The Bottom Line
Because there has been a lot of talk about the chained CPI lately, CRFB has created a brand new "Chained CPI Resource Page" to give readers one place to see all that information.
The page has background on the current consumer price index and the chained CPI. It also shows analyses from a variety of sources about the effects of the chained CPI on the budget, taxes, and Social Security in addition to links to outside experts and organizations who support using the chained CPI for inflation calculations.
As a reminder, the chained CPI would replace the current CPI for inflation calculations for cost-of-living adjustments for retirement programs and for various provisions of the tax code. The chained CPI is widely considered to be a more accurate measure of inflation since it more comprehensively accounts for the ability of consumers to substitute goods to avoid the full brunt of relative price increases.
Click here to view the chained CPI resource page.
While Speaker Boehner and President Obama attempt to bridge their differences in the fiscal cliff negotiations, you can try your hand at creating a plan using the "Choose Your Own Fiscal Cliff Adventure" simulator from Wonkblog. The simulator offers users a chance to come up with their own plan to avoid the fiscal cliff while reducing the deficit in the long run to stabilize the debt.
The simulator allows users to choose among various policy options dealing with the fiscal cliff components, additional stimulus, and deficit reduction. The deficit reduction options include changes to federal health programs, Social Security, discretionary spending, and the tax code. The simulator then displays the effect your choices have on GDP growth over the next three years and deficits over the next ten years.
Wonkblog's simulator is helpful in showing the trade-offs between short-term growth and longer-term deficit reduction. Lawmakers could look to these options and many others, such as those we list in our recently released "Revenue and Health Care Savings Options" report, as they figure out how to navigate the fiscal cliff and the mountain of debt.
The Internal Revenue Service has continued to warn Congress of the administrative consequences of going over the fiscal cliff. In another letter to the chairs of both the Senate Finance Committee and House Ways and Means Committee, IRS Tax Commissioner Steven Miller estimates that between 80 million and 100 million tax returns could be delayed if Congress fails to pass a deal that includes an Alternative Minimum Tax patch due to computer reprogramming issues. In his letter, Miller writes:
In my previous letter, I estimated that more than 60 million taxpayers might be prevented from filing their tax returns while we are reprogramming our computers. This figure includes those who would be subject to additional tax as well as those who would be required to perform the calculation to determine if the changes in thresholds and credit ordering rules affect their tax liability. As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers - 80 to 100 million of the 150 million total returns expected to be filed - may be unable to file.
This number results from the need to limit filing by those who may be potentially impacted. The IRS cannot process the returns of any taxpayers whose return characteristics do not allow us to differentiate them from those whose tax liability would be altered by the AMT expiration. This means that there are certain forms and schedules we could not accept from any taxpayer - even those who ultimately may not have additional AMT liability. Similarly, returns of any taxpayers whose income levels may subject them to the AMT could not be processed.
Furthermore, it may not be possible even to process some returns that are clearly not subject to or affected by the AMT. Allowing only some taxpayers to file as we reprogram could substantially increase the risk of fraud and error in initial filings as well as create the potential for a large number of amended returns.
There is no question the delay in processing tax returns would be a huge problem for federal government and taxpayers alike. Even worse, if the AMT patch is not retroactively reinstated, then 28 million more taxpayers are expected to pay the tax (and current AMT taxpayers would be hit as well). The distribution table below shows that this is a relatively harsh burden that not only hits upper-middle class households, but those in the middle class as well. Clearly, this is not desirable tax policy for either Republicans or Democrats.
Distribution of the Expiration of the AMT
Source: Tax Policy Center
The expiration of the AMT patch, along with many other provisions in the tax code, make it clear that at the very least the fiscal cliff negotiations should fix the current temporary nature of the tax code. We need more revenue, but it is also important that we reform the tax code to promote longer-term growth and reduce uncertainty for businesses and individuals. Failing to fix the AMT is not the answer, and we need a plan if we are going to deal with it.
Click here to read IRS Commissioner Miller's letter.
UPDATE: The Joint Committee on Taxation has scored Plan B as costing $4.1 trillion over ten years, savings of $400 billion over a full extension. Both the text and the graph have been updated to reflect this score. Tax Policy Center has also produced distribution tables of Plan B.
There has been much speculation in these last few days about where the fiscal cliff negotiations might be heading. One piece that has added to the conversation is House Speaker John Boehner's (R-OH) so-called "Plan B."
The plan includes a partial extension of the 2001/2003/2010 tax cuts and Alternative Minimum Tax patch. From the tax cuts, Plan B leaves out:
- The extension of the 35 percent rate for people making more than $1 million. It will instead revert to 39.6 percent.
- The extension of the 15 percent rates on capital gains and dividends for people making more than $1 million. Those will instead rise to 20 percent, consistent with the Senate Democrats' tax cut extension but with a lower tax rate on dividends than President Obama calls for (39.6 percent for millionaires).
- The extension of the 2009 refundable tax credit expansions that were previously extended in 2010. These expansions would shrink the earned income tax credit and child tax credit, while replacing the American Opportunity tax credit with the non-refundable Hope credit.
The Joint Committee on Taxation has estimated that Plan B would cost $4.14 trillion over ten years. Compared to a full extension of the tax cuts, this would save about $400 billion.
All of the other tax cuts for income below $1 million, the estate tax parameters from the 2010 tax cut, and the repeal of the personal exemption phaseout (PEP) and Pease limitation would be continued. Importantly, Plan B does nothing about the other parts of the fiscal cliff beyond the tax cuts and AMT patch. Clearly, as its name indicates, it is not intended to be a cliff replacement plan, but rather an if-all-else-fails option. Lawmakers would have to come back to the issue to address the other parts of the fiscal cliff and the additional deficit reduction necessary for sustainability.
The graph below is our estimate of what Plan B would do to public debt. We show different scenarios assuming that literally nothing else is done with the cliff (current law), the doc fix is extended and the sequester is repealed without being offset, and current policies are extended one year at a time and offset over ten years. These scenarios are compared to the CRFB Realistic Baseline. These figures could be slightly higher depending on what was done with the payroll tax cut and unemployment insurance benefits.
Source: JCT, CRFB calculations
We will provide further analysis as more information comes out.
The chained CPI has been receiving much attention lately after being included in the latest offers from both the GOP and White House. Some critics of the policy have been voicing their concerns, and yesterday, CRFB chimed in again to clear up the misconception that moving to the chained CPI would be regressive. Today, Robert Greenstein, president of the Center on Budget and Policy Priorities, clarified his view on the merits of including the chained CPI, thoughtfully addressing some of the criticisms of the policy. Below is a segment of his reaction:
So what is my thinking? I share concerns about the effects of the chained CPI on beneficiaries. But I think that some benefit cuts in Social Security are inevitable sooner or later. The program needs some changes to make it solvent for the long term, and the chances that policymakers will restore solvency entirely through tax increases — with no benefit-reduction component — are essentially zero. That didn’t happen in 1983, and it almost certainly won’t happen now or in the foreseeable future.
Furthermore, as in 1983, benefit changes won’t be limited to high-income beneficiaries. There are limits to how far one can cut benefits at the top without breaking Social Security’s link between payroll-tax contributions and benefits, and thereby risking undermining public support for the program. I see these factors as basic political realities, whether we like them or not.
That brings me to the key point: the chained CPI is the only Social Security benefit change that brings an increase in general tax revenues with it. Eventually, about half of the savings from the chained CPI come from revenues, and about half from Social Security and other benefit programs. The more that we raise in revenues, the less that policymakers will slash programs generally. So, this — and the fact that the chained CPI is a more accurate measure of inflation (although not necessarily for the elderly) — leads me to conclude that if policymakers can build appropriate protections into the chained CPI to protect both the oldest and the poorest beneficiaries, it’s worth considering.
Finally, I hope people reading Bob’s article don’t think I’m the sole liberal who’s open to the chained CPI. The late, revered Bob Ball — the former Commissioner of Social Security who led efforts to defend the program for half a century and was a hero and beacon on social insurance issues to so many of us — put forth several Social Security plans that included the chained CPI as a way to help restore Social Security solvency. Indeed, I first looked at the proposal after I saw that Bob Ball had included it in one of his plans. The Center for American Progress also embraced the chained CPI several years ago and included the proposal in its Social Security solvency plan.
The full blog post from Robert Greenstein can be found here.
With time running out for a deal, the U.S. credit rating may be in jeopardy if lawmakers don't reach a compromise to replace the fiscal cliff. Fitch is the latest credit rating agency to warn that failure to come to an agreement would likely lead the U.S. to lose its AAA status. From Fitch's Global Sovereign Review (login required):
In Fitch's opinion, the tax increases and spending cuts implied by the fiscal cliff would not address the long-term drivers of higher public spending and the narrow and volatile tax base. Many of the measures would probably be partially reversed if the economy slowed and unemployment began to rise, perpetuating the uncertainty over government tax and spending policies that is weighing on the economic recovery. Failure to avoid the fiscal cliff would not, in Fitch's opinion, place US public finances on a long-term sustainable path. It would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the US into an avoidable and unnecessary recession that could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the US would lose its "AAA" status.
This statement from Fitch echoes comments made last week from Federal Reserve Chairman Ben Bernanke that both avoiding the cliff and having a sizeable deficit reduction plan are equally important. In terms of the latter, Fitch says that after a few years of kicking the can down the road, the U.S. needs to adopt a credible medium- to long-term fiscal consolidation plan.
The credibility of any deficit reduction plan would be greatly enhanced by specific measures and targets reflected in legislation with a significant down payment in 2013. Agreement on a multi-year deficit reduction plan to stabilise government indebtedness and secure the sustainability of public finances would be likely to lead to Fitch affirming the US "AAA" rating and revising the Rating Outlook to Stable. Conversely and in the absence of positive economic and fiscal shocks, failure to put in place a credible fiscal consolidation strategy during 2013 would be likely to result in the US losing its "AAA" status.
Fitch is not the only agency with a current "Negative" outlook on the U.S. Here is a reminder of where the other credit agencies stand:
|U.S. Credit Rating By Agency|
|Standard & Poor's||AA+||Negative|
|Japan Credit Rating Agency||AAA||Stable|
|Rating and Investment Information||AAA||Stable|
Source: Agency Outlooks
Hopefully, the White House and Republican leaders will take the final steps toward a deal over the next few days. While decent progress has been made in recent weeks, there is still a long ways to go.
The recent offers from the White House and Republican House leadership have shown that both parties appear to be committed to finding a compromise. But lawmakers still have a long ways to go. Not only must Congress and the President find a way to replace the fiscal cliff, but they should do so with a plan that adequately addresseses our unsustainable debt problem. To do this, all ideas must be on the table.
To show the many options that lawmakers could choose from, CRFB has compiled two menus of revenue and health care options that could be considered in the fiscal cliff negotiations. The health care list includes roughly 100 options such as reforming Medicare cost-sharing, restricting Medigap coverage, equalizing payments between skilled nursing facilities and inpatient rehabilitation facilities, requiring drug rebates in Medicare, and expanding hospital penalties for re-admissions, among many others.
On the revenue side, there are roughly 70 options, which include taxing dividends as ordinary income, capping itemized deductions at various dollar amounts, limiting the value of tax expenditures for higher earners, getting rid of the mortgage interest deduction for second homes, or implementing a surtax.
Although these are not the only policies out there, these lists give a sampling of what policymakers have to work with in these negotiations. If we are going to agree on a significant bipartisan plan that will stabilize debt and put it on a downward path as a share of the economy, we need to consider all of the ideas out there.
Click here to read the full report.
After being included in both the most recent White House and Republican offers, the "chained CPI" has been front and center as a potential piece of any compromise to avoid the fiscal cliff. A number of critics of the policy (see here, here, and here) have voiced concern about the chained CPI, attacking the option as a regressive Social Security cut and tax increases. To address these concerns, we explored the distributional impact of chained CPI in the most recent update of our report, "Measuring Up: The Case for Chained CPI."
On Social Security, cost-of-living adjustments offer the same percentage increase for all their beneficiaries, therefore a COLA that grows more slowly would be distributional neutral in theory. Differences due to other factors, including a greater cut for those who receive benefits for a longer time, actually make the change slightly progressive. This table from the Social Security Administration show that the benefit cut would be greater for those in the top two quintiles.
On the tax side, switching to chained CPI would affect tax brackets, the standard deduction, personal exemptions, and other features of the tax code. Other than those who have a negative tax burden, most everyone would be affected - with TPC finding each quintile on average receiving a 0.2 percent reduction in their after tax income over the next decade. On average, the chained CPI's effects are roughly distributionally neutral -- though those at the very very very bottom and very very top would bear a smaller relative burden.
Standing alone, switching to chained CPI is more or less distributionally neutral. But policymakers may want to achieve an outcome more progressive than the current system and may want to protect certain vulnerable populations. With regards to Social Security, the best way to do that is to enact a comprehensive package which makes the system solvent in the context of modifying the benefit formula and offering other features such as a minimum benefit. Short of that, however, policymakers could protect the old-old by combining chained CPI with a benefit bump-up for the very old. As an example, the Simpson-Bowles plan included a flat dollar increase equal to 5 percent of the average benefit available phased in beginning 20 years after eligibility.
Whereas by itself benefit reductions are equal by income group in the same cohort, the change is quite progressive when combined with such a policy. The graph shows the benefit change at age 86, since that is when the bump-up would be fully phased-in under a Simpson-Bowles type policy.
Source: Social Security Administration, CRFB Calculations
Likewise, switching to the chained CPI on the tax side has clearly not prevented major bipartisan plans from being substantially more progressive than the current code.
It makes no sense to continue overstate inflation if the most vulnerable can be protected with additional policies.
Click here to read our updated Measuring Up report.
With the fiscal cliff only two weeks away and the upcoming holiday season, negotiations for replacing the fiscal cliff with a sensible deficit reduction plan appear to have accelerated. Over the weekend, Speaker Boehner reportedly made an offer to the White House that included $1 trillion in spending cuts and $1 trillion of revenue – with some of it coming from letting the upper-income tax cuts expire on millionaires.
Yesterday, the White House responded with a third offer, again lowering the revenue in their proposal, now down to $1.2 trillion and backing off their requirement to raise rates on incomes over $250,000. Their proposal now would require the very top rate to rise from 35 percent to 39.6 percent, affecting income over $400,000. The White House has now included the chained-CPI in their offer, and with both parties willing to put that option on the table, it seems likely to be included in the final deal. Both sides are now closer than in their original proposals and there does appear to be renewed hopefulness that a deal will get done.
Importantly, the figures below are based on our best understanding of the offers from press reports, and may differ from the actual offers. In particular, there is a lack of clarity on many of the details of the White House’s latest offer.
|Comparison of Fiscal Cliff Offers (in billions)|
||WH Offer 1 (11/29)
||GOP Offer 1 (12/3)+
||WH Offer 2 (12/10)*
||GOP Offer 2 (12/14)
||WH Offer 3 (12/17)|
|Jobs Measures and Tax Extenders||-$425
|Additional Revenue Through Tax Reform||$600||$650/$450'|
|| $850 - $900
||$1,250 - $1,300
|Total New Savings||$1,950
|Savings Enacted since Simpson-Bowles Report^||$1,700||$1,700||$1,700||$1,700||$1,700|
Debt in 2022
(81% Under Realistic Current Policy)
* We assume the WH Offer 2 is identical to WH Offer 1 except with $1.4 trillion of revenue.
+ We assume GOP Offer 1 is based off of the numbers suggested by Bowles to the Supercommittee applied through 2022 instead of 2021.
^ Includes discretionary and related interest savings enacted since the August 2010 baseline, but excludes cuts used as offsets.
' Press reports indicate that GOP leadership has proposed letting the tax cuts expire for income above $1 million. Letting all the tax cuts expire for income above $1 million would raise roughly $450 billion while letting only the top rate go to 39.6 percent would raise in the broad range of $250 billion.
> Some reports include a permanent extension of tax extenders, which could have substantial additional costs. We assume only two years of deficit financed extenders at a cost of $100 billion.
That both sides have moved closer together is a very welcomed development. Though both sides reduced the total amount of savings in their second offers, it is encouraging that the latest offer from the White House appears to have increased the total savings. Lawmakers went through this process last year during the Super Committee negotiations when offers became smaller, so it's good to see that this process might not be repeated. In the end, however, most offers up until this point would just barely stabilize the debt within the budget window – leaving little room for error.
Public Debt Levels under Recent Offers (Percent of GDP)
While policymakers should be realistic about what can specifically be agreed upon before the cliff, we hope that negotiations will lead them to a bigger and bolder package rather than a smaller one. As we’ve explained, such a deal should "go big" in order to put the debt on a clear downward path, should "go smart" by replacing the mindless recessionary policies of the cliff with a gradual, intelligent, and pro-growth set of policies, and should "go long" by making substantial improvements beyond the ten-year window.
There may not be enough time to agree on a specific plan, but policymakers should at least agree on a framework, a downpayment, and a credible process for putting in place the remaining savings next year.
As negotiations continue, we will continue to track them and offer analysis.
Note: Table updated since original posting to incorporate new details about the White House's latest offer.
Former CBO Director and CRFB Board Member cautioned political leaders in a op-ed in The Hill, that merely finding just enough savings to repeal the fiscal cliff would be not only be a wasted opportunity but a sure sign that Washington is still not serious about controlling our unsustainable debt.
Both entitlement reform and tax reform should be pursued, only through serious reform are we likely to find enough in savings to put our debt on a downward path as a share of the economy. Rivlin writes:
While avoiding the “fiscal cliff” is essential to near-term recovery and job growth, it is just the first step to restoring sustained prosperity in America. It would be catastrophic if negotiations between the president and Congress succeeded in avoiding the cliff but failed to address the fundamental threat of projected debt rising faster than the economy can grow.
We must have fundamental tax reforms that raise revenues and entitlement program reforms that slow the growth of healthcare spending and preserve Medicare and Medicaid for those who need them over the long run.
The “fiscal cliff” is an artificial barrier designed to pressure political leaders to get the nation’s budget on a sustainable path. The worst possible lame-duck deal would be a small one that avoids the cliff and thus removes pressure from policymakers to construct a much larger, multi-year agreement next year. Such a deal would do nothing for long-term fiscal stability.
Rivlin argues that any deal to replace the fiscal cliff should contain an overall framework that would significantly address our debt as well as a legislative process and enforcement mechanism that would allow for needed reform like that proposed in Domenici-Rivlin 2.0. We've also called for negotiators to agree to an significant overall framework, a downpayment, and enforcement mechanism that would lead lawmakers to put debt on a sustainable path. Argues Rivlin:
Imagine what a Medicare reform bill or a fundamental tax reform bill would look like after two or three months’ debate on the Senate floor without the time protections of reconciliation or a similar process.
A bad short-term deal that allows policymakers to avoid the harder long-term decisions would be a step backward. It might make Wall Street happy for a moment or two, but it will mean serious risk to the prosperity of the American people in the long run.
Click here to read the full piece.
"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.
Monday Morning Quarterbacking – The Washington Redskins stayed in playoff contention Sunday with back-up quarterback Kirk Cousins leading the team to victory. As DC basks in the glow of being in the division lead, there is also concern that it is behind in averting the fiscal cliff. With the end-of-year deadline just two weeks away, more of the discussion is turning to what the back-up plan is. While there is plenty of armchair quarterbacking going on, no one has yet taken command of the situation to lead the way to a solution. There is also a pall over everything as the nation comes to grips with the tragedy in Newtown, CT. Our thoughts go out to all those impacted.
Fiscal Cliff Could Hold Back Economy – The New York Times reports that there are signs the economy could strengthen in 2013, if the fiscal cliff is averted. The Wall Street Journal also identifies the fiscal cliff as the wild card that could disrupt the recovery. Meanwhile, Americans are speaking up and demanding that policymakers act. A new ad from the Campaign to Fix the Debt highlights support from Americans from various walks of life among the more than 320,000 signers of the Citizen’s Petition to Fix the Debt. New York Mayor Michael Bloomberg joined the campaign last week as many other leaders signaled support for the cause. Over 2,500 small business leaders are now a part of the effort along with community leaders in several states. There are now several tools for devising your own fiscal cliff plan, including our “Stabilize the Debt” budget simulator.
Both Sides Back Off a Little – There was some movement in the fiscal cliff talks over the weekend between President Obama and House Speaker Boehner. The two met again Monday morning, showing that there may be increased momentum towards getting a deal. Obama has lowered his revenue target from $1.6 trillion to $1.4 trillion. Boehner offered to allow tax cuts to expire for those making over $1 million a year in exchange for entitlement savings. More revenue would be attained through tax reform that simplifies the tax code and broadens the base by limiting or eliminating tax expenditures. Read more on base-broadening tax reform and tax expenditures here. Raising the Medicare retirement age and switching to an alternative version of the Consumer Price Index (CPI) for adjusting federal programs for inflation are discussed as possible changes on the spending side. Read more on the "chained CPI" here (and here). Our latest brief examines what we would like to see come from the fiscal cliff negotiations. Also, keep track of the issue with our Fiscal Cliff Resource Page.
Pushing Back the Debt Limit Fight? – Boehner also reportedly offered to extend the statutory debt ceiling for another year if spending cuts at least equal to the amount of the increase were included in the fiscal cliff deal. Pairing the debt limit increase with a fiscal cliff deal would avert another potential ugly fiscal fight in the first few months of the new year, when the limit will be reached and all "extraordinary measures" to delay a default will be exhausted. Keep abreast of debt ceiling developments here.
Budget Taking a Back Seat – The Office of Management and Budget (OMB) is delaying the process for crafting the president’s Fiscal Year 2014 budget request because of uncertainty regarding the fiscal cliff. The budget is usually submitted on the first Monday in February, but may slip into March because the negotiations over the fiscal cliff are making it difficult for federal agencies to plan their funding requests. Of course, Congress has still yet to complete the current-year budget. The government is currently operating on a stop-gap “continuing resolution” funding federal agencies through late March. Since they managed to pass none of the 12 individual spending bills, lawmakers plan to combine all of them into one “omnibus” appropriations bill. While appropriators have made progress in agreeing on many components of the spending package, the fiscal cliff drama is delaying this process as well. For ideas on reforming the dysfunctional budget process, visit here.
Aid Package to be Brought Up – A $60.4 billion aid package to assist in recovery and rebuilding efforts from Hurricane Sandy is to be considered by the Senate this week. President Obama has asked that the spending not be offset by cuts or revenue elsewhere. The supplemental measure may find more opposition in the House.
Key Upcoming Dates (all times are ET)
- House Education and the Workforce hearing on pension plans at 10 am.
- 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
- 113th Congress will convene
- Unemployment statistics for the month of December released
- Consumer Price Index data for December released
- President Obama publicly sworn in for his second term (a private swearing in will occur on Sunday the 20th, the technical inauguration date)
- Advance estimate of fourth quarter GDP figures released
Reducing federal health spending will play an important role in any long term deficit reduction plan debated over the next year. As lawmakers look to reform and put federal health programs on a more sustainable path for future generations, we've highlighted before that there is no shortage of options. Earlier this week, retiring House Ways and Means Subcommittee on Health Chairman Wally Herger (R-CA) introduced “The Save and Strengthen Medicare Act” (H.R. 6645), adding to the menu of Medicare reform options lawmakers can consider.
Rep. Herger’s bill includes a number of policies we’ve seen before, but with a few new twists. For example, similar to the Fiscal Commission’s recommendation, it would reform traditional Medicare by creating a unified deductible for Medicare Part A and Part B, a uniform coinsurance rate of 20 percent, and an out-of-pocket limit. Like other proposals we have seen by Congressional Republicans, it introduces competitive bidding and premium support into Medicare. The premium subsidy would not be limited to a specific growth rate but instead tied to the lowest bid after 2021. Seniors under 135 percent of the federal poverty line would receive enhanced contributions whereas those with higher incomes would receive a less generous premium subsidy. Herger's proposal differs in that it is the first premium support proposal that would create a three-tiered benefit structure under which plans would be categorized based on their cost sharing level. It also would create new optional health individual retirement accounts where up to two percent of pre-tax earnings (up to $2,500 for singles and $5,000 for couples, adjusted for inflation) can be saved for use once an individual retires.
As another twist on a familiar policy, the bill proposes a "preferred Medicare age" which would gradually increase the Medicare eligibility age to 67, but provide an option for seniors to continue to join at age 65. Similar to Social Security early retirement, those who chose to join Medicare at 65 would pay a higher premium share so that their lifetime benefit would be actuarially equal to those who waited to enroll at the preferred age of 67. After 2026, the preferred age is indexed to longevity. The bill would also cut in half the Medicare payroll tax for workers between the ages of 65-67 and eliminate the tax for workers 68 and older, providing an additional incentive to delay retirement and enroll in Medicare later.
While many of the bill’s policies would likely yield savings to the federal government, it also includes some policies that would increase federal spending. For example, it would repeal the Independent Payment Advisory Board (IPAB) which we’ve discussed the merits of many times before on this blog. At the very least, IPAB would serve as a useful backstop to ensure that Medicare savings materalize and make sure that Medicare growth is kept in line.
Overall, Rep. Herger’s bill is a valuable contribution to the debate on how best to reform and reduce federal health spending in the long term. As one of the largest drivers of future deficits, lawmakers would be wise to consider proposals such as these that tackle rising health care costs.
Senator Tom Coburn (R-OK) has released a new list of ten wasteful tax expenditures, totaling $130 billion over the next ten years. Whether it is tax breaks for NASCAR tracks, fishing tackle boxes, or films produced in the U.S., the list serves as a clear sign that there are plenty of places to look to raise revenue from tax expenditures. Coburn's list is below.
|Coburn's Top Ten Tax Expenditures|
|Eliminate Tax Breaks for Millionaires||$100 billion|
|Eliminate the Professional Sports Loophole||$910 million|
|End New Markets Tax Credit||$7.4 billion|
|End Tackle Box Tax Break||$11 million|
|End Dog and Pony Show Tax Break||$30 million|
|End Hollywood Tax Break||$300 million|
|End NASCAR Tax Break||$400 million|
|End Tree Planting Subsidies||$2 billion|
|End Historic Preservation and Non-Historic Structures Break||$7.6 billion|
|End the Residential Energy Efficient Tax Credit||$12 billion|
|Total Savings||$130 billion|
Source: Senator Tom Coburn
Savings of $130 billion is not enough to close our deficit, but it does reinforce that we need to take a serious look at reforming the tax code to make sure the credits and deductions we do have reflect good policy. A simpler tax code with a broader base could raise revenues and lower rates, while being as or more progressive than today's tax code. A simpler code would also help the IRS reduce our tax gap for additional savings.
On a similar note, Senator Coburn also recently sent a letter to the President and Congressional leaders urging them to let many expiring tax breaks sunset, saving $18 billion next year alone (note: a few of the policies mentioned in the letter overlap with the tax expenditures mentioned above). It's worth taking a serious look at these extenders, some of which may be justified and should be made permanent while are not justified and should expire. Looking at these tax extenders and tax expenditures as a whole should certainly be a central part of efforts to raise revenue during the fiscal cliff negotiations.
One option on the table that has great potential to be included in a final deal is the chained CPI. As we explain in our updated paper on the chained CPI, "Measuring Up," the current CPI overstates inflation because it doesn't account for substitution between different categories as relative prices change. Today, Marc Goldwein, CRFB's Senior Policy Director, further explained this policy in a CNN radio interview using the example of ham and turkey sandwiches. You can listen below:
The story focuses on its application to Social Security, but it is worth noting that the chained CPI would also affect the tax code and other spending that involves cost-of-living-adjustments (COLAs).
Goldwein also appeared in a WBAA public radio piece about the chained CPI. Similar to the CNN piece, he discusses how the chained CPI's methodology would be an improvement over the current CPI and describes its effect on the budget. He also points out that the chained CPI would phase in gradually, so it would have the benefit of not reducing deficits too quickly.
Despite critics claiming that it would hurt the vulernable, we have shown that on average chained CPI would be distributionally neutral. Any particularly vulnerable group that would be hurt by chained CPI -- for example, seniors that collect Social Security for a long period of time -- could be helped with other policy changes like, in this case, a benefit bump-up after collecting benefits for twenty years. This is preferable to continuing to use a less accurate measure of inflation for everyone.
The chained CPI may be one of the easier options on the table right now, and it should definitely be included in the discussion. For more information on the measure, check out our updated report.
UPDATE: This blog has been updated to talk about Goldwein's also recent appearance in a WBAA public radio piece talking about the chained CPI.
In a bipartisan op-ed in the Chicago Tribune, Reps. Robert Dold (R-IL) and Daniel Lupinski (D-IL) endorse a two-part process that avoids the fiscal cliff and sets up a process for Congress to enact a fiscal plan next year. Arguing that the paths of either going off the cliff or avoiding the cliff without offsets are irresponsible, they see the enactment of a plan along the lines of the major bipartisan plans as the most viable option.
At this point in the year, it is likely too difficult to come to an agreement on specific reforms to both taxes and entitlements before the end of the year. Thus, they suggest the following process:
The first part would be an elimination of at least part of the "cliff" taxes and cuts, facilitated by making a significant down payment on deficit reduction that includes immediate spending cuts and new revenue. There are a number of options on the table that have already been spelled out in various debt-reduction commission reports, the discussions that took place last summer between the Obama administration and House Republicans, and in bipartisan legislation.
The second part would be to set up a process for early 2013 that will mandate broader changes to the tax code and entitlement programs. Congress can do this by requiring its committees to produce by a certain date legislation that lengthens the life and sustainability of entitlement programs and reforms the tax code to boost economic growth and bring in new revenue. Rather than rush these changes into fruition before the end of the year, it would be best to achieve these results by going through the legislative process and the appropriate congressional committees.
To encourage Congress to complete this second part, there would have to be a trigger in place to assure that specific debt cuts would be made if Congress failed to produce the debt-reduction legislation. Last summer we put in place the sequestration process — the across-the-board cuts — to encourage the supercommittee to succeed. Unfortunately, the committee did fail. But today the sequestration trigger is having the desired effect of forcing leaders back to the bargaining table.
Readers will recognize this process as being very similar to one we wrote about in a paper released on Monday. The process ensures that fundamental reforms can be undertaken while getting specific savings and avoiding the fiscal cliff upfront. They also agree with us that savings should be sufficient to put debt on a clear downward path as a percent of GDP; specifically, they mention $2.8 trillion of additional deficit reduction, yielding debt of 69 percent in ten years.
Lawmakers who want to "Go Big" seem to recognize that a two-part framework may be the best way to get a comprehensive deal. We hope that the negotiators can figure out how to make it happen.
With the fiscal cliff inching closer and still no clear deal in sight, a new Wall Street Journal/NBC News poll finds the American public overwelmingly want policymakers to reach a compromise. According to the poll, about two thirds of the Americans want Congress to pass a deal that both lowers our deficit and replaces the cliff, even if that includes tax rate increases and cuts to Social Security and Medicare. Less than 30 percent of those surveyed would rather congressional leaders not compromise and stick to principles, pushing us over the fiscal cliff. The polling shows that while some policies in isolation may be relatively unpopular, Americans are willing to do them in the context of an overall deal that avoids the cliff.
This is not terribly surprising. Given the scope of our unsustainable budget problem or the alternative of going over the fiscal cliff, Americans realize that a bipartisan compromise is neccessary if we are to have any positive outcome. As CRFB Board Member and former Senator Alan Simpson (R-WY) said:
The voters are way ahead of their elected representatives in realizing we need to honestly 'do something' about this problem and that fixing it will require that everyone accept some sacrifices in the things they may like for the good of the country they love.
Over 320,000 Americans have signed a petition at FixtheDebt.org urging lawmakers to do just that. Hopefully, our leaders are listening.
Michael Peterson, President and CEO of the Peter G. Peterson Foundation, writes in Politico that much of the coverage on the fiscal cliff has missed the real point. What the debate needs is a concrete target for debt reduction. He writes:
We hear many ambiguities like “fiscal sustainability,” “getting our fiscal house in order,” and “living within our means.” Even targets that seem specific, like “$4 trillion of deficit reduction over 10 years” are vulnerable to manipulation – much of the so-called “savings” can be meaningless if it is compared to a fictional baseline, such as one that projects future increases in spending in Afghanistan even though we are already drawing down forces.
Let’s put all of the rhetoric aside and agree on a clear fiscal goal: reducing our public debt to 60 percent of our GDP by 2030.
We've seen in the past that it is very easy to manipulate baselines and savings through budget gimmicks to come up with a certain amount of deficit reduction. But if lawmakers are willing to get serious about our fiscal problem, they should make the target a centerpiece of a fiscal cliff replacement framework. As Peterson says:
There’s no shortage of policy options to achieve 60 percent by ‘30. Many plans achieve meaningful deficit reduction within the 10-year budget window, but they must be coupled with structural reforms that ensure that we’re on the right trajectory thereafter.
And, assuming our elected leaders really want to solve the problem, it’s entirely possible to agree by the end of the year on a fiscal framework, combined with an expedited legislative process to enact and enforce legislation in 2013. A credible long-term fiscal plan that is agreed upon now, but implemented gradually, would not only put the nation on sound economic footing for the future, but would build the critically needed confidence that today’s economy so desperately needs.
Pretty soon, the fiscal cliff suspense will be over. This self-inflicted fiscal flashpoint has already hurt our fragile economy due to the uncertainty and fear it has imposed on businesses and consumers. On New Year’s Eve, someone will be toasting a political win. But will it be a victory for the country? That only comes once we have a long-term fiscal plan on target for 60 percent by ’30.
Click here to read the full piece.
"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.
Reporting from The Wall Street Journal has indicated that lawmakers from both parties are taking a look at using an alternative measure of inflation, the "chained CPI," in a final deal that would avert the fiscal cliff. As far as possible options, this is one that makes a lot of sense for both technical and budgetary reasons. Today, CRFB's Moment of Truth project has updated its analysis of the chained CPI to include the latest projections of the budgetary impact and a new discussion of the distributional impacts of switching to the chained CPI, in light of current discussions surrounding the fiscal cliff and budget imbalances.
The main reason lawmakers should look to the chained CPI is that it is a more accurate measure of inflation, given that current measures used in spending programs and the tax code overstates inflation by 0.25 to 0.3 percent each year. As CRFB Policy Director Marc Goldwein explained in an op-ed in The Atlantic last year:
Every year, wages and prices go up. The government wants to measure this inflation to index everything from Social Security checks to tax brackets. The government makes these measurements by focusing on a "basket of goods" to compile its so-called consumer price index, or CPI.
The weakness of regular CPI is that we don't account for when consumers start changing their relative buying habits. If the prices of apples skyrocket, the regular CPI assumes cost-of-living will go way up. But in the real world, most people just buy fewer apples and more oranges.
Moving to the "chained CPI" corrects for this technical flaw by trying to provide an honest assessment of each month's basket and creating a "chain" between them. Moving to a more realistic measure of inflation would save well over $200 billion over the next decade, including from Social Security, other inflation-index programs, and from the tax code.
But the chained CPI isn't just a technical fix. As Goldwein mentioned, it would also be timely in that it would also help control deficits in the future. Specifically, it would save $236 billion over ten years, with $149 billion coming from spending savings, $62 billion coming from revenue, and $26 billion coming from interest savings.
We talk a great deal here at The Bottom Line about how comprehensive plans should address both spending and revenue in debt reduction. Fortunately, switching to the chained CPI would both raise revenue through indexing tax brackets while reducing spending, mainly by having cost-of-living adjustments in retirement programs grow more slowly. Additionally, the effects of the chained CPI would be phased in gradually, so individuals would have plenty of time to prepare for the tax and spending changes and it would avoid a dramatic change during the economic recovery.
Some critics have claimed that the chained CPI is a regressive tax increase, but we've shown in the past that this is false. Tax Policy Center analysis shows that its effect is roughly distributionally neutral, with a roughly 0.2 percent of income increase across each quintile. The move doesn't affect those at the very high incomes because they already are in the highest tax bracket, although it would be more progressive if an additional higher bracket were added at some point. Regardless, there are many other ways to make the tax code more progressive, as many plans have done while switching to the chained CPI.
Source: Tax Policy Center
Meanwhile, other critics have claimed that older retirees would be hit hardest by chained CPI due to its compounding effect. This is true, but it doesn't make sense to overstate inflation for everyone just to protect those older seniors. Instead, many bipartisan plans that included chained CPI also included an old age bump up to protect those seniors that live past their savings, targeting resources where they are most needed. The Simpson-Bowles plan proposed implementing this policy in a particularly progressive way through a flat dollar bump up for all beneficiaries who have been receiving benefits for twenty years, which would provide lower income beneficiaries with a greater percentage increase in benefits.
Others have suggested that certain programs such as Supplemental Security Income should be exempted from chained CPI. However, this would undercut the central rationale for adopting the chained CPI -- more accurately achieving the policy goal of indexing benefits to inflation -- and lead to pressure for further exemptions. Rather than continuing to use an inaccurate measure of inflation to index certain programs, policymakers could include targeted policies to offset the impact of chained CPI on vulnerable populations. For example, the Center on Budget Policy Priorities -- which supports the use of chained CPI as part of a comprehensive deficit reduction plan if low income populations were protected -- has proposed several policies to achieve this goal through changes in the SSI, including indexing the income disregards and asset limits in the program for inflation and applying the twenty year benefit bump-up to SSI as in Social Security.
Policymakers are certainly going to have to make tough choices in a large deal. But including the chained CPI is one of the easier ones. It will more accurately measure inflation and its savings will be both gradual and include a mix of revenue increases and spending cuts. Those negatively affected by the new measure, like older seniors, can easily be helped with additional policies in a bipartisan compromise. We still have a ways to go in the negotiations, but the chained CPI should definitely be considered.
Click here to read the updated "Measuring Up" paper.
In September, the Federal Open Market Committee (FOMC) announced a third round of quantitative easing, consisting of purchases of mortgage-backed securities and long-term Treasuries. QE3 represented a break from previous rounds of easing because it did not involve an end date for the purchases. With that modification, there was some speculation that the FOMC would also set inflation and unemployment thresholds after which, if reached, the Fed would wind down its easing policy. This concept was floated by Chicago Federal Reserve President Charles Evans and endorsed by Minneapolis Fed President Narayana Kocherlakota.
Today, the FOMC embraced the so called "Evans rule." Specifically, they announced they would maintain the near-zero federal funds rate at least until the unemployment rate fell to 6.5 percent and projected inflation for one to two years out rises above 2.5 percent. Previous statements since the announcement of QE3 had simply said that easing would be contingent on a substantial improvement in the labor market in the context of price stability. Now, it is much clearer what they mean by "substantial improvement" and "price stability."
Beyond the targets, the FOMC also announced that it would continue to buy mortgage-backed securities at a rate of $40 billion per month while reinvesting maturing securities back into MBSs. They also will continue to buy long-term Treasury bonds at a clip of $45 billion per month even after Operation Twist expires at the end of the year. This means that the overall Fed balance sheet will likely increase faster than it has in recent months.
Source: Cleveland Federal Reserve
During the press conference following the FOMC statement, Fed chairman Ben Bernanke stressed that meeting either the inflation or the unemployment threshold would not automatically trigger a tightening of policy; rather, that would depend on a broader context, especially if one of the thresholds is not close to being met. He also made clear that the 6.5 percent unemployment target was not the FOMC's view of full employment but rather would allow the Fed some room to withdraw its support gradually without risking overheating the economy by being too accomodative.
On fiscal policy, he hoped Congress would do the right thing by coming to an agreement on a deal to replace the fiscal cliff, and hopefully one that does not kick the can further down the road. Bernanke advocated that Congress and the President work to simultaneously avoid creating economic headwinds that could hurt our recovering economy and agree on a framework that could show policymakers are serious about addressing our unsustainable fiscal path. Both were equally important according to Bernanke.
The markets rose quickly after the FOMC announcement, but economic growth in the near term may ultimately depend more on what happens with the cliff. Bernanke has cautioned that the Fed would be unable to prevent the economic downturn created by the fiscal cliff. With clear guidance on monetary policy, lawmakers must come together soon to get fiscal policy right.
All eyes are on Washington, as we see what the White House and the Congress agree on to avert the fiscal cliff and begin to tackle our debt. While we wait for our national leaders, we can at least have some fun coming up with our own plans.
Just like CRFB's budget simulator exercise, The Wall Street Journal has a new game that enables users to come to terms with the difficult choices our national leaders are faced with in reaching a deal. Unlike CRFB's simulator, which shows users what they would get debt as a percent of GDP to in 2020, the WSJ simulator shows how much users reduce the projected $1.1 trillion deficit in 2020.
The game features a variety of options scored by CBO covering revenues, discretionary spending, and entitlement reform. Some options include:
- Let the 2001/2003/2010 tax cuts expire as scheduled
- Place a 15 percent cap on the value of deductions
- Increase the earnings subject to the Social Security payroll tax to $170,000 (currently $110,100)
- Enact a carbon tax
- Allow the sequester to go into effect
- Enact tort reform
- Add a public option to the health insurance exchanges
- Change inflation measure for COLAs to a more accurate measure of inflation (the chained CPI)
- Raise the retirement ages for Social Security
When playing the game -- like the CRFB simulator -- it becomes apparent quickly that it is quite difficult to make a significant dent in deficits using only tax increases or spending cuts alone, especially considering the politics involved with many of these options. Any plan, especially one that is politically realistic, will need a mix of revenue and spending cuts that looks at all areas of the budget.