The House is pressing forward this week on debt ceiling legislation that contains a few different moving parts. The bill would buy lawmakers some more time to deal with it but would not be a full solution to avoiding breaching the debt limit.

In short, the bill would do the following:

• Suspend the debt ceiling until May 19. In other words, there would be no debt limit to constrain debt issuance from the passage of the legislation until then.
• Reinstate the limit on May 19.
• Increase the limit by the amount of debt necessary to cover obligations in the period when the debt limit was suspended. The bill appears to be worded so that Treasury could not issue an excess amount of debt within that period and use the surplus funds to pay full obligations beyond May 19. It could only go to fund the necessary obligations within that time period.
• Withhold Members' pay after April 15 until each respective chamber passes a budget resolution or the 113th Congress ends.

Although this proposal would set a specific date of May 19 when the government would hit the debt ceiling, it would likely not be a dropdead deadline. There would still be some extraordinary measures that Treasury could employ after May 19, although the exact amount of headroom is unknown and would depend on if Treasury repaid the funds it was using in the suspended limit period.

The withholding method described above is used because Congress is barred by the 27th Amendment from altering its own pay in the same term, thus making elimination of pay unconstitutional. The enforcement may not be necessary since Sen. Chuck Schumer (D-NY) has indicated that the Senate will pass a budget, and the House might go with something similar to their budget resolutions from the past two years. Tax Policy Center president Donald Marron notes that the bill does not require the chambers agree on a single budget, just that each pass one on their own. Assuming that they pass, broader budget negotiations would likely build off those budget plans.

While we welcome an effort to address the debt through the regular budget process, we would discourage complacency over the next couple of months. Policymakers should still replace the sequester with a more gradual and intelligent set of deficit reduction policies. If not, they must at minimum fully pay for any further delay of the sequester and hope to hammer out a deal through regular order as happened in the 1990s.

In a New York Times op-ed the other day, Paul Krugman argues that the urgency and significance of the debate over the federal budget deficit are overstated. He contends that the outlook for the deficit in the next 10 years, "doesn’t look at all alarming,” even without the $1.4 trillion in deficit reduction the Center on Budget and Policy Priorities argues to be sufficient to stabilize the debt as a percentage of GDP. On the budget, he says:

The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should.

But then he continues on to say that we do indeed have some long-term budget challenges, but that (in his view) waiting is okay:

Now, projections that run further into the future do suggest trouble, as an aging population and rising health care costs continue to push federal spending higher. But here’s a question you almost never see seriously addressed: Why, exactly, should we believe that it’s necessary, or even possible, to decide right now how we will eventually address the budget issues of the 2030s?

The reason we need to act now is that rising debt levels, rising health care costs, and the budgetary challenges of dealing with a largely retired Baby Boom generation a decade or two from now cannot be fixed over night. Addressing health care and retirement costs in a smart way takes time, and delaying changes comes with severe economic risks that have been quantified by many economists, severe societal risks for the people who truly rely on Social Security and other safety net programs, and severe generational risks.

Delaying to put in place reforms to our largest federal health care programs -- reforms that we know can help address the problem of rapid cost growth -- creates even higher costs and debt levels down the road and a reduced ability to make reforms to those programs if millions more beneficiaries are in or near retirement. It is true that lawmakers and experts do not know all the details about how some health care models and payment ideas might pan out in the future, and additional time can shed further light on those questions. But delaying all action, even on reforms that experts know a great deal about, is not responsible. Reducing certain payments to health care providers that MedPAC and other health experts agree are in need of reform, reforming cost-sharing rules to help give beneficiaries more skin in the game and reduce the amount of unnecessary care, and changing other payment rules to improve care coordination are examples of actions policymakers can take now.

But it's not just a health care problem. The aging of the population is actually a larger driver of deficits than health care costs for the next few decades, though not over the long-term. Addressing the challenges posed by population aging requires gradual changes. That way, future and current beneficiaries are given plenty of time to prepare for any changes. It wouldn't make sense to attempt to reform retirement programs overnight once we hit the 2030s when we have the benefit of time right now to phase in smart and gradual changes. But even if it were possible or even desired to significantly reform health care and retirement programs overnight for all future and current beneficiaries alike, that still wouldn't address the accumulating interest payments and higher interest rates that the United States would be paying on a higher debt load. Interest payments and debt levels cannot be changed overnight. 

Making reforms to both the tax code and entitlement reforms to control future deficits is not about enacting cuts today to stave off equal sized cuts in the future, as Krugman's argument hints at. Reforming the budget is about slowing the growth of spending and reforming the tax code in order to stave off abrupt and likely far more aggressive spending cuts and tax increases down the road. This principle applies to whether or not you're talking about Social Security benefits in the 2030s, when the trust funds are projected to be exhausted, or a possible loss of confidence in the United States' finances before or after that which could affect all taxpayers and the people who truly rely on the social safety net alike. Again, that's not responsible.

Policymakers should seek to make future budget projections as sustainable as possible, and then make further adjustments if needed. Not making changes now when we know we will have to do so in the future, and with the luxury of time and an abundance of gradual options right how, is a very risky proposition. So yes, it is necessary to act now to start gradually addressing the budget issues of the 2030s.

In an op-ed in the Hill, former Senator Judd Gregg (R-NH) is calling on Congressional Republicans not to use the debt ceiling as leverage for extracting concessions. Gregg explains that while Republicans may believe that the debt ceiling could force legislators from both parties to address our unsustainable debt problem, breaching the debt ceiling may leave retirees without Social Security payments, with much blaming by both parties and little gain.

But Gregg also says that it will be important to force both parties to the table. As we showed yesterday, there are many fiscal speed bumps on the near horizon, with the sequester an obstacle that Gregg believes can force the parties to the table.

The much better hostage is the sequester.

A battle over whether to allow the sequester to go forward is by definition a battle over restraining spending.

It is a big number, $1.2 trillion, and any agreement to abate it is almost certainly going to have to involve serious entitlement reform, which is exactly what needs to be on the table in this next round of brinkmanship over fiscal policy.

Picking the right canyon to ride into will be the test of whether those in the Republican Congress come out of this next round with what could be significant progress on controlling spending, or just another political debacle where no progress is made on getting our fiscal house in order.

Click here to read the full op-ed.

"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.

A recent report from the Business Roundtable (BRT) outlines their proposal to reform Social Security and Medicare with the goal of maintaining an effective and efficient social safety net for future generations while addressing our long-term fiscal imbalance.

On Social Security, the report notes that the Disability Insurance trust fund is projected to be exhausted in 2016, while the overall trust fund is projected to be exhausted in 2037. BRT's proposal seeks to address the solvency issue without touching benefits for people currently over age 55. They propose:

• Increasing the normal retirement age from 67 to 70
• Increasing the progressivity of benefits by instituting a new minimum benefit for "full-career" workers and by means-testing eligibility
• Switching to the chained CPI for calculating the cost of living adjustments (COLAs)
• Including newly hired state and local workers in Social Security
• Encouraging more private savings by strengthening retirement saving incentives

CRFB has made the case for the need to switch to the chained CPI for COLAs since it better accounts for consumer substitution, and we have also discussed raising the Social Security age as an option previously.

In the second half of the report, BRT focuses on the future of Medicare spending:

The April 2012 Status of the Social Security and Medicare Programs Trustee Report confirmed that the Medicare HI Trust fund (Part A) faces depletion in 2024, earlier than the combined Social Security Trust Funds. Medicare costs will grow substantially from approximately 3.7 percent of the GDP in 2011 to 5.7 percent of GDP by 2035. Medicare spending will jump from $560 billion in 2012 to $1.0041 trillion in 2022. The number of beneficiaries enrolled has doubled in the past 35 years and are expected to double again in the next 35 years. The average Medicare enrollee cost in 2011 was $12,042.

Similar to their Social Security proposal, their plan for slowing Medicare spending would not affect people over age 55. The proposal involves:

• Increasing the Medicare eligibility age to 70
• Allowing private plans to compete with Medicare
• Exploring "other types of means-testing" Medicare beyond income-related premiums
• Maintaining current financial support for low-income beneficiaries

In a related development, a number of House Democrats introduced The Public Option Deficit Reduction Act (H.R. 261). The bill would, as its name indicates, establish a government-run health insurance plan to compete with private insurance in the new health exchanges. Since the public option's premiums are projected to be 5 to 7 percent lower than private health insurance, the proposal would save $88 billion through 2021, according to a CBO estimate from March 2011.

Given the indisputable fact that entitlement spending and health care costs in particular are the main drivers of the deficit, any serious deficit-reduction strategy must address these programs. Thus, it is promising to see national and business leaders bring ideas to the table on how to get spending in these programs under control. Proposals like these might generate heated debates, but they are a healthy start to negotiating a bipartisan deal.

The full Business Roundtable report can be found here, and the full text of H.R. 261 can be found here.

Yesterday, Rep. Dennis A. Ross (R-FL) introduced H.R. 243, otherwise cited as the Bowles-Simpson Plan of Lowering America's Debt (BOLD) Act, a bill that contains some policies found in the Simpson-Bowles plan. The BOLD Act includes some spending cuts -- such as reducing Congressional and White House expenditures by 15%, prohibiting earmarks, reducing federal travel, and imposing an additional 3-year pay freeze on federal workers and DOD civilians -- that could be undertaken to reduce the debt. But more importantly, the bill goes into significant detail on tax reform, naming not only the broad parameters of the tax system but also many tax expenditure reductions or eliminations to help the offset the cost. Some of the notable measures are:

• Replacing the current seven individual income tax brackets (10/15/25/28/33/35/39.6) with two rates of 10 and 20 percent
• Repealing the Alternative Minimum Tax, Personal Exemption Phase-out, and Pease phase-out
• Reducing the corporate tax rate to 20 percent

The bill then calls for the elimination of a number of tax expenditurs in various areas in both the individual and corporate tax code. Some of the bigger eliminations include the earned income tax credit, the domestic production activities deduction, the child and dependent care credit, accelerated depreciation for new investment, and various energy preferences. The plan does leave many tax expenditurs in place like the mortgage interest deduction, charitable deduction, child tax credit, retirement savings preferences, and step-up basis for capital gains at death.

In addition to the BOLD Act, Rep. Ross introduced the ZERO Act, which would require agencies to justify each activity, in the manner of zero-based budgeting. Agencies would need to do the following for each spending item:

• Provide a description of each activity that requires an appropriation from Congress
• Cite to Congress the legal basis under which they may lawfully receive an appropriation
• Offer three alternative funding levels  
• Provide a summary of the cost effectiveness and efficiency to the taxpayer for each activity that requires an appropriation from Congress

Although the budgetary impact is unclear (it appears the tax reform portion would lose revenues), we applaud Rep. Ross for proposing specific reforms, particularly which tax expenditures would be reformed. Tax reform will be critical in the upcoming budget negotiations, and ideally should seek to raise additional revenues as part of a comprehensive plan to control rising debt. We appreciate his eye for reforming the budget process to make spending more efficient. While tax reform will be critical in the upcoming year, we also need to be looking at reforming entitlement programs, which are the true drivers of long-term deficits and haven't yet been addressed. The sooner the discussion on tax reform and entitlement reforms gets rolling, the better.

Note: This blog has been updated from its original posting to include a description of the ZERO Act.

Yesterday, President Obama suggested we need about $1.5 trillion in deficit reduction on top of what has been enacted so far, a claim which matches a recent analysis from the Center on Budget and Policy Priorities showing $1.4 trillion as sufficient to stabilize the debt. As we gear up for another round of budget negotiations, we'd encourage lawmakers to raise the bar and put the debt on a clear, downward path relative to the economy.

Although we agree with CBPP's analysis that $1.4 trillion would be sufficient to keep the debt stable through 2022 -- at least relative to their baseline which is quite similar to the CRFB Realistic Baseline -- we believe this amount of deficit reduction would fall short of what is needed in the long term. To be sure, $1.4 trillion of deficit reduction would be a very welcomed package of savings, but would almost certainly need to be followed with additional deficit reduction in order to put the debt on a truly sustainable path.

Among our specific concerns are:

1. A plan that is projected to just barely stabilize the debt leaves no room for error. Slower economic growth, higher interest rates, or new deficit-increasing legislation could all push debt back on an upward path.
2. Simply stabilizing the debt over ten years would likely not be sufficient to keep it stable beyond the ten year window. Given budgetary pressures from health care, aging, and rising interest payments, $1.4 trillion is highly unlikely to stop debt from rising in the early to mid-2020s, let alone over the longer-term.
3. 73 percent of GDP may be too high of a steady-state level for the debt. That level is higher than the international standard of 60 percent, and there would be little fiscal flexibility to accommodate economic or national security emergencies.

No Margin For Error

Aiming for the debt-to-GDP ratio to be exactly stable carries with it tremendous risks, because both economic and technical projections may be off and because future policies may worsen the situation.

On the former point, the Congressional Budget Office (CBO) bases all of its projections on specific economic forecasts and assumptions about GDP growth, inflation, interest rates, immigration, health care cost growth, unemployment, and other factors. For example, if the economy recovers more slowly (CBO projects a full recovery by 2018), steady-state growth is lower (CBO projects about 2.3 percent real growth), or interest rates are higher (CBO projects a 5 percent interest rate on a 10-year note by the end of the decade), debt projections could worsen.

As an illustrative example, we estimated the effects of average annual GDP growth being about a quarter of a point lower than CBO's projections each year, which would simultaneously increase the numerator and decrease the denominator in the debt-to-GDP ratio. Rather than stabilizing the debt at 73 percent, under this scenario a $1.4 trillion deficit reduction plan would put the debt on an upward path nearing 77 percent by 2022.

^{Source: CRFB calculations based on CBO data.}

To be clear, we do not believe GDP will grow a quarter point slower every year than CBO's projections, and there is a similar probability that the economy could grow a quarter point faster. However, the consequences of slower-than-projected economic growth, or higher-than-projected interest rates, are real enough to be taken seriously and reason enough to leave a margin of error to ensure stable debt levels.

This is especially true when considering the second type of projection error: a policy projection error. Both CBPP and CRFB rely on "current policy" baselines which create a base case projection of how Congress will act. In reality, however, it is likely Congress will enact more deficit-increasing policies than what are even in those baselines. CBPP points out one case -- the "tax extenders" -- where Congress has tended to resort to deficit financing; and they rightfully point out that if the extenders are not dealt with as part of a debt deal (for example, through tax reform) then as much as $400 billion in additional savings would be needed. Other similar examples abound as well.

Extending bonus depreciation (described here), a temporary measure now in its sixth year, would have substantial costs as would, to a lesser extent, continuing extended unemployment benefits beyond this year. On top of that, funding for Hurricane Sandy disaster relief, an extension of the lower Stafford loan interest rate beyond June of this year, the extension of higher Medicaid payments for primary care physician payments beyond 2014, the small bucket of "health extenders" outside of the doc fix, and any of a number of policies we cannot yet predict could all add to the deficit. A strict adherence to pay-as-you-go rules -- which both CRFB and CBPP support -- would reduce the effect of these policies on the debt. But so long as one year of costs is paid for over ten years of savings, deficit effects would not be eliminated entirely.

No Long-Term Stability

Even if $1.4 trillion proves sufficient to stabilize the debt through 2022, it is unlikely to stabilize debt in the second decade or beyond. With a debt stock of 73 percent of GDP ($18 trillion in 2022), interest alone will cost the government 2.9 percent of GDP ($700 billion) per year by 2022. By our estimates, even if the primary deficit (programmatic spending minus revenue) were held constant as a percent of GDP after 2022, debt would continue to grow relative to the economy due in large part to these interest payments. More importantly, the combination of population aging and health care cost growth is projected to put substantial upward pressure on the costs of Social Security, Medicare, and Medicaid while slowing the upward pressure on revenue.

Addressing these realities will require something of a "running start" in order to keep interest payments at bay and make the necessary changes to "bend the health care cost curve" and slow the growth of entitlement costs in a way that is sufficiently gradual to allow workers to plan and protect those already in retirement from dramatic benefit changes.

To demonstrate why a $1.4 trillion plan is unlikely to be sufficient, we put an illustrative plan into our long-term budget model. Specifically, we took CBPP's $1.191 trillion of primary savings ($185 billion in 2022) and $177 billion of interest savings ($51 billion in 2022) and assumed the primary savings is split equally between revenue and spending (CBPP's "Scenario B"). For illustrative purposes, we assume all of the health and other mandatory savings from the President's budget, with additional spending reductions coming from discretionary spending.¹

As the graph below demonstrates, this deficit reduction would be sufficient to keep the debt stable only through 2023 after which it would begin to rise again -- reaching 94 percent of GDP in 2035 based on CRFB's Realistic Baseline. Although the savings grow over time, particularly the interest savings, they do not grow fast enough to combat the effects of health care cost growth and population aging. In other words, we should enact more savings in order to get out in front of these effects.

^{Source: CRFB calculations}

To be sure, not all $1.4 trillion is created equally. A plan which included substantial long-term controls to Social Security, Medicare, and Medicaid could indeed keep the debt stable over the long-run. However, it is difficult (though not impossible) to imagine a package with only $1.4 trillion in savings this decade creating enough running room to allow for these changes, to the extent such changes would require the type of political pain policymakers would only endure in a "Go Big" scenario. As we've said before, putting everything on the table for consideration in a "Go Big" approach can improve the chances of actually controlling debt by providing the political tradeoffs necessary to generate savings and reforms sufficient to control the debt. 

CBPP rightfully points out that we don't currently know all the ways to control health care cost growth, and learning more about what works and doesn't work over the next several years can give us a better idea about controlling costs over the long term. However, this is no excuse for waiting to enact those policies that we know, or at least have significant evidence to believe, could help control costs now without causing unnecessary damage. In December, CRFB put forward nearly 100 options to reduce health spending, including policies recommended by MedPAC, the White House, House Republicans, the Simpson-Bowles Commission, the Dominici-Rivlin plan, the American Enterprise Institute, the Center for American Progress, and the National Coalition on Health Care. Many of these policies could be enacted today, with further reforms following in future years as we learn more about the health care system.

Policymakers must take action soon to control costs over the long term because many health care and Social Security reforms take time to phase in. But those savings compound over time. Waiting to make those changes further delays that process, but also may reduce total savings if more and more current or future beneficiaries are exempt from certain changes.

No Fiscal Flexibility

Even if a $1.4 trillion plan were designed in a way that stabilized the debt over the long run, it is not clear that stopping at 73 percent of GDP would be low enough. While this is below what Reinhardt and Rogoff found to be the "danger zone" of 90 percent of GDP, it is twice the nation's historical average and well above the international standard of 60 percent.² Higher debt levels leave the country vulnerable, both budgetarily and economically.

Would debt at 73 percent of GDP be a disaster? Probably not. In fact, it is about that right now. But as the economy recovers that level would lead to more "crowding out" of investment than would a lower debt level. More importantly, it would leave little flexibility for further debt accumulation in the case of an economic or national security crisis. Since our debt was 36 percent of GDP prior to the previous financial crisis, it gave the government substantial room to rescue the financial industry, inject stimulus into the economy, provide relief for those out of work, and avoid immediate austerity. It is unclear whether that same flexibility would have been available had debt levels been twice as high as they were.

Policymakers may not bring the debt down below 60 percent in the next couple of years or even in the next decade. But so long as our debt is at elevated levels, they should be working to put it on a clear downward path relative to the economy.

By reducing rather than merely stabilizing the debt, policymakers can help to ensure fiscal sustainability for future generations.

^{1 Longer-term calculations are based on the long-term CRFB Realistic baseline, adjusted for changes in the CBO August baseline and the American Taxpayer Relief Act. From 2014 through 2022, we assume year by year primary and interest savings as specified by CBPP. We assume that in each year in the ten-year window, half of the primary savings will come from revenue and generated in a way that does not fundamentally slow or accelerate the growth trend of revenue. We assume that in each year in the ten-year window, the other half of the primary savings comes from spending reductions. For illustrative purposes, we use the President’s budget as a starting point for where CBPP might assume those savings are generated. Specifically, we assume $325 billion of health savings reflecting CBO’s updated year-by-year estimates of the President’s health policies, updated for timing and legislative changes. We also assume roughly $175 billion of other mandatory savings based on the President’s budget. Finally, we assume any remaining spending reductions to hit CBPP’s target come from the discretionary side of the budget. Beyond 2022, we generally rely on our long-term model to extrapolate savings. We assume additional revenue grows at the same rate as baseline revenue in light of real bracket creep and other structural forces. We assume discretionary and mandatory savings, like discretionary and mandatory spending, are held constant as a share of GDP. In general, we assume that health care savings grow over time in line with the growth in health care spending. In three cases, we assume health care savings grow faster than health care spending and roughly extrapolate those savings based on our own calculations. Specifically, we assume that the President’s proposal to slow the growth rate of post-acute care payments will result in compounding savings over time that will exceed health care cost growth; we assume that proposals to change cost-sharing rules for new beneficiaries only will increase with the growth of both health spending and new beneficiaries; and we assume the proposal to increase income-relating for Part B and D premiums and freeze the income-related thresholds until they reach 25 percent of beneficiaries will grow rapidly due to a combination of rising per-capita costs and an increasing number of beneficiaries subject to the premiums. Finally, we assume that interest savings will grow as a result of the lower debt stock, relative to our baseline, in each year through 2035.}

^{2 In Reinhardt and Rogoff's study, the data looks at gross debt across countries for comparability. However, international comparisons of gross debt more closely resemble public debt for the United States.} 

With the Treasury Department undertaking extraordinary measures to avoid a potential default, the Concord Coalition is calling for both raising and reforming the debt ceiling. In an issue brief, It’s Time To Raise and Reform the Statutory Debt Limit, Concord notes the weakness of the debt limit as a tool for fiscal discipline, as it only comes into play after decisions on spending and taxes have already been made, and it carries the dangerous possibility that the U.S. could be unable to pay its obligations in full or default on the debt.

There should be no delay in voting to increase the debt limit. Despite its name, the debt limit has never proven to be an effective means of controlling debt. And yet, failure to raise the debt limit risks serious long-term harm to the nation’s creditworthiness. The main flaw is that debt limit debates commonly take place long after decisions have been made on the policies that produce the debt. This disconnect between inputs and results gives the debt limit an arbitrary nature, which is made worse by the fact that it has never been tied to an economically significant target such as the debt-to-GDP ratio.

Current circumstances require a prompt increase in the debt limit. Reforms should then be enacted as part of a fiscal sustainability plan that tie future increases to policy decisions or economic circumstances at the time they occur.

According to Concord, other budgetary restraints, such as pay-as-you-go (PAYGO) rules and statutory spending caps, have been much more effective in enforcing fiscal restraint compared to the debt limit and do not have the same potential to damage the economy.

With the debt limit crisis out of the way, the Concord Coalition says that lawmakers should immediately begin to develop a comprehensive debt reduction plan that could replace the sequester and get our fiscal house in order:

With an unnecessary crisis over the debt limit averted, Congress and the President should promptly develop a comprehensive, specific and credible plan to place our nation on a sustainable fiscal path. Lawmakers should consider the entire federal budget to be on the table -- including entitlement programs, domestic discretionary spending, defense spending, and revenues.

The immediate fiscal goal should be to stabilize the debt-to-GDP ratio within the 10-year budget window, if not sooner. No procedural mechanism to control the debt will work if the policies don’t add up. And until an overall framework is agreed upon, it is likely that policy decisions will continue to be driven by short-term crisis management rather than responsible strategic planning. Without such a framework, economic uncertainty will continue, public frustration with the political process will grow and the debt burden hanging over future generations will remain as our legacy.

Breaching the debt limit would likely lead to a downgrade from credit agencies and dramatically shake confidence in the state of U.S. finances. Prioritizing payments is also not an easy task given the sheer number of transactions that the Treasury Department has to manage. Describing the consequences of hitting the debt ceiling, Treasury Secretary Timothy Geithner today sent a letter to Congressional leaders urging immediate action to raise the debt ceiling and avoid potential default.

The last couple of weeks people have been focused on possible gimmicks to avoid the breaching the debt limit, but this conversation is largely distracting. Instead, as CRFB President Maya MacGuineas wrote today, Congress and the President should focus their energy on making a deal to raise the ceiling as soon as possible and enact a fiscal consolidation package that would replace the blunt, across-the-board sequestration.

Click here to read the full brief from the Concord Coalition and here to read the letter from Treasury Secretary Geithner to Congress.

Yesterday, the Federal Reserve announced in a preliminary estimate that it had made a profit in 2012 and transferred $88.9 billion to the Treasury. This is a new high for the Fed, up from the previous high of $79 billion in 2010, and $77 billion last year.

The Fed took in $91.0 billion, the overwhelming majority ($80.5 billion) of which was attained through its open-market operations. The Fed was selling short-term T-bill and buying longer-term bonds as part of what has been called "Operation Twist," and recently has been buying more mortgage-backed securities as part of QE3. Expenses of the Federal Reserve System totaled $4.9 billion, with an additional $387 million to fund the operations of the Bureau of Consumer Financial Protection and Office of Financial Research that were created by the Dodd-Frank Act.

Revenue from the Federal Reserve has been one of the more significant revenue streams flowing to the federal government in the past few years. It has raised about as much money as all excise taxes and ranks only behind individual income, corporate income, and payoll taxes. It's worth noting, though, that while Federal Reserve remittances have dramatically increased over the last few years, that is unlikely to continue when the economy recovers and interest rates begin to rise. The Fed will likely increase their holdings of short-term T-bills, but they will significantly shrink their balance sheet overall to unwind from their current accommodative monetary position.

Unfortunately, since the Fed has been sending Treasury these profits routinely throughout the year, this will not affect the headroom Treasury has under the debt ceiling.

Of course, the Federal Reserve does not conduct its operations with the intention of earning the greatest profit -- it is simply a side consequence of their balance sheet expansion since the financial crisis began. But it reminds us that beyond just the economic effect, the Fed's QE efforts have a budgetary effect as well.

The complexity of our tax code has many advocates making the case for tax reform as we head toward the second round of fiscal negotiations.

In a recently released annual report to Congress from the IRS's National Taxpayer Advocate Nina Olson, it was estimated that individual and business tapayers spent 6.1 billion hours to complete filings, with a tax code that contains almost four million words. The report argues the complexity leads to errors and abuse of loopholes. Meanwhile, the report suggests that a significant amount of revenue could be raised from reform, citing the JCT estimate of individual income tax expenditures in FY 2013 of $1.09 trillion dollars, compared to the $1.36 trillion that the individual income tax raises.

The Taxpayer Advocate report recommends that Congress employ a zero-based budget approach, in which lawmakers would start from a baseline where all tax expenditures are eliminated and debate whether certain provisions should be added back in, an approach embodied in the Fiscal Commission's Zero Plan.

The Alternative Minimum Tax was listed as the second greatest problem in the current tax code by the Taxpayer Advocate after the overall complexity of the code. Part of the problem previously was the continuous patching of the AMT exemption to ensure that it did not hit millions more taxpayers. The exemption has since been permanently patched by indexing it to inflation in the American Taxpayer Relief Act.

But even with that problem fixed, the AMT's complexity and filing burden on taxpayers remains a problem. As the graphic below demonstrates, the AMT itself has holes which allow high-income taxpayers to reduce their tax liability to zero, an issue which was the original impetus for the tax. Olson's report recommended repealing the AMT, although this would lose a significant amount of revenue that would have to be offset elsewhere in tax reform.

Olson also expresses concern about the sequester, which would further reduce the IRS's funding. According to the report, the tax gap between actual tax liability and taxes collected is about $400 billion. Should the agency lose resources, this number could be even larger and would likely offset the original cuts to the program and then some.

The IRS report is another reason for taking a serious look at tax expenditures and other provisions which add unnecessary complexity to the code and lose revenue. Well-designed tax reform can make the code simplier and raise more revenue than the current code even while lowering marginal tax rates.

On a related note, the GAO has a report on the evaluation of tax expenditures, saying that these preferences are good policy only if they acheive desired objectives efficently, outweighing the downsides of revenue loss and added complexity. By that measure, many tax expenditures could be eliminated or better designed to achieve their desired goals. As one example, they show how the R&E tax credit gave taxpayers a subsidy on research that would have been done anyways without the credit, estimating in 2009 that half of what was claimed for the credit was a windfall. They make the case for a floor only above which R&E expenditures would be eligible for the credit. In general, better designs for tax expenditures could make the code more efficient and allow the system to raise more revenue.

The recent fiscal cliff fight was a clear sign that our tax code could benefit from reform and stability. As a result of the last minute changes under the fiscal cliff, the IRS will be forced to delay the start of the tax filing season one week to January 30th, and some taxpayers will have to wait as long as late February or March to begin filing.

For a still-weak economy, tax reform that gives the markets and public greater confidence in our fiscal path and tax code and greater stability would be a significant help.