The Bottom Line

December 9, 2014

Earlier today, CRFB Senior Policy Director Marc Goldwein testified before the House Energy and Commerce Health Subcommittee. The hearing, entitled "Setting Fiscal Priorities," discussed policy options to reduce health care spending. Also testifying were Executive Director of the Medicare Payment Advisory Commission Mark Miller, the American Action Forum's Director of Health Care Policy Chris Holt, and Georgetown Professor of Public Policy Judy Feder. The witnesses represented different perspectives and focused on different parts of the health care system.

Miller's appearance made up the first panel, and naturally, his testimony focused on Medicare. He gave some background on Medicare but focused on the types of savings policies that MedPAC has recommended in its reports. These policies include simple recommendations on annual payment updates (increases or decreases) or more far-reaching recommendations like site-neutral payments and bundled payments (two policies that were part of our PREP Plan). Questions for Miller spanned a far range of topics, including the Affordable Care Act's payment reductions.

The second panel had the other three witnesses. Goldwein's testimony focused on both the need to rein in health spending to control debt and the options available to do so. He noted the large run-up in debt that is projected to have in the coming decades and the central role health care plays in that.

For solutions, he focused on two different types of policies: "Benders" which have the potential to bend the health care cost curve and "Savers" which are not as transformative but lead to a better allocation of health care spending. In his oral testimony, he focused on the policies in the PREP Plan, which involve reforming Medicare's cost-sharing structure and provider payments to encourage more efficient care. His written testimony included many other options with the potential for bipartisan support.

December 8, 2014

With Congress set to retroactively revive the tax extenders for the past year at a cost of $42 billion, our president, Maya MacGuineas, published a commentary online in the Wall Street Journal criticizing them for adding the costs to the deficit.

J.D. Foster, deputy chief economist at the U.S. Chamber of Commerce, however, published a blog on the U.S. Chamber's site calling our reasoning "a tad skewed" and arguing that letting these myriad tax breaks remain expired should be considered a "tax hike" because many people now consider them to be permanent provisions of the tax code. His implied conclusion is that restoration of these extensions does not need to be paid for.

Foster argues that "many of these provisions have been in the law for decades." A few have been around that long – the research & experimentation tax credit was enacted in 1981 – but most are more recent. In 2000, there were only a quarter as many provisions that expired within one or two years.

Furthermore, many of these provisions only passed in the first place because they weren't permanent, lowering their budgetary cost. For instance, Congress enacted the sales tax deduction temporarily because it only offset the cost of the deduction for two years, requiring lawmakers to come back to the table if they wanted to make it permanent. The provision was scored with a total ten-year cost of $5 billion when it was enacted, but it has been repeatedly extended at an annual cost of about $3 billion, bringing the real ten-year cost of the provision closer to $30 billion.

Other tax breaks in the extenders package were explicitly intended to be temporary stimulus in response to the recent recession, including the most costly provision, bonus depreciation – which would add almost $250 billion to the debt over the next ten years if made permanent. The expiration of temporary infusions of money into the economy should not be considered tax hikes or spending cuts. When Congress sends rebate checks to every taxpayer, as they did in 2001 and 2008, is it a tax hike or spending cut if they do not continue the checks the next year?

Allowing lawmakers to extend these provisions for free would incentivize them to disguise more tax cuts as temporary provisions. Lawmakers would avoid paying the full cost when creating the tax break and would later add to the debt when extending it without offsets. If lawmakers, however, really want temporary tax breaks to be included in the baseline so extensions do not need to be offset, they should change scoring rules so that permanent costs are scored when the provision is originally created. Individual spending provisions, such as Unemployment Insurance or the Sustainable Growth Rate (SGR) patches, follow the same rules: they are required to be offset.

December 5, 2014

Before debating a potential "CRomnibus" bill to fund the government, lawmakers are ready to check one item off their lame-duck to-do list: a defense authorization for FY 2015. The House and Senate Armed Services Committees agreed to a bill that addresses a number of issues involving military operations overseas and military compensation, among other items.

On the first issue, the authorization sets war spending -- mostly intended for combat related activities in Iraq and Afghanistan -- at $63.7 billion, the level requested by the Administration. It encouragingly scales back a $4 billion Counterterrorism Partnership Fund, which is only tangentially related to combat spending, to $1.3 billion. However, it also shifts $350 million of funding previously designated for Iron Dome, an Israeli missile defense system that is clearly not directly related to Afghanistan and Iraq war spending, to the war category. Note that since this is just an authorization, these funding decisions are not final and will be made in the Defense appropriations bill. The soundness of the decisions they made is mixed: encouraging on the funding levels but less so on the gimmickry with Iron Dome. It would be better if the authorization had gone further and outlined criteria for what could qualify for the war designation.

In terms of military compensation, we highlighted last month two decisions that lawmakers were considering on TRICARE drug co-pays and the Basic Allowance for Housing (BAH). In both cases, the authorization does make changes but only partway to what the Defense Department suggested. The bill raises co-pays by $3 for generic and brand-name retail drugs and for brand-name and non-formulary mail-order drugs. Generally, these increases are much lower than the ones the Pentagon included, saving $2.4 billion over ten years. The only area where lawmakers exceeded requests is in generic retail drugs -- the Pentagon had a $1 per year increase over the next nine years starting in 2016. Regarding housing changes, the authorization would reduce the BAH by 1 percent of housing costs (to 99 percent); that is, one-fifth the size of the 5 percent decrease the Pentagon suggested.

December 4, 2014

The House passed the ABLE Act yesterday, a bill that helps those who have been disabled since youth accumulate savings. The bill, with an estimated cost of $2 billion over the next 10 years, would create tax-free savings accounts that do not count against the account holder for means-tested programs. The bill is an encouraging example of fiscal responsibility, since it is fully paid for with savings in other parts of the budget.

Currently, low-income individuals cannot accumulate more than a certain amount in their savings accounts without losing SSI and Medicaid payments. For instance, individuals with more than $2,000 or couples with more than $3,000 in savings and assets are ineligible to receive SSI payments. Many have pointed out that these limits prevent people with disabilities save for medical bills, education, or equipment they may need to stay in the workforce

To remedy this, the bill would allow any child or person who became disabled before the age of 26 to establish an ABLE account and contribute up to $14,000 annually (subject to other state caps). The balance of the account would not count against the asset limits for low-income programs. Contributions into the account are made with after-tax dollars but there is no tax on the account's accrued interest or dividends.

December 4, 2014

The House approved last night a deficit-increasing one-year tax extenders package. After a correction by the Joint Committee on Taxation, the updated cost of the bill is $41.6 billion over 10 years. Notably, this cost violates various budget rules, or points of order, which the House waived.  More significantly, the legislation included language excluding costs from statutory pay-as-you-go (PAYGO).

Furthermore, tax extenders are intentionally made temporary to hide their costs when they are repeatedly extended year after year. If the extenders in this bill were extended for the next 10 years, debt as a share of the economy would be 3 percentage points higher by 2024, an increase of $850 billion.

Because the legislation had over $40 billion in costs that were not offset, it violates several budget enforcement provisions.  First, it reduces tax revenue below the current law levels called for in the Ryan-Murray agreement serving as this year's budget. Section 115(b)(3) of the Ryan-Murray budget agreement set revenue levels for the next ten years at the levels in CBO's most recent baseline. The bill violates Section 311 of the Congressional Budget Act, which enforces the budget resolution's totals, because CBO's baseline assumes that those temporary tax breaks remain expired. While the Ryan-Murray agreement did not call for increased revenues as the Senate's FY 2014 budget resolution did, it maintained revenues at current law levels as the House-passed FY 2014 budget did, effectively assuming expired tax breaks would be paid for if renewed

December 2, 2014

Update (12/3): This blog has been updated to reflect a correction the Joint Committee on Taxation made to its estimate of the wind production credit.

After proposing a nearly $450 billion budget-busting deal on the tax extenders that received a veto threat from the White House, Congress is scaling back its plans to a one-year retroactive extension of the extenders. This $42 billion plan would end the uncertainty on tax extenders for the upcoming filing season by extending the provisions for 2014, but it would leave the issue to be dealt with again next year (with extensions again needing to be retroactive). Furthermore, many of these policies were meant to encourage economic activity or provide economic stimulus, but by being done retroactively, this extension is simply providing a windfall for activities that have already taken place. Retroactive tax cuts are poor policy and a sign of a broken legislative process.

Still, this approach is a clear improvement over the previous deal because it has a much lower cost, and it doesn't permanently lower baseline revenue for tax reform, which will be needed to pay for an aging population. Encouragingly, it also limits extensions to current policies and no longer includes expansions as the previous package did.

Cost of One-Year Retroactive Extensions of Tax Extenders
Extension 2015-2024 Cost
R&E Credit $7.6 billion
Wind Production Tax Credit $6.4 billion
Subpart F Exception for Active Financing Income $5.1 billion
Mortgage Debt Forgiveness Exclusion $3.1 billion
State and Local Sales Tax Deduction $3.1 billion
15-Year Recovery Period for Leasehold, Restaurant, and Retail Property $2.4 billion
Bonus Depreciation $1.5 billion
Section 179 Expensing $1.4 billion
Work Opportunity Tax Credit $1.4 billion
Biodiesel Production Credit $1.3 billion
Look-Thru Rule for Payments Between Related Subsidiaries $1.2 billion
New Markets Tax Credit $1 billion
Exclusion of Gains on Small Business Stock $0.9 billion
Mortgage Insurance Premium Deduction $0.9 billion
Other Provisions $4.3 billion
Total $41.6 billion

Source: House Rules Committee
Numbers may not add up due to rounding.

Even with the more responsible nature of the package, lawmakers should still offset the lower cost so they don't reverse the progress that has been made on deficits in recent years. That's where CRFB's PREP Plan can help.

PREP gives three principles for offsetting tax extenders in a way that maintains fiscal responsibility and sets up broader reform of the tax code. They are:

    1. Address most tax extenders permanently in the context of tax reform
    2. Fully offset the cost of any continued extenders in the interim without undermining tax reform
    3. Include a fast-track process to achieve comprehensive tax reform

Obviously, a one-year extension would satisfy the first criterion, but 2 and 3 have yet to be fulfilled. On 2, the PREP plan includes enough savings to offset a two-year, $83 billion extension of all of the provisions that expired at the end of 2013, except for bonus depreciation. Doing a one-year extension means that lawmakers could pick and choose among these provisions rather than having to do the whole package (or something equivalent).

December 1, 2014

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

The tax-extenders deal got off on the wrong foot, and it just keeps getting worse.

At issue are 55 tax breaks that are part of the tax code on a temporary basis but are routinely extended. These breaks expired at the end of 2013, and Congress is scurrying to restore them. That we are only now discussing what do to about tax breaks that expired nearly a year ago underscores just how broken our government has become. It does not work to govern retroactively. Businesses cannot plan, invest, or compete when they don’t know the tax rules they must abide by each year.

What Congress should be doing is comprehensive tax reform. Many of these expired tax breaks, along with the $1.2 trillion worth of permanent deductions, credits, and exclusions that pepper the tax code, could be permanently eliminated or reformed, allowing rates to be lowered and providing the certainty needed to enhance economic competitiveness. In February, House Ways and Means Committee Chairman Dave Camp proposed an impressive array of tax-code fixes to do just that. But Congress ignored his plan and procrastinated, and now legislators complain that time is too short for real reforms.

Still, policymakers could go through all the expiring tax breaks and choose which ones to keep and which ones to get rid of. That’s what they did the last time they dealt with this issue. But, no, Congress is looking to extend the lot of them.

November 25, 2014

Congressional negotiators are reportedly nearing a deal to address the year-end tax extenders while adding $500 billion to the debt. By reinstating, making permanent, and in some cases significantly expanding a number of tax provisions, this deal would give away half of the revenue raised from fiscal cliff deal or about half the savings generated from the sequester, undoing some of the progress that has been made toward long-term deficit reduction. Horse trading one permanent provision for another and adding other "sweeteners" reportedly under consideration could push the price tag even higher.

Policymakers should fully offset the cost of any new spending or tax breaks, especially permanent ones. But perhaps most disconcerting about these discussions is that they are apparently considering expanding a number of provisions beyond what a permanent extension would cost – the expanded version of the R&D credit under discussion would double its pricetag. The table below outlines the reported deal with cost estimates for each provision (though based on reports of the total cost, some provisions may not have been reported yet).

Because of expanding the provisions, the deal will cost about $120 billion (after interest) than a straight extension.

Potential Tax Extenders Deal (Ten-Year Cost)

Policy Cost of Reported Deal
Incremental Costs Above Straight Extension
Expand and make the research & experimentation credit permanent ~ $160 billion ~ $ 85 billion
Restore 2013 levels of small business expensing permanently (Section 179) $73 billion $4 billion
Extend the American Opportunity Tax Credit permanently and index to inflation ~ $73 billion ~ $5 billion
Permanently allow state residents to deduct sales tax instead of income tax $34 billion -
Extend the Wind production tax credit for 2 years, and phase it out over the next two ~ $20 billion -
Permanently extend increased deduction for mass transit commuters $2 billion -
Permanently extend tax-free charitable donations from retirement plan $8 billion -
Extend 2 S-Corporation provisions $2 billion -
Create a category of tax-free savings account for disabled individuals (ABLE Act) $2 billion $2 billion
Permanently extend a provision for businesses donating food $2 billion -
Extend more generous limits for donating conservation easements  $2 billion  -
Extend the rest of the tax extenders through the end of 2015 $43 billion -
Other unreported provisions ~ $20 billion ?
Potential Costs of the Lame Duck
~ $440 billion ~ $100 billion
Interest Costs  ~ $90 billion  ~ $20 billion
Total Debt Impact
 ~ $530 billion ~ $120 billion

Source: JCT, CBO, CRFB calculations

November 25, 2014

In October, the National Academy for Social Insurance published a study on Americans' preferred solution to making Social Security solvent. CRFB responded with a post questioning the study's option choices and description of some of the options. NASI's Board Chair Bill Arnone defended their methodology in a subsequent post. The following response was posted by CRFB President Maya MacGuineas.

The National Academy of Social Insurance has done a real service by conducting “trade-off analyses” to better understand how Americans would fix a Social Security program quickly headed toward insolvency. By forcing Americans to fully understand and weigh various options, rather than just asking about them in isolation, a trade-off analysis has the power to better simulate the tough choices that lawmakers will face in adjusting the program.

As we wrote in our blog, however, NASI’s trade-off analysis falls short in some areas that cause us to question the results. As we explained, the survey omits the single largest and most prominent set of benefit options – gradual adjustments to the initial benefit – which have been in nearly all plans that restore solvency by slowing benefit growth or with a balance of revenue and spending options. On top of that, many of the choices are framed in fashions that are not parallel with each other, likely leading participants to favor certain choices over others.

November 24, 2014

Recent press articles report that policymakers are negotiating a deal to accompany a temporary restoration of most of the 55 expired tax extenders with a permanent extension of a few provisions. The most commonly mentioned provision is the Research & Experimentation (R&E) credit, which would add $77 billion to the deficit if made permanent. Making the R&E credit permanent without offsets would be a costly and fiscally irresponsible mistake, but not as bad as what some reports suggest policy makers might do: expand the R&E credit and more than double its cost to $156 billion.

The unfortunate reality is that once policymakers abandon pay-as-you-go (PAYGO) rules, it makes it easier to throw budget discipline out the window. The Tax Reform Act of 2014 put forward by Ways & Means Chairman Dave Camp – which did abide by PAYGO – reformed the R&E credit and cut its cost in half to $34 billion over ten years. Meanwhile, the House-passed R&E credit, which appears to be on the negotiating table, would increase the credit from 14 percent to 20 percent of the incremental increase in research expenses and cost $79 billion more than simply making the current credit permanent.

Reinstating expired provisions for any period of time without offsets is fiscally irresponsible, which is why our PREP Plan combined a temporary continuation of the extenders with offsets from tax compliance and a process for tax reform. Making a provision permanent without offsets, however, is worse than a temporary continuation. Even worse is an unoffset (and unadvertised) expansion.

November 24, 2014

According to the latest CBO Budget Options report, adopting the chained CPI – an inflation index that most economists believe is a more accurate measure of inflation than the current CPI – would reduce the deficit by $332 billion through 2024, or $375 billion including interest. Those savings include $150 billion of revenue, $116 billion from Social Security, $66 billion from other mandatory spending, and $45 of interest savings.

As we’ve explained before, the current method used to index most tax and spending provisions is flawed. The measure overstates inflation by failing to account for the fact that consumers substitute similar products based on relative prices – so that if the price of steak falls, they might buy more steak and less chicken. As a result, the federal government currently overspends and undertaxes relative to the intent of the law, which is to index various provisions to actual changes in cost of living (such as cost-of-living adjustments, or COLAs). The Moment of Truth Project paper "Measuring Up" more fully explains the economic rationale for switching to the chained CPI and which programs and tax provisions would be affected.

In addition to being more accurate, adopting the chained CPI also results in huge amounts of deficits reduction. The $116 billion of Social Security savings would eventually accumulate to 0.56 percent of payroll over 75 years, which is enough to close one-fifth of the combined solvency gap and is nearly twice as large as the entire disability insurance gap (though most of the savings would accrue on the old-age side).

Savings from the Chained CPI (billions)
  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2024
Social Security $0 $2 $4 $7 $10 $13 $16 $19 $22 $25 $116
Other COLAs $0 $1 $1 $2 $3 $3 $4 $5 $5 $6 $29
Health Care $0 $1 $1 $2 $2 $3 $4 $5 $7 $7 $32
Other Spending $0 $0 $0 $0 $0 $1 $1 $1 $1 $1 $5
Revenue $1 $5 $7 $8 $11 $16 $20 $23 $27 $32 $150
Subtotal $1 $8 $14 $18 $26 $36 $44 $52 $62 $71 $332
$0 $0 $0 $1 $2 $4 $5 $8 $10 $13 $44
Total $1 $8 $14 $19 $28 $39 $50 $60 $72 $85 $376

Source: CBO

November 21, 2014

With the national debt at record highs and projected to increase, lawmakers need to find ways to reduce the long-term budget deficit. Fortunately, CBO has just released an updated book of options to do just that in advance of lame duck legislation and the new Congress being sworn in.

The report updates 79 options from last year's report, providing a selection of ways to either increase revenue or decrease spending. Since all of the options are very similar to those presented last year, the report simply updates the budget estimate, so readers will want to look at the previous report for the pros and cons of each option.

With so many options, we have highlighted just a few in each budget category to illustrate the savings options available to consider. See the report for more options.

November 21, 2014
People who wanted market-driven health care now have it in the Affordable Care Act

Alice Rivlin is a former Director of the Congressional Budget Office and Office of Management and Budget. She has served as a member of the National Commission on Fiscal Responsibility (Simpson-Bowles) and a co-chair of Domenci-Rivlin Debt Reduction Task Force. She currently is on the board of the Committee for a Responsible Federal Budget and is the Director of the Engelberg Center on Health Care Reform at the Brookings Institution.  She recently wrote an Op-Ed in the Washington Post entitled "People who wanted market-driven health care now have it in the Affordable Care Act".  It is reposted here.

As the Affordable Care Act moved into its second open enrollment period on Nov. 15, critics seized on the fact that some beneficiaries are in for unpleasant surprises. Some of those who enrolled last time will face higher premiums if they stay with their current plans. They will have to shop around on the exchange to find a plan with a lower price. When they return to the Web site, they are likely to find more plans to choose from than they did last year. More choices — how confusing!

When shoppers find a cheaper plan, they may find they have to pay more of their health-care bills out of their own pockets. The cheaper plan may also have a narrower network of providers. If they want to stick with a more expensive doctor or hospital, they might have to pay more. If they opt for the higher costs and are eligible for a federal subsidy, they will find that the subsidy will leave more of their premiums uncovered than it did last year.

November 20, 2014

CQ is reporting (subscription required) that the main obstacle to the defense appropriations authorization, which must be addressed during the lame duck session, are a pair of Defense Department proposals to slow the growth of military personnel spending. These recommendations would save $16-$18 billion over five years, providing room for other spending under the defense caps. However, while the Senate Armed Services Committee accepted these proposals, the House rejected them. If Congress requires the Pentagon to cut its budget but keeps rejecting the Pentagon's ideas for budget savings, they will ultimately need to make even more difficult choices.

The first policy, which would slow the rapidly rising cost of health care, would increase co-pays for pharmaceutical drugs in TRICARE. Co-pays for 30-day supplies would gradually increase over ten years from $5 to $14 for generic drugs and $17 to $45 for brand-name drugs. For 90-day mail-orders, they would increase similarly from $0 to $14 for generic drugs and $13 to $45 for brand-name drugs. Non-formulary brand-name drugs would see co-pays of $90, up from $43. The Pentagon has stressed that these increases are necessary to control health care costs and further encourage the use of cheaper generic drugs.

The second policy would slow the growth of the Basic Allowance for Housing (BAH) so that its coverage would fall on average from 100 percent of housing costs to 95 percent. The 5 percent of housing expenses that servicemembers would be expected to cover would still be well below the 20 percent they had to cover in the 1990s.

November 20, 2014

Policymakers are considering using the lame duck session to substantially worsen the nation's budget. A commonly discussed package would add potentially as much as $1.5 trillion over the next 10 years. According to news reports [last one is behind a paywall], politicians of both parties have talked about deficit-financing a permanent continuation of tax breaks that expired last year and a replacement of the Medicare SGR.  A lame duck session is not an excuse to throw fiscal responsibility out the window. We recently released the PREP plan, which shows one way lawmakers could pay for these changes.

Failing to offset these policies would add a huge amount to the debt. Continuing the extenders would wipe away all the new revenue raised in the fiscal cliff deal, while failing to offset the SGR reprieve would break with years of precedent, as the doc fix has been paid for 98 percent of the time since 2004.

A moderate-sized package that includes the SGR and health extenders, plus one of the most-often discussed combinations of tax extenders, would add $640 billion to the debt ($760 billion with interest), increasing the debt by another 3 percent of GDP. In a worst case scenario if lawmakers take the most costly approach (described below), debt would rise from a near record-high 74 percent of GDP today to 83 percent of GDP by 2024. Conversely, if policymakers follow current law spending levels, debt will be much lower – still growing, but reaching 77 percent of GDP by 2024.

November 19, 2014

Congress and the President need to prep for some important upcoming fiscal moments, and CRFB has a plan to help them do just that. The Paying for Reform and Extension Policies Plan, or the PREP Plan shows a path to restoring the expired tax extenders and avoiding the Medicare Sustainable Growth Rate cuts without adding $1 trillion to the deficit.

The PREP Plan assumes (but does not endorse) the passage of the Tricommittee SGR reform bill and a two-year tax extenders package. The plan includes over $250 billion of offsets, roughly two thirds from reforming incentives to slow health care cost growth and one third from improving tax compliance, along with a fast-track process for tax reform.

You can read the full plan here and view some of the details in the table below.

`Due to interactions, policies can't be scored on an individual basis
*Savings are less than $500 million

In addition to putting forward a plan, CRFB released a number of principles that should apply to any effort to continue extenders or reform the SGR.

November 18, 2014

Following a final rule issued by the Centers for Medicare and Medicaid Services (CMS), CBO has updated its estimate of various "doc fix" policies to replace the Sustainable Growth Rate (SGR) formula. The new estimates show mixed news for policymakers depending on the type of approach they wish to take.

CMS determined that the SGR would cut Medicare physician payments by 21.2 percent in April when the current doc fix expires. Simply freezing physician payments at today's levels would cost $119 billion over ten years, somewhat less than the $131 billion CBO estimated in its August baseline. Providing 0.5 percent annual payment increases, as Congress did for 2014, would cost $140 billion.

Importantly, CBO re-estimated the bipartisan agreement on a permanent SGR replacement at $144 billion, $6 billion more than projected in February – and that estimate included $16 billion of new spending that was passed in the doc fix this past spring, although some of the savings within the SGR replacement bill were used to help offset the temporary fix. 

November 17, 2014

This post is a letter from CRFB President Maya MacGuineas about the passing of former Congressman and CRFB co-Chair Bill Frenzel. You can also view the letter here.

Dear Friends,

It is with great sadness that I inform you that former Congressman and CRFB co-Chair Bill Frenzel died this morning.

November 14, 2014

The CBO has updated its data on the distribution of income and taxes. This analysis contains a wealth of data detailing changes in household income, tax rates, and other statistics since 1979. Below are some of the highlights from the report, drawing out trends since 1979 and how the new 2011 data factored in.

Tax rates have fallen for everyone since 1979 but have risen since 2011. This statistic is no surprise to those who noticed the relatively low revenue intake during and after the Great Recession.  In 1979, the average tax rate was 22 percent, but after the tax cuts in the early 2000s, they fell to around 20 percent. Since the Great Recession, they have fallen further to around 18 percent as individuals' income declined and temporary tax cuts were put in place. The rate decreases were largest for the middle quintiles but were also fairly sizeable for the lowest earners and the top 1 percent. The one major change between 2010 and 2011 – the replacement of the Making Work Pay (MWP) tax credit with the payroll tax cut – made tax rates slightly more regressive, since many of the lowest earners benefited more from MWP, and the highest earners who didn't benefit from MWP could get the payroll tax cut. However, CBO's preliminary numbers for 2013 also show that changes in tax law since 2011, namely the fiscal cliff deal and taxes in the Affordable Care Act, have partially reversed the longer trend, raising tax rates for the bottom 99 percent by 1 percentage point and by 4 percentage points for the top 1 percent.

Income has risen much more for the top 1 percent than for everyone else.  Inflation-adjusted after-tax income (which included government transfers) has risen by 58 percent overall since 2011, but the bottom 90 percent of earners on average have seen income growth below that (a low of 35 percent for the middle quintile). The next 9 percent of earners (90th to 99th percentile) have seen their income grow by more than that, but less than the top 1 percent, who saw their income grow by 200 percent. As a result, the Gini index, a commonly used measure of income inequality, has increased from .358 to .436. Although taxes and transfers do more to reduce inequality than they did in 1979, the underlying distribution of income is much more skewed.

November 13, 2014

Henry Aaron – Chair of the Social Security Advisory Board and a Senior Fellow at the Brookings Institution – recently weighed in on the Social Security Disability Insurance (SSDI) debate. Given the imminent depletion of the program’s trust fund – leading to an across the board cut in benefits in 2016 absent congressional action – experts and policymakers are starting to wonder how to best address the program’s needs.

As we have argued before, many experts agree that SSDI is facing more challenges than insolvency. Many aspects of the program could be improved, from the incentives created by the eligibility criteria to the determination process to the efforts to encourage beneficiaries to return to work.  While policymakers could simply inject funds into the program – through a payroll tax reallocation from the old-age fund, an inter-fund loan, or a general fund transfer – this would waste an opportunity to enact reforms that would make the program better for beneficiaries, workers insured by the program, and society as a whole. As Aaron explains:

Whether out of compassion or an instinct for political survival, Congress is quite unlikely to cut benefits for disabled Americans, a group that contains some of the neediest of our fellow citizens… Simply reallocating payroll taxes is not acceptable to many members of Congress in both parties. A consensus has arisen that both the design and administration of disability benefits are flawed. Critics of the program have promised to insist on reforms as a condition for agreeing to shift taxes around. Alas, agreement on just what the flaws are and what to do about them is elusive. Even worse, we lack information to undergird well-considered reforms.

The program faces challenges in a number of areas, including its core tenet, the definition of disability. To qualify for benefits, insured workers must be unable to earn above a certain threshold ($1,010 a month in 2012 for non‐blind individuals) due to a “medically determinable physical or mental impairment” (or combination of impairments) that is expected to last at least 12 months or result in death. By defining disability as the inability to work, the program discourages beneficiaries who could potentially go back to the workforce from trying, out of fear that they may lose benefits.

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