The Bottom Line
John Oliver, interim host of The Daily Show with John Stewart, opened last night's program with an update on tax reform. The segment is hilarious, but Oliver's analysis is also spot on -- special interests and political infighting are holding up a reform process that is long overdue. As we have written before, tax reform is really hard, but well worth the effort.
You can watch the entire segment below in three parts. Click here to read CRFB's full coverage of tax reform.
Yesterday in Phoenix, one of the hardest hit areas by the housing bust, President Obama gave a speech that laid out his plan to strengthen the housing market. This was the second speech in a series President Obama plans to give laying out his principles and proposals to improve the economy. While yesterday's speech covered a broad range of issues within housing, some had substantial fiscal implications, especially the decisions that need to be made on the Freddie Mae and Fannie Mac, the two largest government-sponsored enterprises (GSE) which were explicitly brought under conservatorship in 2008.
As the housing market is beginning to slowly make its recovery, President Obama stressed the importance of preventing a future housing bubble, while also continuing to provide support for the sector in the short term. The President proposed allowing more homeowners to refinance mortgages under the current lower rates, simplifying mortgage forms, assisting renters, and implementing the $15 billion "Project Rebuild" stimulus program, among other policies.
But most significant from a budgetary aspect may be the President's plans for winding down Fannie and Freddie. The White House has proposed to wind-down their investment portfolios by a mimimum of 15 percent per year. Replacing the two would be an institution similar to the FDIC, which would only provide government backing after all private capital is wiped out. The federal government would be paid a premium for its catastrophic guarantee. The proposal is similar to the approach that is being led by Senators Mark Warner (D-VA) and Bob Corker (R-TN) and the plan put forward by University of Maryland's Phillip Swagel as part of the Hamilton Project's series on the federal budget.
The collapse of the housing market was met with a major effort startto prop up the sector, such as the federal takeover of Freddie and Fannie, the First-Time Home Buyers Credit, and smaller stimulus provisions. Back in 2009, when CBO reviewed the federal commitment to housing, we noticed that much of the support for housing was not temporary, but part of the regular budget. Not surprisingly, even after many of the stimulus provisions have expired or wound down, federal support is still significant.
As was the case four year ago, much of the support is provided through the tax code. Tax expenditures that back housing will result in nearly $135 billion in forgone revenues, with nearly half of that from the mortgage interest deduction (estimated a $70 billion in 2013), according to the Joint Committee on Taxation. While popular, the mortgage interest deduction, like many other itemized deductions, disproportionately benefits higher earners. We've examined many different options that could reduce the mortgage interest deduction's cost, including turning it into a credit, putting a cap on its value, disallowing it for second-homes and home equity loans, or eliminate it all together.
Federal Support for Housing in 2013
Source: JCT, Departments of Housing and Urban Development and Agriculture
Spending programs for housing will roughly total more than $60 billion in 2013. The majority is provided through tenant-based (Section 8) and project-based rental assistance, and federal construction and maintenance of public housing. The Making Home Affordable program was created in 2009 as part of the financial crisis response and is slowly being phased down. Smaller programs exist to serve vulnerable populations. Beyond those spending programs, the Federal Housing Administration (FHA) and the Department of Agriculture also make loans, whose totals are not accounted for in the graph below.
We will continue to follow the White House's economic speeches and provide analysis of budgetary implications in the coming weeks.
As we've written many times before, the U.S. population is aging and in doing so putting increasing pressure on Social Security, Medicare, and to some extent Medicaid. In part, this is due to rising life expectancy which has increased markedly over the last century from 47 years in 1900 to 79 years today.
Growing life expectancy, however, does not necessarily mean those additional years will be healthy and productive ones. A recent working paper by David Cutler, Kaushik Ghosh and Mary Beth Landrum from the National Bureau of Economic Research aims to explore this question. The answer: people are not only living longer but are living healthier as well.
In their research, the authors focus on three major statistics: longevity, disability, and disease prevalence. They find that in 2005, Medicare beneficiaries (for a typical person aged 65) were living 0.7 years longer than they did in 1992, but actually spending 1.6 years less of their golden years with a disability. In other words, not only are the additional years of life free of disability, but seniors have gained additional disability-free years on top of that.
Importantly, the authors' findings on disease-free years is not quite as rosy, though still relatively good news. They find that of the 0.7 additional years of life expectancy, 85 percent (0.6 years) of them are disease-free. In other words, the number of years where a senior has a disease has gone up slightly, but only by a small fraction of the number of years their life expectancy has gone up.
So what are the implications of this finding? Certainly nothing definitive, but the study is suggestive that workers should be able to bear some more time in the workforce as life expectancy grows.
As we have written before, people working longer can help accelerate economic growth by increasing labor and investment, can leave workers with more security for their own retirement, and can generate important new revenue for the federal government. If public policy creates incentives for this longer work by raising the Social Security and Medicare retirement ages, it can also save substantial sums of money for those programs in order to reduce the debt and extend their solvency.
Population aging is the single biggest threat to the budget over at least the next quarter century, and anything public policy can do to bend the aging curve can certainly make things easier. This latest research offers more evidence that increasing retirement ages can be a part of the solution.
Update: The Tax Policy Center has released a distributional analysis of the reducing the top individual and corporate rates to 25 percent and eliminating the AMT.
With submissions in from Senators wishing to weigh in on the Finance Committee blank slate process for tax reform, both Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) are now undertaking the hard work of writing their marks. According to news reports, Camp has committed to producing a tax reform bill in October and Baucus plans to follow a similar schedule.
As we've argued before, tax reform is an incredibly worthwhile endevour both to promote economic growth and to help reduce the deficit. And with $1.3 trillion in annual tax expenditures out there, there is plenty of money to reduce rates and deficits. But those who support fiscally responsible reform with dramatically lower rates (including us) do need to accept a reality: tax reform is really, really hard.
According to new estimates by the Joint Committee on Taxation, eliminating the AMT while reducing the top individual and corporate tax rates to 25 percent could cost over $5 trillion over ten years. To be sure, there are enough tax expenditures in existence to finance these costs, with roughly $15 trillion worth under current law and perhaps in the neighborhood of $10 trillion after accounting for interactions with the rate. Importantly, that $10 trillion number is likely to shrink even more when accounting for taxpayer behavior to minimizing tax burden and the administratively difficulty of eliminating some preferences.
When politics are added to the mix, the cash available from tax expenditures declines further. For example, policymakers are very likely to want to maintain some support for housing, health care, and charitable giving (see our list of options to make these preferences more efficient here) and will also likely want to continue to support savings and investment through the tax code. Trying to maintain the same level of progressivity, as the Senate Finance Committee has announced in its clean slate framework, adds an additional challange to cutting rates.
These realities have caused some groups, such as the Center on Budget and Policy Priorities, to be concerned about focusing on rate reduction in tax reform and especially about setting a rate target before identifying the specific tax preferences to cut. These concerns are merited, given research from the Tax Policy Center which recently concluded that "it is possible to maintain revenues in the face of large marginal tax rate cuts by pairing back tax expenditures, but it would be very difficult."
The flip side to this concern is that lower rates will likely make tax reform more politically appealing, can have real economic benefits, and can force a tougher look at a number of inefficient and distortionary tax preferences which might not be scrutinized without the prospects of substantial rate cuts.
In our view, rate reduction is an important part of the tax reform formula but only in the context of generating the revenue stream to help finance our government and pay down our deficits. The blank slate approach can help to maintain discipline on tax expenditures, but expectations must be managed.
Both the 2005 Tax Panel and the Simpson-Bowles Commission found that eliminating all tax preferences would allow for a top rate of 23 percent. Yet both plans included tax expenditure add-backs which required rates in the high 20s or low 30s. Ditto the Domenici-Rivlin tax plan. And importantly, none of these commissions faced that type of political pressure that Congress is likely to face on retaining tax expenditures.
As policymakers continue to pursue tax reform, we recommend that they keep this reality in mind. For those interested in substantially reducing rates, we also recommend doing the following:
- Keep All Tax Expenditures On the Table. As a number of major tax reform plans demonstrate, it is possible to achieve substantial deficit reduction without repealing every tax expenditure in the code. Yet once one tax expenditure is taken off the table for consideration, no matter how worthy, it opens the door to taking the next off the table. If each Member of the Senate was able to protect just one tax expenditures from reform, half would ultimately become unavailable. Given that the most popular preferences also tend to be the biggest ones, the amount of money left for rate reduction or deficit reduction would likely be minimal. Removing the top ten largest expenditures would take $900 billion out of $1.3 trillion in annual expenditures off the table.
- Be Creative: Think Beyond Tax Expeditures. Although the Senate Finance Committee has rightly identified tax expenditures as the first place they are looking to for revenue, it should not be the only place. A recent Tax Notes paper by CRFB's Marc Goldwein, Adam Rosenberg, and Jessica Stone identifies "non-tax-expenditure-base-provisions" (NTEBPs) as a part of the income tax base beyond tax expenditures to tap for revenue. Rate levels and bracket thresholds could also be adjusted in a number of ways to simplify the code and reduce the cost of rate reduction. In addition, other forms of revenue outside the income tax could be considered to help finance reform.
- Recognize Tax Reform is About More than Rate Reduction. All else equal, the lower the tax rates the better. Lower rates mean a smaller tax gap, smaller distortions from tax expenditures, and better incentives to work and invest. But rate reduction should not and cannot be the only goal of tax reform. Nor should deficit reduction, though achieving this goal is quite important. Tax reform also has the power to reduce economic distortions by getting government out of the business of picking winners and losers and subsidizing bad behavior. At the same time, improved simplicity, reduced compliance costs, increased equity and fairness, and clearer incentives where appropriate can all be benefits of tax reform. These would be important improvements, regardless of how much rate reduction is achieved.
Ultimately, tax reform should aim to push the envelope. Chairmen Baucus and Camp should push their colleagues to think as boldly as possible to achieve as much rate and deficit reduction as the political system will bear, given other important policy goals. But they shouldn't expect such reform will be easy.
Tax reform is very, very hard, so policymakers should work hard to achieve it.
Update: Post-sequester figures have been revised according to the most recent estimates.
Another month has gone by, and while on paper the budget process is moving forward, the roadblocks preventing the passage of appropriations bills for FY 2014 are becoming quite apparent.
Both the Senate and House have been busy, especially in the Committees. Since our last update, the House Appropriations Committee has passed four more appropriations bills and the full chamber has passed two bills, Defense and Energy-Water. The Senate Appropriations Committee has passed seven bills since our last blog, but none have passed the full Senate.
Despite that progress, sequestration remains the main point of contention. As we detailed in our last blog, the Senate has continued to appropriate based on a pre-sequester funding level, while the House has adopted the post-sequester target, though with a pre-sequester level for Defense. But agreeing on additional cuts for non-defense has been difficult. The House Transportation-Housing and Urban Development (THUD) bill, with $44 billion of funding, was pulled from floor consideration last week, while the Senate's $54 billion THUD bill did not survive a filibuster. Not only will the different approaches to sequestration make it difficult to reconcile bills from each chamber, but it may also stall the appropriations process as the committees look to get their bills passed by their respective chambers.
While it is theoretically possible to complete appropriations by the September 30 deadline, a continuing resolution that would keep the government funded at least temporarily is more likely. One sticking point, however, is that Republicans are reportedly pushing for a short, one to two month continuing resolution, even though House Speaker John Boehner has said that he does not want to operate the whole year on a CR. On the other hand, some media accounts indicate that Democrats might prefer a longer-term CR similar to what the government has been operating under since March.
With both parties seeking to alter sequestration in some form, a comprehensive plan may be the only way out of this jam, and there appears to be new momentum surrounding a deal. Republican Congressional leaders have made it clear that they are open to a sequester replacement, and the White House is also expressing some confidence about the possibility of a bigger deal this fall. If lawmakers are able to work together on entitlement and tax reform, the breakdown in appropriations caused by the sequester could be a blessing in disguise and would result in the sequester finally fulfilling its purpose as a deal catalyst.
|Status and Funding of Appropriations Bills|
House Funding (in billions)
|Senate Status||Senate Funding (in billions)||
Post-Sequester FY 2013 Funding (in billions)
|Agriculture||Passed by Committee||$19.5||Passed by Committee||$20.9||$19.5|
|Commerce-Justice-Science||Passed by Committee||$47.4||Passed by Commitee||$50.3||$47.0|
|Defense||Passed by House||$512.5||Passed by Committee||$516.6||$486.3|
|Energy-Water||Passed by House||$30.4||Passed by Committee||$34.8||$33.8|
|Financial Services||Passed by Committee||$17.0||Passed by Committee||$23.0||$21.6|
|Homeland Security||Passed by House||$39.0||Passed by Committee||$39.1||$38.0|
|Interior-Environment||No Action||$24.3||No Action||$30.1||$28.2|
|Labor-HHS-Education||No Action||$121.8||Passed by Committee||$164.3||$149.6|
|Legislative Branch||Passed by Committee||$4.1||Passed by Committee||$4.4||$4.1|
|Military Construction-VA||Passed by House||$73.3||Passed by Committee||$74.4||$70.9|
|State-Foreign Ops||Passed by Committee||$34.1||Passed by Committee||$44.1||$39.8|
|Transportation-HUD||Passed by Committee||$44.1||Passed by Committee||$54.0||~$48.5|
Source: House and Senate Appropriation Committee websites
Note: Italics indicate changes from the last appropriations update.
~ THUD has been adjusted to remove one-time offsetting collections from the Federal Housing Administration (FHA) and Government National Mortgage Association (GNMA) for better comparability
With both the Senate's and House's Transportation-Housing and Urban Development (THUD) appropriations bill stalled, it seems unlikely Congress will be able to agree to a package of appropriations for FY 2014 by the October first deadline. In the Senate, Democrats have been unable to pass funding in excess of sequester levels while in the House Republicans have been unable to pass funding which meets them.
The recognition that neither pre- or post-sequester spending levels have sufficient political support on Capitol Hill may have an upside, breathing new life into the idea of enacting a comprehensive set of tax and entitlement reforms to replace at least some portion of the sequester.
According to the Wall Street Journal, OMB director Sylvia Mathews Burwell views this impass as a possible "inflection point" to begin negotiations on a sequester replacement deal. And encouragingly, Hosue Republicans leadership appears to be open to the idea as well. In a press conference Thursday, House Speaker John Boehner (R-OH) opened the door to replacing the sequester, rightly arguing that "sequestration is going to remain in effect until the president agrees to cuts and reforms that will allow us to remove it" and arguing for any replacement "to get serious about our long-term spending problem."
House Majority Leader Eric Cantor (R-VA) reiterated interest in replacing the sequester with long-term reform in a Fox News Sunday interview over the weekend. He said:
What we have said in the House as Republicans, leadership and members alike, is that we want to fix the real problem. The real problem is entitlements. We've also said sequester is not the best way to go about spending reductions. It was, as you know, a default mechanism because Congress couldn't do the job it was supposed to a couple of years ago... this fall is going to give us a great opportunity I think to all come together and try and tackle the real problem which is the entitlements.
Encouragingly, some policymakers aren't waiting for the fall to get started. President Obama and a small group of Senate Republicans continue to discuss a possible framework for a "grand bargain," according to The Wall Street Journal. One of the participants, Sen. Bob Corker (R-TN), confirmed the intentions of the group, saying "I think we’re looking at something larger than [replacing] the sequester," though there has also been talk of a smaller deal to replace a few years of sequester.
We've written many times before that sequestration is the wrong way to do deficit reduction. It cuts too abrupty on too narrow a slice of the budget in a way that could hurt short- and even long-term economic growth without addressing any of the long-term drivers of the debt.
A petite bargain which replaces several years of sequesteration with more structural reforms that save just as much in the medium term and far more over the long-term would likely improve our fiscal and economic picture. However, with the White House unlikely to cut entitlement spending without revenue and Republicans unlikely to pay for sequestration repeal with revenue, a bigger deal might be the best way to make sure both sides get what they want, as we showed in our report. The big deal could replace sequestration with spending cuts and generate revenue from comprehensive tax reform -- all while putting the debt on a clear downward path relative to the economy.
To be sure, even achieving the petite bargain is an uphill battle. But this week, the hill just got a little bit less steep.
Detroit's recent bankruptcy makes it the largest municipal bankruptcy in our nation's history as the city seeks to restructure $18 billion in debt. However, this didn't just happen overnight, it was the result of years of deficit spending and inadequate revenues compounded and demonstrated in particular by its pension program. In an article in The Business Desk, Larry Kotlikoff argues that Washington has shown many of the traits Detroit did enroute to its ultimate bankruptcy. In his article, he discusses the accounting used by both entities to either keep certain liabilities off their books or give the appearance that the shortfall is much less than it actually is.
Kotlikoff primarily refers to the differences between the official public federal debt and the long-term fiscal gap in his argument for a new generational accounting system, much like the one proposed in "The INFORM Act" which he helped design and which is championed by the millennial organization The Can Kicks Back.
The debt Uncle Sam publicly acknowledges -- official federal debt in the hands of the public -- is now $12 trillion. But the true measure of our debt -- the one suggested by economic theory -- is the fiscal gap, which totals $222 trillion. The fiscal gap is the present value of all future expenditures, including servicing outstanding official federal debt, minus the present value of all future receipts.
Detroit's main means of hiding its true liabilities was discounting its future obligations at a rate far higher than appropriate, thus giving the appearance that less saving was needed to cover the shortfall.
Washington's dirtier trick has been to keep virtually all of its future liabilities off the books, which creates the vast ocean separating the fiscal gap and the official debt. Decisions about what debts to put on and what debts to keep off the books are not grounded in economics; this duplicitous accounting is grounded in linguistics.
This said, acknowledging our potential fiscal obligations and deciding how to deal with them rules out neither productive government investments in infrastructure, education, research or the environment nor pro-growth tax reform. The fiscal gap tells us whether current policy is sustainable, what's needed to make current policy sustainable, and the tradeoff between adjusting policy now or later.
The current system of accounting may lead to some shortsighted behavior, especially the non-consideration of many of the unfunded liabilities the federal government faces down the road. Generational accounting, he argues, could help remedy this by making long-term budgetary effects explicit. This type of accounting is by no means a new phenomenon, as many countries and well-known agencies have actually been using it, or a version of it, for quite some time.
Foreign governments and international agencies like the International Monetary Fund have being doing fiscal gap and generational accounting either on a routine or periodic basis for decades. This analysis has led Norway to set up a Generational Trust that preserves oil revenues for future generations. It's led the Dutch to reform their pensions without overly burdening today's and tomorrow's Dutch children. And it's influenced generational policymaking in countries as near as Canada and as far away as New Zealand. In contrast, the U.S. continues to let official debt determine its generational policy.
This may change in the near future with The INFORM Act slowly working its way through the legislative process. The Act could result in more responsible fiscal policy making by analyzing current and future policies in a context that is more conducive to long-term thinking and planning.
As of Wednesday's GDP report, GDP for fiscal year 2012 was revised upward by roughly $560 billion to a total of $16.2 trillion. This almost Houdini-like event is due in no part to direct increases in production and consumption, but rather it is the result of the Bureau of Economic Analysis's (BEA) new accounting system. The bottom line is that the way we measure GDP has changed, and that will change budget metrics as a share of GDP (both going forward and retrospectively), but the underlying facts about our budget challenges remain.
Donald Marron draws attention to these GDP changes in a recent blog post regarding the relative decrease in size of the U.S. government in relation to the larger GDP numbers. The nearly $560 billion increase in GDP is largely the result of accounting for things like research and development and artistic creation as capitalized investments rather than immediate expenses. These changes also changed historical GDP growth rates which Catherine Rampell of The New York Times notes, among other things, meant that the Great Recession was not as steep and the recovery slightly better than we thought, at least in terms of that one measure.
These changes to the accounting system have no direct effect on the federal budget - nominal totals of revenue, spending, and debt remain the same. The changes merely improve BEA's measures of fixed investment and allows for a better measurement of the effects innovation and intangible assets have on the economy, producing a better estimate of GDP. But because GDP is larger under the new measure, the revisions also have resulted in federal government spending, revenues, deficits, and debt becoming smaller relative to the economy, as the charts below show.
Source: OMB, BEA
So what does this mean for our budgetary numbers? Though nominal values stay the same, we now know that revenue, spending, and debt as a share of GDP are and have been lower than we previously thought. As an example, we've typically described historical revenue levels at about 18 percent of GDP, but these new numbers put it closer to 17.5 percent. Spending has typically been described as averaging 21 percent of GDP over the past 40 years, but these new numbers put it about 0.5 percentage points lower as well.
The table below, in part with data from Marron's post shows how the 40-year historical averages of different budget metrics have changed.
|1973-2012 Average, Percent of GDP|
|Memorandum: 2013 Debt||75.1%||72.5%|
Source: Marron, CBO, BEA
As for the debt, the revised historical average is 38 percent of GDP rather than 39.2 percent previously thought. Importantly, this new measure of GDP will also change the way we measure debt going forward. In its most recent outlook, CBO estimated the 2013 debt level at 75 percent of GDP. Based on this new measure, debt is actually 2.5 percentage points lower at 72.5 percent. Whether or not this means we have additional capacity to carry our debt is unclear, but what is clear is that the numbers going forward will look different from those reported previously.
BEA's revisions will change the past and present budget picture somewhat, but they leave the underlying trend largely unchanged. We expect that when CBO revises its budget estimates, absent deficit reduction legislation, debt will continue to be rising on an unsustainable long-term path albeit at a slightly lower level in relation to GDP. The numbers may be different, but the story will likely remain the same.
As we have written before, the recent downward turn in the growth of health care costs is an encouraging development, but one that may not last in the long term. Historically, such slowdowns in health expenditures tend to last only temporarily, and an aging population will once again lead to escalating health care spending in the next decade even if per-capita cost growth remains relatively subdued.
Earlier this week, Dr. Kavita Patel, a Managing Director at the Brookings Institution's Engelberg Center for Health Care Reform, testified before the Senate Budget Committee about the importance of reining health care costs. Also testifying at the hearing were Joseph Antos of AEI, who argued in favor of a premium support program and market competition, and Len Nichols of George Mason University, who made the case for payment reforms and realigning incentives in the system.
Dr. Patel's testimony focuses specifically on the Affordable Care Act's impact on health spending in the context of payment and delivery system reforms. She also identifies opportunities for additional savings in ambulatory care, inpatient services, post-acute care, and simplification of pharmaceutical delivery, supplies, and administration.
In addition, Dr. Patel argues in favor of increasing transparency in the Medicare program so beneficiaries can be more informed consumers. These type of reforms -- which could theoretically work with cost-sharing provisions -- would encourage quality and value of care by simplifying the Medicare program and giving seniors more information in making their health care decisions. Dr. Patel argues:
Most patients and their physicians have little to no understanding of the true cost of care or pricing, often resulting in poorly informed decision-making. It is clear that as consumers face increased out of pocket spending and continue to bear more financial responsibility, there is a need for a systematic approach to increase transparency and then deal with the consequences of such transparency.
She notes that it is unclear how best to implement greater transparency in the Medicare system, but policymakers have suggested several approaches, namely "anti-trust litigation to reduce the market power of certain insurance companies and providers to drive up prices and obscure them from consumers, incentivizing price transparency through legislation and regulatory action, and market solutions such as making transparent and releasing data on quality and prices of providers to employers would enable them to demand lower-cost and higher quality health plans, hospitals and providers."
Dr. Patel argues that transparency and efficiency reforms can and must be considered alongside other Medicare provisions as a part of broader structural Medicare reform. This sentiment echoes a framework released by Brookings in an April report highlighting approaches for bending the health care cost curve that have garnered bipartisan support. Many of the reforms that Dr. Patel describes -- including increasing transparency in conjunction with cost-sharing reform -- could help to ensure that some of the slowdown in the growth of health expenditures continues over the long term.
Updated 8/2/2013: Newly released submissions to the Finance Committee have been added.
The deadline for Senators to make their arguments for what tax expenditures should be included in Sens. Max Baucus (D-MT) and Orrin Hatch’s (R-UT) “blank slate” approach to tax reform has now come and gone. Baucus and Hatch are going to great lengths to keep the submissions private, but some Senators have declined privacy and released letters to the public, with more expected to do so in the coming weeks.
Here are a few of the letters that have been made public so far on what should happen with tax reform:
Senator Tom Coburn (R-OK): Coburn included a list of 25 tax expenditures from his Back In Black plan, which he believes should be eliminated or reformed as part of revenue-neutral comprehensive tax plan. Some of the tax expenditures included tax breaks for U.S. made films, the tax-exempt status for professional sporting leagues, accelerated depreciation for motorsports tracks, credits for the preservation of historic structures, and many others.
Senator Jay Rockefeller (D-WV): Rockefeller emphasized the need to combat income inequality with the tax code. Specifically he identified the importance of the Earned Income Tax Credit (EITC), as well as the Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC) and other refundable credits in the tax code. But Rockefeller also called for more revenue, implying that many other tax expenditures would need to be eliminated.
Senator Mike Enzi (R-WY): Enzi drew attention to two bills he has previously introduced, S. 2091 (submitted in the previous Congress), which would reform the international corporate tax code and implementing a territorial system, among other changes, and S. 420, which would simplify filing dates. Beyond those bills, Enzi called for comprehensive, revenue-neutral tax reform.
Senator Joe Donnelly (D-IN): Besides using tax reform to make the code simpler and more conducive to economic growth, Donnelly called for the Finance Committee to use some of the revenue raised from eliminating tax preferences for deficit reduction.
Senator Marco Rubio (R-FL): In his letter, Rubio emphasized the need for simplifying the code, reducing the gap between effective and marginal rates, transitioning to a territorial system, and eliminating double-taxation of income. Rubio also called for tax reform negotiations to be public and subject to rigorous debate.
Senator Chris Murphy (D-CT): In Murphy's letter, the Senator wrote that tax reform should protect earners making less than $200,000 per year, should raise revenue, and simplify the code. He also cites two specific provisions that should be protected: the exclusion for interest on municipal bonds and retirement provisions like 401(k)s.
Senator Jeff Flake (R-AZ): Flake argued that the U.S. should adopt a flat tax, move toward a "more competitive international system of taxation," and address double-taxation in the code, broadening the base and lowering rates for both the individual and corporate tax codes.
Senator Bill Nelson (D-FL): One unique proposal from Nelson was requiring all tax expenditures to "sunset" after ten years. This would require tax preferences to be reviewed and prevent ineffective measures from becoming permanent, although it would create a "cliff" of sorts like the kind we see with tax extenders.
Senator Mike Crapo (R-ID): Crapo argued that tax reform should broaden the base and lower rates, with no more than three tax brackets, a target top marginal rate of 22-26 percent for the individual code, repeal of the Alternative Minimum Tax (AMT), and lower rates for capital gains and dividends. He called for corporate reform to achieve a top rate between 23 and 25 percent and include a territorial system.
Senator Chris Coons (D-DE): Coons called for tax reform to maintain incentives and support for retirement savings, homeownership, affordable college, charitable donations, and employer-sponsored health insurance along with support for lower income earners and families. However, Coons also pressed on the need for a simpler tax code and the redesign of many tax provisions to better achieve their goals.
Senator Bernie Sanders (I-VT): Sanders released a series of three letters (available here, here, and here) that characterize the Senator's stance on many tax preferences. He advocated for taxing capital gains and dividends at ordinary income rates for the top two percent of earners, instituting a carbon tax, changing the international tax system by eliminating the deferral of taxes on income held abroad, and instituting a financial transactions tax.
Senator Kelly Ayotte (R-NH): Ayotte argued against levying sales taxes on online retailers in states which they do not have a physical presence. She also called for tax reform to eliminate loophole and lower tax rates across the board.
Sens. Amy Klobachar (D-MN) and Al Franken (D-MN): The Minnesota Senators made a case against the 2.3 percent medical device excise tax included as a part of the ACA and called for a repeal as part of a comprehensive tax reform plan.
Senator Bob Casey (D-PA): Casey suggested adopting the Senate Budget's tax reform framework as a starting point for tax reform. On specific tax expenditures, he calls for the preservation of the CTC and EITC refundable credits and the energy tax provisions.
Senator Tim Kaine (D-VA): Kaine also called for the Finance Committee to adopt the framework proposed by in the Senate Budget, including the revenue target of $975 billion. Kaine's plan for tax reform would not use a "blank slate" approach, rather undertake corporate tax reform, first seeing what revenue should be raised on the corporate side, and then using a broad-based limitation on tax expenditures.
Senator Maria Cantwell (D-WA): Cantwell's letter has a wider focus that just tax expenditures, commenting on many other budget issues. But specific to tax reform, Cantell suggests creating tax provisions for apprenticeships, creating a financial tax, and improving fairness across states in the tax code, among others.
Senator Patty Murray (D-VA): Murray's letter calls for the adoption of the Senate Budget as a starting point for tax reform including its revenue target.
Senator Mark Begich (D-AK): Begich's letter focuses in particular on tax expenditures that benefit the state of Alaska, including those related to Alaska Natives, energy, Merchant Marine Capital Contruction Funds and many others.
Senator Richard Blumenthal (D-CT): Blumenthal builds off of three themes - tax reform should protect the middle class, help create jobs, and reduce loopholes and giveaways. For Blumenthal, that means the preservations of many tax credits that benefit low income earners, creating hiring credits, and eliminating many corporate tax provisions.
Senator Jeff Merkley (D-OR): Merkley's letter supports many tax provisions for low income earners, including those for education and homeownership, but should also raise signficant revenue for new investments and deficit reduction.
Other Senators including Sens. Ben Cardin (D-MD) and Richard Shelby (R-AL) have also commented on their submissions, though they have not publicly released their letters. Earlier last week, the Senate Republican Leadership released a letter calling for tax reform to be revenue-neutral. A group of Democratic Senators also advocated for the preservation of the Child Tax Credit and the Earned Income Tax Credit.
The public letters give us some idea of what lawmakers have advocated to the Finance Committee heads, although little in these submissions is a surprise. Still, the tough work is still ahead in taking all of these submissions and creating a comprehensive tax reform package to get through Congress that is substantially better for our economy, our budget, and taxpayers.
In 2009, President Obama created the SAVE Award (Securing Americans Value and Efficiency), encouraging federal employees to submit their ideas to reduce waste, make the federal goverment more efficient, and save money. The contest will continue this year with yesterday's announcement of the fifth annual SAVE Award contest.
The White House reports that over the past four years, federal employees have submitted over 85,000 ideas for the contest. Past winners include:
- Switching transit benefits for federal employees from a regular fare to a senior fare as soon as they become eligiable in 2012
- A "lending library" for specialized tools used by NASA in 2011
- Limiting distribution of copies of the Federal Register only to those who need them in 2010
- Allowing patients to take medications with them on discharge instead of throwing them out in 2009
Even ideas that don't win the contest are still used to help the federal government save money. The White House claims that over 80 SAVE Award submissions have been included in the President's last four budgets.
In the past, we've described the program as a "gimmick we like." The submissions may contain only small savings, but they are clearly good ideas that help the government operate more efficiently. However, only a combination of entitlement reform, tax reform, and targeted spending cuts will be able to put the budget on a sustainable path - requiring tough choices. Still, even small proposals that save the government money should be encouraged, since reducing unnecessary spending shows taxpayers that their money is being spent more wisely.
Click here to learn more and submit an idea.
The talk of the town in recent days has been President Obama's new plan to combine corporate tax reform with public investments in what President Obama calls a "grand bargain for middle class jobs." From a growth perspective, there is a lot to like about this proposal. But there is also a lot we find discouraging about a plan which would decouple corporate tax reform from any broader deficit reduction effort. In our view, the best and most productive way to achieve corporate tax reform and boost public investment is through a comprehensive plan that also includes individual tax reform and entitlement reform in the context of medium- and long-term deficit reduction.
The Nuts and Bolts of the President's Proposal
For the most part, the President's new bargain is a rehashing of various investments in his budget, coupled with his business tax reform framework, which calls for the corporate tax rate to be reduced to 28 percent, many corporate tax preferences be eliminated, and incentives for manufacturers and small businesses to be increased.
At the time the framework was released last year, the President called for his tax reform to be revenue-neutral. However, corporate tax reform which is cost-neutral over the first decade is likely to lose revenue over the long-run because, as the Center on Budget and Policy Priorities explains, "many corporate tax subsidies are structured in such a way that scaling them back would generate much larger savings in the first ten years than over the long run."
To ensure corporate tax reform doesn't add to the deficit over the long-run, the President is now calling for reform where base broadening exactly pays for rate reduction over the long run but generates new net revenue in the ten-year period. That net new revenue would go to temporary investments such as those in the President's FY 2014 budget proposal for direct infrastructure investment, a national infrastructure bank, new infrastructure bonds, and various job training and community college initiatives.
The exact source of the ten-year revenue need not be specified since it can come from a combination of reforms, but one option which has been floated is to use revenue from a temporary transition tax on foreign income that could accompany broader international reform. Another possibility is to use the portion of the revenue from repealing or reducing accelerated depreciation schedules which represents a timing shift in tax payments, while leaving the portion which represent a permanant change in tax burden for rate reduction.
Overall, the plan includes some encouraging aspects but also many negative aspects.
The Good News
In the past, we've called on policymakers to "go smart" and "go long" by focusing on economic growth and looking beyond the ten-year budget window. The President's proposal would, to some extent, do both.
As we've explained before, corporate tax reform can be an important part of an economic growth strategy to make United States businesses more competitive. For example, a 2005 Joint Committee on Taxation (JCT) study concluding that even a deficit-financed reduction in the rate to 28 percent would raise GDP by 0.2 to 0.4 percent. Using base broadening to reduce rather than increase the deficit and removing various distortions in the tax code could have additional economic benefit.
On top of the benefits from corporate tax reform, the President's proposed investments in infrastructure and job training initiatives could help to increase employment in the short run by boosting aggregate demand and could increase the productive capacity of the economy over the long run by boosting the supply of physical and human capital.
In addition to his plan likely being pro-growth, it is encouraging to see the President focus on the long-term deficit impact of corporate tax reform rather than just the first ten years. A number of perfectly sensible reforms will have the effect of raising more revenue in the first decade than over the long-run. By demanding that corporate tax reform look beyond the first decade, the President is ensuring the plan won't add to the debt over the long-term, when population aging and growing health care costs will present us with enough fiscal challanges as is. This focus will also discourage explicit timing gimmicks, such as the Roth IRA provision included in the fiscal cliff agreement.
The Bad News
Although there is some economic virtue to the President's plan, there is also much to be concerned about.
Reasonable people can disagree on whether corporate tax reform should be a revenue-generating or revenue-neutral part of a broader fiscal plan, but the President's proposal to make corporate tax reform revenue-positive and put none of that money toward deficit reduction seems to us a mistake.
The political challenges of generating an agreement which includes new net revenues are substantial. With $2.2 trillion of further deficit reduction needed to put the debt on a clear downward path, using none of that revenue for deficit reduction would be a significant missed opportunity in our view.
It would also be a mistake to divorce corporate tax reform from individual tax reform. The two codes are intertwined, with most businesses filing as "pass-through entities", paying on the individual side and with many corporate tax expenditures available to those businesses. Decoupling corporate and individual reform will mean either accepting a large divergence between the rates and/or tax base paid by C-Corps and pass-through entities or else devising a complicated and costly work-around.
Even if a solution for pass-through entities could be worked out, abandoning individual reform would be a fiscal and economic mistake. The individual tax code suffers from substantial complexity and costly distortions and should be addressed in ways that will lower rates, broaden the base, promote economic growth, and contribute to deficit reduction.
The Disappointing News
Failing to use new revenue for deficit reduction and seperating corporate from individual tax reform are problematic in our view. But our biggest concern is the President's decision to decouple corporate tax reform from the broader deficit reduction effort.
With few sweeteners left available for deficit reduction, the Administration had previously conditioned corporate tax reform on a broader set of changes to both raise revenue from high earners and slow the growth of entitlement programs. Although the President has not abandoned his call for deficit reduction, that he has decoupled it from tax reform and seemingly deprioritized it relative to tax reform is quite discouraging.
Indeed, any "grand bargain" for middle-class jobs is not complete without a plan to bring the debt under control. As it currently stands, sequestration is hurting short term growth, and our large debt burden will hurt long-term growth potential. New investments and corporate tax reform can make improvements on the margins. But absent a comprehensive plan to address the sequester, reform the individual tax code, reform entitlement programs, and put the debt on a clear downward path, it isn't clear that sustained growth will be achieved over the long term.
Now isn't the time to think small, it is time to think big. We are big fans of corporate tax reform which our corporate tax calculator shows can be designed a number of ways. But what the President has proposed is a mini-bargain. What we need is a grand bargain.
Yesterday, the House Transportation-Housing and Urban Development (THUD) appropriations bill was removed from floor consideration, showing a lack of consensus in Congress regarding how to live within the existing caps. The question of how the Congress should replace sequestration in a fiscally responsible manner is becoming increasingly important with this decision.
Both the House and Senate have both been pursuing appropriations bills that would violate sequestration in some way for FY 2014. The Senate has set overall funding levels at the pre-sequester levels, while the House has chosen to keep the sequester caps, but reallocate funding so that defense spending is funded at the pre-sequester mark, requiring further cuts to nondefense discretionary spending. The House's THUD bill would have required a $4.4 billion cut from post-sequester levels, with an overall funding total not seen since 2006. Pulling the bill from the floor shows that abiding by the steep cuts to discretionary spending required by the sequester for 2014 will be difficult.
House Appropriations Chairman Hal Rogers (R-KY) expressed his disappointment in a statement and argued that yesterday's actions were evidence that the sequester needed to be replaced with a comprehensive plan:
I am extremely disappointed with the decision to pull the bill from the House calendar today. The prospects for passing this bill in September are bleak at best, given the vote count on passage that was apparent this afternoon. With this action, the House has declined to proceed on the implementation of the very budget it adopted just three months ago. Thus, I believe that the House has made its choice: sequestration – and its unrealistic and ill-conceived discretionary cuts – must be brought to an end. And, it is also clear that the higher funding levels advocated by the Senate are also simply not achievable in this Congress.
This Congress must now deal in a productive way to address the nation’s crippling deficits and debt to put our budget back on a sustainable and responsible path. This means that all government programs – not just those on the discretionary side of the ledger – must be reduced. Spending reductions in mandatory and entitlement programs, which are the drivers of our deficits and debt, are the most effective way to enact meaningful change in the trajectory of federal spending. The House, Senate and White House must come together as soon as possible on a comprehensive compromise that repeals sequestration, takes the nation off this lurching path from fiscal crisis to fiscal crisis, reduces our deficits and debt, and provides a realistic topline discretionary spending level to fund the government in a responsible – and attainable – way.
We agree with Chairman Rogers that sequestration should be replaced with a comprehensive package that puts debt on a downward path in the long term. Rogers aptly points out that spreading the savings throughout the budget is much more achievable than the sequester approach, and additional mandatory and entitlement reforms must be part of the package. As should comprehensive tax reform that simplifies the code and reduces the deficit. But even if a sequester is not replaced with a comprehensive plan, any smaller scale replacement must at minimum be fully offset with equal or greater savings. Waiving the sequester without offsets would be a clear failure on the part of Congress.
Given yesterday's actions, it is clear that the current approach the Senate and House are both taking for appropriations is not working. Ideally, lawmakers will begin negotiations toward a comprehensive fiscal framework before the September 30 deadline, as we described in our report on what we expect in the upcoming fiscal discussions. But at the very least, lawmakers should begin to find offsets for a sequester replacement.
The 2008 recession substantially altered the enrollment and operations of many government programs, particularly those providing financial benefits. The Urban Institute further explored one of these programs in a recently released report analyzing the recession's effects on Social Security claiming.
As the report states, Social Security benefits upon retirement are in part determined by the full retirement age (FRA), currently at age 66 and scheduled to be 67 for people born in 1960 and later. While benefits can be claimed as early as 62, benefits are adjusted depending on how much earlier or later than the retirement age they are claimed. The paper notes that the recession and resulting unemployment levels forced many low and middle-income elderly workers into early retirement. Retired worker claims increased 12 percent in 2008 and an additional 20 percent in 2009.
Yet, the Urban Institute finds that this surge in early retirement claims was far from permanent. As the unemployment rate began to fall from it's 2009 peak levels, so did claims. What ultimately fueled the reversal from dangerous early retirement trends was a change in government policy: increase in the retirement age.
Perhaps the most important change to Social Security was the increase in the FRA, which had been age 65 since the program began. The FRA was raised to 65 years and two months for those born in 1938. It increased another two months for each successive birth cohort until it reached 66 years for those born in 1943. It is scheduled to remain at 66 until it begins increasing two months per year again for those born in 1955 through 1960. Current law sets the FRA at 67 years old for everyone born in 1960 or later.
Increasing the retirement age, as the Urban Institute argues, allowed for the transition from the short-term increases in Social Security claims to a decreasing trajectory as the average retirement age taken by beneficiaries gradually increased. The graph below illustrates the correlation between a gradually increasing FRA and a gradually increasing age of retirement for those born in between 1937 and 1943. The second spike at which many beneficiaries begin collecting Social Security strongly correlates with the gradual scheduled increase in the FRA.
Source: Urban Institute (Survey of Income and Program Participation)
By increasing the FRA, as Urban argues, policy makers have the ability to "influence retirement decisions by signaling an 'appropriate' time to begin collecting retirement benefits." While claiming benefits later has a muted effect on the Social Security Trust Fund (as those benefits are actuarially-adjusted), the decision to retire later will boost economic growth by increasing the size of the labor force, increase retirement savings, and reduce the longevity risk of beneficiaries outliving those savings. There may be some who are not physically able to work longer, but many solutions have been proposed to address this problem, and the retirement age should not be adjusted based on that minority.
Social Security as it currently stands needs reform, with the trust fund's expected depletion in 2033. We know that we will have to act on Social Security, and an increase in the retirement age should be on the table. Not only will it help the Trust Fund, but it will help increase labor participation among the elderly when Americans are living longer, helping both the budget and the economy. Social Security is in need of reform and changes will be neccessary; raising the retirement age is a good place to start.
Early this month, the Obama Administration announced that it would delay enforcement of the employer mandate penalty in the Affordable Care Act for 2014. The employer mandate would have required employers with 50 or more full time workers to pay $2,000 to $3,000 per employee if any of their workers did not receive an affordable offer from the employer and instead obtained subsidized health insurance coverage through a health insurance exchange. The first 30 workers are exempted in calculating the penalty.
At the time, we estimated that the delay would increase spending in the exchanges by about $3 to $5 billion, in addition to revenue losses from fewer penalties of about $10 billion. All-in-all, we estimated about $13 to $15 billion in costs. Now, CBO has put its official score out, estimating that the action would increase the net cost of the ACA's coverage provisions by $12 billion over ten years -- very close to what we roughly estimated!
CBO also estimated the effect for delaying the implementation of an additional layer of income verification for exchange subsidy applicants but found that the effect would be almost negligible.
The bulk of the $12 billion difference, $10 billion to be precise, comes from the lack of employer penalties themselves as 1 million fewer people would receive coverage through their employer. About half of those people would then receive coverage through the exchanges or through Medicaid. As a result, CBO estimated that a $3 billion increase in exchange subsidies. CBO also estimates a $1 billion revenue gain from the lessening employer coverage as employees make up for their loss of health insurance coverage by increasing their taxable compensation.
Last week at Knox College, President Obama gave the first of a series of speeches on the economy. He called on Washington to pass policies that would give middle class families a "better shot" in the global economy, emphasizing education, investments, and research. But in a piece today, the Washington Post editorial board notes that President Obama left out a major piece in making the nation more competitive: entitlement reform.
By the tendentious standards of politics, it was okay for the president to challenge Republicans to come up with better ideas than his, while simultaneously portraying most of them as mindlessly bent on a government shutdown. What’s rather less forgivable, however, is that, even though the president of the United States is well into a highly promoted series of major addresses on the future of the U.S. economy, searching the text of his speeches for “entitlement reform” or “entitlement” yields nothing but “phrase not found."
Yes, Mr. Obama told Democrats that they “can’t just stand pat and just defend whatever government is doing.” Addressing Republicans, he pronounced himself “ready to work” on tax reform, or a “balanced, long-term fiscal plan that replaces the mindless cuts currently in place.”
But that’s a far cry from leveling with the public about the fact that Social Security, Medicare and the rest are crowding out other domestic priorities — including those that the president emphasized in his speeches — and that these programs are at the heart of the country’s long-term fiscal challenges, which have still not been addressed even as the deficit has declined in the short term.
Six months into President Obama's second term, there is the question of what the President's legacy will be. The economy is a good place to start. But if the President and Congress want to have a major long-term impact, they should turn to the tough decisions that need to be made on these programs. Writes the editorial board:
As president, Mr. Obama is the one player in the capital’s drama best positioned to represent the national interest on entitlement reform; as a second-term president, he is also in the best position to take the political heat for doing so. It is still possible that he will do so in his remaining speeches. Until then, though, Mr. Obama’s vision for the country can only be described as incomplete.
Click here to read the full editorial.
Today, the Center for American Progress (CAP) hosted a panel discussion featuring Center on Budget and Policy Priorities Senior Fellow Jared Bernstein, CAP President Neera Tanden, Concord Coalition Executive Director Robert Bixby, and President of the Committee for a Responsible Federal Budget Maya MacGuineas.
As a follow up to the Center for American Progress's paper by the same name (that we have responded to here, here, and here) -- which suggested that short-term improvements in budget projections could allow lawmakers to put aside deficit reduction for the next couple of years -- the participants gathered to discuss and debate the urgency of dealing with the national debt, the effectiveness of current policies, and what they believe our future should hold. Although each panelist had different perspectives, they all agreed that policy changes must ultimately be made to create a long-term, fiscally sustainable future.
CRFB President Maya MacGuineas began by explaining the necessity for long-term solutions. She argued that recent deficit reduction measures, most notably the sequester, have not changed our long-term debt outlook as they focus almost exclusively on discretionary spending, a category of spending that is not a key driver of the country's long-term debt. She argued that much more work is needed before the debt is put on a sustainable long-term path, and that true fiscal sustainability will only be achieved when policymakers address the structural drivers of debt including health care, population aging and the tax code.
By enacting such long-term oriented reform, she explained, not only will we begin accumulating savings today, but many of the savings associated with these policies (the chained CPI, for one) will compound in the medium and long run. Furthermore, many of the long-term policies produce little savings in the first few years, making them much better than frontloaded approaches like sequestration. Moreover, MacGuineas showed that although the recovering economy has resulted in lower deficits, our long-term problems are far from solved. Many structural problems that existed before the recession continue to threaten our economy today. It is not the current deficits that are the problem, she concluded, but the ballooning debt that threatens our economy if we choose not to act.
In regards to the other outstanding panelists, Bixby echoed and reinforced very similar concerns, placing an emphasis on the structural problems that continue to exist in many of our institutions while both Tanden and Bernstein had a different focus. Tanden noted that the Center for American Progress had put out many plans to address our long-term debt problem but did not believe a compromise could be acheived with Republicans. Bernstein, while concerned about the long-term outlook was more concerned with the negative affects associated with the policies currently in place - especially sequestration. They both argued that the administration's number one concern should be the current economic weakness, with Bernstein asking not whether our short-term deficits are too big, "but whether they are big enough?"
Despite the differences in opinion, in the final minutes of the discussion, MacGuineas asked the other panelists whether, disregarding politics, they would support long-term deficit reduction along with Social Security, Medicare, and tax code reform. They all answered "yes". This response suggests that securing a sustainable fiscal future is not necessarily the biggest source of disagreement. Instead, it is a question of whether Congress can achieve while aiding short-term economic growth. Neither Tanden nor Bernstein were against long-term deficit reduction and reform, but they did not believe that Congress had what Bernstein called the "political oxygen" to deal with both issues simultaneously. Yet, with continued progress on tax reform and increasing pressure for longer-term entitlement reforms -- with both policies being talked about as replacements for the sequester -- the policy foundation is there for Congress to do just that.
The tax reform debate is heating up and many groups are weighing in on what tax provisions should be kept and what the broad revenue and distributional goals of tax reform should be. But Paul Weinstein of the Progressive Policy Institute, a former senior advisor to the Fiscal Commission reminds in a new report that lawmakers should not forget about the opportunity to make the code drastically simpler for taxpayers.
In the paper, Simplify, Simplify, Simplify: The First Principle of Tax Reform, Weinstein argues that focusing on simplification will in turn achieve many other policy goals that are important to lawmakers and prevent special interest groups from disrupting the process. In her annual report to Congress, the IRS Taxpayer Advocate Nina Olson estimated that businesses and individuals spent 6.1 billion hours complying with the tax system. 60 percent relied on paid preparers, while another 30 percent used a tax filing software. Besides the tax code's complexity costing taxpayers their time, tax expenditures also lead to substantial forgone revenue, estimated at $1.3 trillion in 2013 for both individuals and corporations.
Some have suggested return-free filing, where the government fills out the tax form for taxpayers, as a way to make the tax filing process simpler. However, Weinstein points out that this move does not address the underlying complexity and opacity of the code, may be very administratively difficult, and presents a conflict of interest with tax authorities who may view maximizing revenue as the goal over accuracy.
Therefore, Weinstein focuses on simplification of the code itself first and foremost, eliminating or redesigning many of the tax preferences currently in place. Weinstein recommends achieving six goals with comprehensive tax reform:
- Promote economic efficiency and growth
- Reduce the number of tax incentives to lower rates and rebuild the nation's revenue base
- Maintain progressivity
- Reduce errors and avoidance
- Better align state and federal rules
There are many benefits that can come with tax reform: the opportunity to raise needed revenue, lower marginal rates and promote growth, and better target tax preferences to benefit those who need them. But focusing too much on the distributional effect or marginal rates distracts from the benefit of making the code simpler and more efficient. Concludes Weinstein:
Simplicity and its many benefits are often overlooked in the tax reform debate, which typically centers on economic and redistributive issues. Simplification should be considered a goal of equal importance and should be made a fundamental test of comprehensive tax reform. A democracy should strive to make tax policy transparent and user-friendly to ordinary citizens, so that it becomes an instrument for promoting common prosperity rather than special privilege.
Fortunately, the good news is that policymakers do not have to choose among economic growth, progressivity, and simplification when it comes to tax reform. There are a number of plans that would incorporate all three principles and would put our nation on a path to prosperity for everyone, not just a select few. There is a moment of opportunity in this Congress and this Administration to do great good in making our tax system more rational and understandable and effective. We need to seize the moment.
Click here to read the full report.
Heading for the Exits – This is the final week before Congress begins its five-week August recess. Lawmakers have a lot baggage to pack up before they leave town. As such, there is a flurry of activity to wrap up work on items such as student loans and spending bills before lawmakers head home. The stage is also now being set for the fights that will begin as soon they return as the budget battles are set to be revived with a potential government shutdown, the need to lift the statutory debt limit, and further work on tax reform.
House Set to Vote on Student Loan Bill – The House of Representatives could end the drama over student loans this week when it votes on the bipartisan student loan legislation approved by the Senate. We applauded the compromise for dealing with the problem in a permanent and fiscally responsible way and also noted that it isn’t a bad deal for students. We also took issue with some of the criticisms The New York Times had against the bill.
Appropriations Move...Towards Government Shutdown? – Both the House and Senate are busy marking up fiscal year 2014 spending bills before the recess, yet no progress is being made to bridge the more than $90 billion gap between the spending levels in the two chambers. The difference centers around the fact that the Democrats who control the Senate want to get rid of the sequester, while Republicans who control the House want to leave it in place. The full House last week passed the Defense spending bill, while the Senate Appropriations Committee approved spending bills for Financial Services and State-Foreign Operations. Both the full House and Senate are expected to pass the Transportation-Housing and Urban Development spending bill this week, though the two measures are $10 billion apart, which is indicative of the deep divide in Congress on discretionary spending overall. Lawmakers will have only three weeks from when they return to approve all appropriations bills and avoid a federal government shutdown when the current fiscal year ends on September 30. Both sides appear to be digging in for a confrontation.
Laying Down Markers for Upcoming Fiscal Battles – Last week, President Obama began setting the stage for this fall’s fiscal battles by kicking off a series of speeches across the country on the economic challenges facing the country and his vision for addressing them. On Tuesday he continues the tour in Chattanooga, Tennessee. The White House is staking its position ahead of potentially nasty fights over government funding and raising the statutory debt ceiling. While neither side publicly seems to be giving any ground, eight Republican senators met twice last week with the White House to discuss a deal that could diffuse the situation. The talks reportedly involve changes such as implementing the chained CPI and making wealthier Medicare beneficiaries pay higher premiums. These changes could be part of a package changing the sequester. Check out the other fiscal speed bumps ahead with our infographic.
Tax Reform Looks for Brotherly Love – Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Dave Camp (R-MI) take their tax reform tour to Philadelphia today as they move forward with fundamental reform of the tax code. Several senators submitted ideas for what tax breaks to maintain under the blank slate" approach ahead of the Friday deadline imposed by Baucus. Meanwhile, in the House, the New Democrats Coalition is looking to get involved in the effort. And Baucus said he plans for his committee to mark up reform legislation this fall. The Tax Foundation begins a series of case studies looking at different tax expenditure reform ideas, starting with the mortgage interest deduction. We offered some ideas for tax reform beyond tax expenditures in a recent Tax Notes article. In addition, the Campaign to Fix the Debt made the case for fundamental tax reform and offered principles in a brief last week.
CBO Looks at Economic Impact of Sequester – On Friday, the Congressional Budget Office (CBO) released a study estimating that repealing sequestration would improve the economy in the short term, but growth would be reduced in the longer term because of increased debt. CBO also notes that "boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis." As we point out, the better approach would be to replace sequestration with a comprehensive fiscal plan with targeted cuts in all areas of the budget that are much more gradual than sequestration.
New Bill Will Better INFORM the Consequences of Fiscal Decisions – Last week, Sens. John Thune (R-SD), Tim Kaine (D-VA), Rob Portman (R-OH), and Chris Coons (D-DE) introduced the Intergenerational Financial Obligations Reform (INFORM) Act, which aims to improve the budget process by providing analysis on how budgets and major legislation would affect younger generations further down the road. The legislation calls for extending the window in which the fiscal impact of legislation is measured beyond the usual ten years.
Key Upcoming Dates (all times are ET)
- Senate Budget Committee hearing on containing health care costs at 10:30 am.
- House Appropriations Committee mark-up of the Fiscal Year 2014 Interior and Environment appropriations bill at 11 am.
- Joint Economic Committee hearing on how tax reform can boost economic growth at 2 pm.
- Senate Appropriations Committee mark-up of the Fiscal Year 2014 Defense appropriations bill at 10:30 am.
- Bureau of Labor Statistics releases July 2013 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases June 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases advance estimate of 2013 2nd quarter GDP.
Today, the Congressional Budget Office released a report detailing the projected economic effects of repealing the sequester starting August 1. The report is timely considering the big role the sequester will play in the 2014 appropriations process which is now heating up.
In the report, CBO finds that repealing the sequester starting in August would increase spending by $14 billion in fiscal year 2013 and by $90 billion in fiscal year 2014. CBO concludes that such changes would increase real GDP by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of 2014 relative to the levels CBO currently projects. The full range of possible changes are between 0.2 and 1.2 percent for growth and between 0.3 million and 1.6 million for employment. The central tendencies of their estimates are similar to what the agency found the total effect of the sequester would be in 2013.
|Economic Effect of the Sequester|
|2013 Q4||2014 Q3|
However, CBO notes that growth over the longer term would be harmed if the repeal was done by itself since it would lead to greater federal debt that would eventually reduce the nation's output and income below what would occur under current law. Furthermore, as they say, "boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis." Although the sequester is mostly a short- and medium-term solution policy for the debt, repealing it would be a step in the wrong direction in absence of a better plan to deal with longer-term deficits.
The sequester represents a poor way to reduce the deficit. Rather than relying on gradual and intelligent changes focused on the drivers of the debt, the sequester results in abrupt, across-the-board, and economically harmful cuts which leaving growing entitlement programs longly unscathed and come to an end after 2021.
Therefore we and many others have advocated that policymakers should replace the sequester on a more permanent basis with a comprehensive deficit reduction plan that makes more gradual and smarter cuts and finds savings in all parts of the budget. Recent CBO numbers show that this would be a win-win for the economy, creating jobs in the short-run and accelerating growth over the long-run while putting our debt on a more sustainable long-term trajectory.