prefer to maintain spending levels on, say, transportation programs or scientific research, or you're more interested in keeping taxes low, your preferred policy is about to be swallowed up by what we need to pay to service our debt. Unless we act now.
And now really is the time to act. With the "fiscal cliff" - the club-footed combination of tax hikes and spending cuts, $500 billion in 2013 alone - looming come Jan. 1, our political leaders have been given a firm deadline to get something done.
It will not be easy though, Jones explains that the only way to solve this problem is by putting everything on the table.
Any deal worth the paper it's printed on must make sure to treat nothing as sacrosanct. Any promise made to keep a constituency's favored spending program or tax break is short-term thinking; unless we put everything on the table, we will never come close to plugging the hole we're in.
I've seen much agreement across party lines when it comes to fiscal issues. And I am optimistic that, even in this age of political polarization, that we'll be able to do so again.
The full piece can be found here.
"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.
Not long after Fitch sounded the alarm bells for the urgent need of a comprehensive debt deal, Senate Majority Leader Harry Reid (D-NV), House Speaker John Boehner (R-OH), Senate Minority Leader Mitch McConnell (R-KY), and House Ways and Means Committee chairman Dave Camp (R-MI) have indicated their willingness to work with both sides of the aisle in finding common ground to avoid the fiscal cliff. This is encouraging, given that both parties are coming off of a tough fought election.
Speaker Boehner identified replacing the fiscal cliff with a comprehensive debt deal as a serious matter that needs congressional action. He seemed to indicate his party was open to additional revenues as long as it was accompanied by serious entitlement reforms and fundamental tax reform.
Republicans have signaled a willingness to accept new revenue if it comes from growth and reform. Let's start the discussion there. I'm not suggesting we compromise on our principles. But I am suggesting we commit ourselves to creating an atmosphere where we can see common ground when it exists, and seize it....
There is an alternative to going over the fiscal cliff, in whole or in part. It involves making real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions. By working together and creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the president seeks.
Senate Majority Leader Reid is also focused on the upcoming fiscal cliff and resolving our deficit problem. Reid believes a deal is possible in the next year and does not want to delay action any longer.
I’m not for kicking the can down the road. I think we’ve done that far too much. We know what the issue is; we need to solve the issue. Waiting for a month, six weeks, six months–that’s not going to solve the problem.
I think that we should just roll up our sleeves and get it done.
Both Leader McConnell and Chairman Camp echoed those thoughts. McConnell said that work on the fiscal cliff "begins by proposing a way for both parties to work together in avoiding the ‘fiscal cliff’ without harming a weak and fragile economy, and when that is behind us work with us to reform the tax code and our broken entitlement system." On tax reform, Camp said "I believe the House and Senate are prepared to act next year on reform and that not only means a fairer tax code and more jobs, but also more revenue to help solve our nation’s debt and deficit problems."
These leaders recognize that the outcome of the election means that both parties will have to work together -- nothing will get done otherwise. The willingness to come together and the apparent willingness to consider a wide array of options looks very encouraging for an attempt to steer around the cliff and to also address the debt. Speaker Boehner also discussed having a "downpayment" on deficit reduction to be a catalyst for the bigger pieces being enacted in 2013. Given the amount of time left, that may be the way a deal may have to go, but it is encouraging to hear the Speaker thinking about a comprehensive plan.
The leaders of both houses have set the tone for reaching a bipartisan and comprehensive fiscal plan. There's a bunch of work left to do, but given how soon these statements came after the election, the shift toward compromise is very encouraging.
Click here to read the Campaign to Fix the Debt's statement on the post-election action.
Video of Speaker Boehner's remarks
Video of Majority Leader Reid's remarks
First off, CRFB would like to congratulate President Obama and all of those who were elected and re-elected to the Senate and the House. CRFB is looking forward to continue working with policymakers from both sides of the aisle to help make deficit reduction a reality.
While the campaigns may be over, there's no time to waste in transitioning into governing mode. Lawmakers have a ton on their plate over the cmoing months and an incredible opportunity to make meaningful progress on controlling federal debt this decade and beyond. The lame duck session is going to be a busy and critical time of negotiations as we work to avoid the fiscal cliff and a mountain of debt. There will be plenty of work to do.
To get a sense of how big the fiscal cliff really is, here are all of its components:
- 2001/2003/2010 Tax Cuts: The 2010 tax cut will expire at the end of the year, taking with it many provisions originally enacted in 2001 and 2003. This will mean rate increases for earned income, capital gains and dividends, and large estates; reductions in refundable tax credits; the return of phaseouts of personal exemptions and itemized deductions for higher-income taxpayers; the elimination of reductions in marriage penalties; and reductions in education tax benefits. Extending these provisions permanently would cost $2.7 trillion over ten years.
- AMT Patch: The Alternative Minimum Tax is a tax intended to ensure that higher-income taxpayers pay at least a minimum amount of tax. However, the exemption from the AMT is not indexed for inflation, so Congress does so manually every so often to ensure the tax does not ensnare millions more taxpayers. The most recent patch expired in 2011, meaning that Congress would have to retroactively patch it for 2012. If the AMT is not patched, it would hit 30 million taxpayers, as opposed to the current four million who are affected. Permanently patching the AMT would cost about $860 billion by itself, but almost $1.8 trillion if the 2001/2003/2010 tax cuts are extended.
- Sequester: The sequester, enacted in August 2011 in the Budget Control Act, would make a 9.4 percent across-the-board cut to defense spending and a roughly 8 percent cut to non-defense spending on January 2. Neither party wants the sequester to go off then, but there are differences about how to pay for a delay and whether to keep some of the savings for the later years. The House Republican budget, for example, re-assigned the defense cuts to non-defense discretionary spending, keeping the total savings about the same (other than repealing the 2013 cuts). By contrast, the President's budget repealed the sequester entirely. Full repeal would cost about $970 billion over ten years.
- Payroll Tax Cut and Unemployment Insurance: The payroll tax cut was originally passed in the 2010 tax cut, reducing the employee tax rate by 2 percentage points. It was extended through the end of this year in February. There was initially little interest in extending it for 2013, but recently Democrats have started to jump on the bandwagon again. The White House reportedly has interest in bringing back the Making Work Pay tax credit, which the payroll tax cut replaced. Extended unemployment benefits will also expire at the end of the year, at which time the maximum number of weeks a person could collect benefits would fall from 73 weeks to 26 weeks. There has been less discussion about what will happen to UI benefits, but it will certainly be on the table in December, given the continued high unemployment rate.
- Doc Fix: Due to the Sustainable Growth Rate (SGR) formula, which was intended as a backstop to limit Medicare spending growth, Medicare physician payments will be cut by 27 percent at the end of the year. Congress has rolled back the SGR every few years since 2003, usually freezing physician payments but leaving a cliff in place for future years. Permanently repealing the SGR and freezing physician payments would cost $245 billion over ten years. There are also a number of small "health extenders," temporary provisions related to Medicare and Medicaid that are typically extended along with the doc fixes.
- Tax Extenders: Tax extenders are temporary provisions of the tax code that are routinely extended. Many of these extenders are business tax breaks, like the R&E tax credit, but there are also some individual tax breaks for things like education expenses and state and local sales taxes. Like with the AMT patch, the most recent extension ended in 2011, so a retroactive extension in 2012 would need to take place. So far, the Senate Finance Committee has passed a two-year extension (extension through 2013) of most of the extenders, but otherwise there has been little action. We'd expect that there will be by the end of the year. Extending all of the extenders permanently would cost $890 billion over ten years.
There are also many other fiscal-related issues that will come up in the lame duck session and into next year. They are:
- Debt Ceiling: The Treasury Department recently stated that the U.S. may breach the debt ceiling by the end of this year, although it will be before early 2013 before there is serious danger. As they did previously, Treasury will use "extraordinary measures" to create extra space under the ceiling. House Speaker John Boehner (R-OH) has reiterated his position from last year that any increase in the debt ceiling must be accompanied by an equal or greater amount of spending cuts. If all goes well, an increase in the debt ceiling would be rolled into a deal that responsibly replaces the fiscal cliff.
- Appropriations: In September, Congress passed a continuing resolution to fund the government through March 27. This setup is somewhat parallel to what happened in the spring of 2011, when there nearly was a government shutdown. Although the partisan make-up of Congress and the Presidency (is the same?), it does not seem likely that there will be another showdown. There may be a dispute over riders, however, which has been commonplace in the past few years.
- Farm Bill: The 2008 farm bill lapsed on September 30 with no Congressional action on either that or a discussed drought relief bill. Although the Senate passed a farm bill in June, the House did not take one up. The expiration means that we now revert to the 1949 law, the last time a permanent bill was passed. For now, the expiration means that certain conservation and other programs will no longer take new enrollees. In terms of commodity programs, the expiration will affect dairy products on January 1 and other crops sometime during the 2013 crop season, at which point commodity payments would soar and the target prices for many crops would be well above the market price.
|Cost of Various Provisions (billions)|
|2001/2003/2010 Tax Cut Extension||$2,736|
|Jobs Measures One-Year Extension||~$150|
|Tax Extenders Extension||$890|
|Debt Ceiling Increase||$0|
|Appropriations Bills Completion||$0|
|Farm Bill Completion^||-$23 to -$35|
*Includes interaction with 2001/2003/2010 tax cuts
^CBO has scored the leading House and Senate-passed farm bills as saving $35 billion and $23 billion, respectively, relative to CBO's baseline. CBO has estimated that these bills would authorize slightly less than $1 trillion of spending over ten years.
There are also, of course, many non-budget related items that Congress is also looking to deal with, so they have their work cut out for them to say the least. In these last couple of months, politics has dominated. But now it's time to govern and focus on policy. We hope lawmakers will use this election to give the country a comprehensive debt deal.
While last night election is still many people's mind, the rating agency Fitch reminds us of the tremendous stakes of these next couple of months. In a statement, Fitch warned that without a comprehensive deal, the U.S. could lose its 'AAA' rating, just as it did last year from S&P.
The economic policy challenge facing the President is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the US. Resolution of these fiscal policy choices would likely result in the US retaining its ‘AAA’ status from Fitch. As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013.
No doubt, those who have just been relected or elected for the first time have their own policy agendas that they would like to see through. But as Fitch reiterates, there will be no greater issue in the next year than the decisions we must make on fiscal policy.
Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its ‘AAA’ status. Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch.
From an economic and sovereign credit perspective, the most important policy priority for the President and Congress is reaching agreement on a deficit reduction plan backed by clear targets and specific tax and spending measures that would firmly place US public finances on a sustainable path over the medium to long term. In Fitch’s opinion, such a plan would significantly reduce the uncertainty that currently characterises federal tax and spending policies and underpin a sustainable economic recovery and confidence in the full faith and credit of the federal government.
Fitch has previously indicated that it could downgrade the U.S. if it does not address its fiscal situation, but so far we have not made any progress. We may already see Congress begin to focus its attention on the cliff, with the House Speaker, John Boehner (R-OH), set to hold a press conference in a few hours to possibly enumerate on ways to avoid a fiscal cliff. Hopefully, we can count on our politicians to resolve this pressing issue in a timely, efficient, and bipartisan manner.
Click here to read the statement.
The Urban Institute's Eugene Steuerle and Caleb Quakenbush have updated their estimates calculating lifetime Social Security and Medicare benefits and taxes. In order to compare contributions to benefits received, they assume that the contributions have a rate of return (discount rate) of inflation plus two percent. We previously presented inflation-adjusted numbers based on the older estimates.
Their new estimates show the same story as the old: Social Security and Medicare benefits exceed taxes for past, present, and future age groups. In reality, though, this difference is more about Medicare benefits and taxes.
For Social Security, lifetime taxes largely compensate benefits on average--with the exception of middle-income one-earner couples--for recent retirees with that trend projected to continue into future years. For Medicare however, benefits exceed taxes by a factor between 2.5 and 4 for the recently retired. This discrepancy is due to the fact that only Part A of Medicare is financed with a dedicated tax. Parts B and D, on the other hand, finance only 25 percent of their program costs (net of cost-sharing) from premiums, while the other 75 percent comes from general revenue.
Source: Urban Institute
Steuerle's and Quakenbush's estimates should dispel the myth that benefits, particularly in Medicare, are paid for and that we can avoid entitlement reform. With health care costs projected to keep rising and population aging, policymakers are going to have to look to make changes to the Medicare program, as this problem is not going away.
Decision Time – Election Day is tomorrow and the stakes are high. Not only is control of the White House and Congress at stake, but the election will also have repercussions for the federal budget and national debt. Although it will be the current group of policymakers that will address the fiscal cliff (or not) in a post-election lame duck session of Congress, the results of the voting will no doubt play a role in the deliberations, which could very likely spill into next year. Will our leaders pull the lever on a solution or will they elect to kick the can down the road again?
Down to the Wire – As the candidates eye the finish line, the bottom lines of their fiscal plans are getting more scrutiny. The Concord Coalition looked at the Obama and Romney budget proposals and called for more specifics. Wonkblog gives you the opportunity to fill in the blanks for both the Romney and Obama tax plans. And check out this video from Fix the Debt on the election debt discourse. The candidates have not been keen to detail how they would address the debt, but whoever sits in the Oval Office next year will quickly learn that the debt is getting in between all of their priorities.
Fiscal Cliff as Dark Horse – The looming fiscal cliff has been a dark horse in this campaign as it has been rarely discussed but always looming in the background. However, it will take center stage immediately after the votes are counted as Congress will attempt to address it before the year-end deadline, though House Speaker John Boehner (R-OH) says that the best scenario is a “bridge” over the cliff -- a temporary fix that delays the cliff until next year. The Financial Services Roundtable proposed a two-pronged “bridge” approach in an open letter last week. If policymakers push back the fiscal cliff, they should provide a down payment and credible approach for fully resolving the cliff in the first half of 2013. Leaders in Washington are learning that the cliff is not just a national problem, as more countries are expressing concern that it will impact the global economy.
Debt Ceiling May Be Fiscal Cliff’s Running Mate – The fiscal cliff will have a partner as the Treasury Department confirmed that the statutory debt ceiling will also be reached at the end of the year, though "extraordinary measures" can be taken to put off the need for a debt limit increase until early 2013. You can follow debt ceiling developments here.
Tax Reform Throws Hat Into the Ring – Lots of groups are making the case for tax reform in 2013, and lines are being drawn on Capitol Hill. Fundamental tax reform will be key to a comprehensive debt reduction plan. While tax reform won’t be easy, there is general agreement that reform should contribute to reducing the debt. The Business Roundtable is also pushing for corporate tax reform to be a part of the equation. To get an idea of how corporate tax reform can be accomplished, try out our corporate tax reform calculator.
Sandy Gets on the Ballot – Superstorm Sandy is gone, but its devastating effects still linger. As millions of people slowly recover, lawmakers are considering a supplemental appropriations bill to fund the cleanup and recovery efforts. Last week, we blogged that preparing for disasters should also include being fiscally prepared so that we can deal with such catastrophes without busting the budget.
Key Upcoming Dates (all times are ET)
- Election Day
- House and Senate due to convene for lame duck session
- Consumer Price Index for October released
- Second estimate of Third Quarter GDP figures released
- Unemployment statistics for the month of November released
- Consumer Price Index for November released
- Third estimate of Third Quarter GDP figures released
January 1, 2013
- The “fiscal cliff” occurs, including the expiration of the 2001/2003/2010 tax cuts and across the board spending cuts the following day
Richard Kogan at the Center for Budget and Policy Priorities has released a new report that argues that it may be a better goal for an upcoming budget deal to stabilize the debt as a share of the economy, rather than "Going Big" and coming up with a deal that will put the debt-to-GDP ratio on a downward path. Kogan agrees that a rising level of debt is a threat to the economy, but argues that stabilizing the debt, even at its current high levels, should be our current goal. As he says:
Nevertheless, by stabilizing the debt for the next decade, an additional $2 trillion in savings would give experts and policymakers time to figure out how to slow the growth of health care costs throughout the U.S. health care system without impairing the quality of care. An additional $4 trillion of deficit reduction over the next decade would, in contrast, result in a declining debt ratio (as Figure 1 shows) but would require policymakers to make decisions today on policies, particularly in health care, where desired solutions remain elusive.
There are major unknowns in the health arena. Health care cost growth has slowed appreciably over the past two years. Experts don’t yet know whether this slowdown is permanent or only temporary, and the answer will affect both the magnitude of the long-term fiscal problem and the extent to which further slowing of health-care cost growth is required.
More fundamentally, we currently lack needed information on how to slow health cost growth without reducing health care quality or impeding access to needed care. Demonstration projects and other experiments to find ways to do so are now starting, some of them government-funded and others being undertaken in the private sector. By later in the decade, we should have substantially more knowledge of what works and what doesn’t.
There's no doubt that stabilizing the debt should be the first step over the next few years, but stopping there would not be ideal. There are a number of reasons why "going big" would be preferable to "going medium":
- Economic Projections: The largest uncertainty in budget projections is always in the economic projections, and there is a good chance that we could be overestimating economic performance. For example, CBO does not attempt to predict when a recession will occur, so it projects steady economic growth over the next ten years. It is quite possible that there would be a recession by 2022; otherwise, we would be in the middle of the longest expansion in U.S. history by far. In general, CBO has been revising downward its economic projections in recent years, which could cause a much worse fiscal outlook as we have seen in the past decade. If the debt path was only stable, it would take only a slight downward revision to throw it off track.
- Budget Projections: It's very possible, indeed likely, that CBO will be wrong about certain projections in the budget. It is difficult to predict with great certainty the budget outlook for the next few years, let alone the next decade. CBO may find that they are underestimating the growth rate of health care spending, the number of people receiving benefits in a variety of programs, or the share of compensation going to taxable income is lower than they anticipated. Obviously, they could be doing the opposite as well, but prudent budgeting is wiser, especially in the current fiscal environment. If we were only to stabilize the debt, an unexpected surprise in CBO's projections would push debt unequivocally back up.
- Breathing Room: It is important to keep the budget flexible. We could have an unanticipated emergency such as a natural disaster or recession that presents a drain on the budget. In these cases, it would be wise to do what was necessary to combat the challenge, but a stabilized debt path would quickly turn upward, perhaps to dangerous levels. Putting debt on a clear downward path would provide space for lawmakers to overcome unforeseen emergencies without risking our fiscal standing. Merely stabilizing the debt at a high level may leave little margin for error.
- The Politics of Going Big: This is a point we have made frequently. Doing a medium-sized plan would take most, if not all, the low-hanging fruit off the table and may still require another bite at the apple if things go wrong. Then, the only solutions left would be painful policies that would be politically difficult to enact by themselves. Going big can make a plan more successful by allowing both palatable and unpalatable policies to be enacted together in a package that is much easier to swallow as a whole.
On the topic of health care cost containment, it is difficult and we do expect health care reform to be a work in progress as this decade goes on. But just because we may learn new ways to control health care costs in the upcoming years does not mean we should hesitate in putting policies in place that we believe could be successful in reducing health care spending. We have discussed some of these ideas (see here, here, and here) in the past. These may not be fundamental reforms to the way health care is delivered and financed, but they would certainly help.
Stabilizing the debt is a useful benchmark for early negotiations, but ultimately a deal needs to go beyond that. Deficit reduction is hard, and the opportunity for both Democrats and Republicans to come together on this issue might not always be there. Lawmakers have a real opportunity to act on fixing the budget as a result of the approaching fiscal cliff. We urge policymakers to "Go Big" in their approach.
The Hill reports that some lawmakers are supporting a supplemental bill to deal with the aftermath of Hurricane Sandy. Rep. Chaka Fattah (D-PA) recently introduced a $12 billion supplemental that would mostly go to the Federal Emergency Management Agency (FEMA), and a supplemental has the support of the Senate Appropriations Homeland Security Subcommittee chair Mary Landrieu (D-LA).
The clean up and restoration after Sandy will clearly take an enormous amount of effort and resources, both from state and local government, the federal government, and the private sector. If or when lawmakers enact supplemental emergency appropriations for recovery and reconstruction efforts, they should also be willing to offset those costs over a reasonable period, as CRFB has said in the past.
Budgeting is all about priorities, and it should not be difficult to find $12 billion that can be found to pay for the emergency supplemental. For example, we compiled a table full of policies that have been endorsed by multiple fiscal plans and by members of both parties. There are plenty of savings options to choose from if lawmakers want to be fiscally responsible.
On Wednesday the Tax Relief Coalition, a group made up of notable business councils including the U.S. Chamber of Commerce, National Associations of Independent Business and the National Association of Manufacturers, released a letter urging replace the fiscal cliff with a comprehensive deficit reduction plan using both tax reform and entitlement reform.
The looming fiscal cliff is growing closer and threatening and our economic recovery, so it is good to see more CEOs and business leaders call for action to replace the cliff. The Tax Relief Coalition writes:
TRC welcomes the recent action of corporate CEOs calling for action to avoid the looming fiscal cliff. We firmly believe that reforms of our tax code and entitlement systems is necessary to get our country back on a path to fiscal sanity.
They also called for a bipartisan debt reduction plan earlier this year in a letter to members of Congress:
TRC members believe that a credible bipartisan plan for long-term deficit reduction and economic growth would produce the immediate benefits of reducing uncertainty and improving financial stability and set the stage for long-term deficit reduction through comprehensive tax and entitlement reform.
The Tax Relief Coalition is worried about the increase in marginal rates that come with the fiscal cliff, arguing that it would be especially harmful for the millions of businesses that are organized as pass-through businesses and taxed through the individual code. Base-broadening, rate reducing tax reform could both raise more revenue and reduce tax rates, spurring more growth. Entitlement reform also needs to be included in the conversation, with health care spending as the greatest future driver of our unsustainable debt.
This is very much in line with what the Fix the Debt campaign argues; everything needs to be on the table with both revenue increases and spending cuts. Specifically, the campaign lists in its core principles that a plan should include reforming Medicare and Medicaid, strengthening the Social Security program by giving it solvency, and engaging in comprehensive and pro-growth tax reform that raises more revenue while broadening the base and lowering rates. If we are willing to put everything on the table, we can stabilize the debt and put it on a downward path without instituting the drastic spending cuts and tax increases in the fiscal cliff.
It's good to see both business leaders and citizens actively engaged in the current debate about the budget. We can replace the fiscal cliff with a plan that addresses all parts of the budget, but we are going to have to make the tough choices. With the stakes so high, everyone needs to be involved.
David Wessel, economics editor for The Wall Street Journal, has produced a fiscal cliff primer video. Wessel covers everything from why the cliff exists, what our current debt dilemma is, and where we could go next. It's a great introduction to the fiscal cliff and the current budget debate.
You should especially check it out if you enjoy some great whiteboard animation (we're fans.) If you want to learn more, check out our fiscal cliff paper.
Yesterday in a blog post, IMF's Fiscal Affairs Director Carlo Cottarelli stressed the need for fiscal transparency on the part of governments around the world in attaining a comprehensive debt-deal. By fiscal transparency, Cottarelli means the necessity for governments to make fiscal information accurate and readily available. By doing this, governments are able to set reasonable parameters for making "good budget decisions," while at the same time, citizens become well-informed and are able to hold their governments liable for those decisions. Cottarelli writes:
Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. And unless that information is made public, citizens and their legislatures can’t hold governments accountable for those decisions.
Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus to the foundation of effective fiscal management.
But how fiscally transparent have governments been? Citing a paper from the IMF, Cottarelli attempts to assess the gains governments have made, noting that there have been some improvements. In the same vein, he sets out ground rules governments must adhere to. Over the past few years, standards for reporting fiscal data have been enhanced significantly with the number of countries able to report data rising by over 50%. Many have also improved the timeliness of their reporting.
Of course, in the U.S., we have a wealth of budget information compiled by the CBO, OMB, Treasury Department, and the Social Security and Medicare Trustees, among other sources. They show not only historical data, but budget forecasts as far out as 75 years into the future. Information is readily available, and the sources that provide it are trusted to produce non-biased results. In terms of fiscal transparency, we're doing well compared to other countries. Still, Cottarelli has some advice that we could use with regards to our budget process:
Finally, the fiscal adjustment process requires, in many cases, governments to set ambitious targets for reducing deficits and debt. We know from experience that governments in these circumstances are often tempted to resort to creative accounting as a way of avoiding, albeit temporarily, the tough fiscal choices implied by those targets.
It is important that we have a blueprint for where our budget should go, and we should make sure that our accounting standards are up to the task.
Over at Wonkblog, Dylan Matthews and Ezra Klein have worked with analysts at Citizens for Tax Justice and the Institute for Taxation and Economic Policy to create an individual tax reform calculator. The calculator comes in versions for both Governor Mitt Romney's plan and President Obama's plan. In the Romney version, one must find revenue sources in the tax code to offset extending the Bush tax cuts, reducing tax rates across the board by 20 percent, eliminating the AMT, and reducing corporate tax rates. In the Obama version, one must find additional revenue above allowing the upper-income tax cuts to expire to meet either his revenue target (an additional $500-$600 billion over ten years, or $1.5 trillion total) or the Simpson-Bowles revenue target (about an additional $1.35 trillion over ten years, or slightly above $2 trillion total).
The user is given the option of choosing a broad-based tax expenditure reduction, specifically Gov. Romney's proposed itemized deduction cap and President Obama's limitation on deductions and exclusions for upper-income taxpayers. Beyond that, the user can also reduce or eliminate other tax expenditures, including a few large provisions such as the health care exemption and preferential rates for dividends and capital gains. The calculator also allows additional taxes like a VAT or a carbon tax, or returning the estate tax to pre-2001 levels.
Here's a sample of both of them.
Both calculators tell a similar story--that enacting comprehensive tax reform is very hard. This is especially true if one tries to a base-broadening rate-reducing tax reform that raises revenue. This is also apparent on the corporate side for those who have tried our own corporate tax calculator. We hope lawmakers look at tax reform as an opportunity to improve the tax code, but more importantly to raise the revenue we need to stabilize our debt.
We've shown before that it is possible to make the math add up, but not unless lawmakers are willing to make some difficult choices. We can reform the tax code to raise more revenue, be more progressive, and better promote growth, but it is going to require that every tax expenditure--and some non-tax expenditures--be given a serious look.