The Bottom Line
In Sunday's New York Times, CRFB board member David Stockman wrote an op-ed discussing the recent budget proposals from President Obama and House Budget Committee Chairman Paul Ryan and how "the resulting squabble is not only deepening the fiscal stalemate, but also bringing us dangerously close to class war." He writes,
"So the Ryan plan worsens our trillion-dollar structural deficit and the Obama plan amounts to small potatoes, at best. Worse, we are about to descend into class war because the Obama plan picks on the rich when it should be pushing tax increases for all, while the Ryan plan attacks the poor when it should be addressing middle-class entitlements and defense."
Click here to read the full commentary.
"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.
After the Bunny – Easter has come and gone. Chocolate-induced comas are being overcome and many -- though not Congress -- return this week from spring break. Are there still hidden Easter eggs waiting to be found? The debt ceiling and negotiations over a debt reduction deal will continue to be top items of interest.
President Makes the Case for His Plan – The Easter Bunny wasn’t the only one making the rounds last week. President Obama hit the road promoting his debt reduction proposal, convening town halls in Northern Virginia, Palo Alto, California and Reno, Nevada. CRFB took a deeper look at the President’s plan last week in a paper. We found that although the framework represents a step in the right direction, it falls short of the debt reduction proposed by the President’s Fiscal Commission.
Just Biden Time? – Deficit fighting “Gangs of Six” seem to be multiplying like bunnies now. The lawmakers have been chosen and a date has been set for the first meeting of the bipartisan, bicameral group called by the President to negotiate a debt reduction agreement, but it remains unclear if the new gang led by Vice President Joseph Biden will have any traction. What was first proposed by President Obama as a 16-member group will only have six members – Rep. Chris Van Hollen (D-MD), Rep. James Clyburn (D-SC), Rep. Eric Cantor (R-VA), Sen. Max Baucus (D-MT), Sen. Daniel Inouye (D-HI), and Sen. Jon Kyl (R-AZ). The group will have its first meeting on May 5. Meanwhile, the original “Gang of Six” senators continues its work on a bipartisan compromise, with a deal possible soon.
Trigger Talk Gets Bigger – The idea of a trigger mechanism to help reduce the debt -- and possibly coupling such a trigger with a debt limit increase -- continues to grow. The Peterson-Pew Commission on Budget Reform illustrated how such a mechanism can be implemented and a recent CRFB brief offered ideas on how the “debt failsafe” proposed by the President can be improved. A forthcoming paper will provide more detailed recommendations. And see the CRFB paper on responsibly raising the debt ceiling.
Key Upcoming Dates
- New home sales for March.
- Consumer Confidence Index for April from The Conference Board.
- Advance estimate for Gross Domestic Product for the first quarter of 2011 from the Department of Commerce.
- Consumer Sentiment Index for April (Thomson Reuters/University of Michigan).
- Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.
- Treasury Secretary Geithner says that the U.S. will default on its obligations around July 8 if the statutory debt ceiling is not increased before then.
Yesterday, CBO released a report on the effect of automatic stabilizers on the deficit, showing that in recent years, they have added hundreds of billions to the deficit. This report follows a report they released last year on the same subject.
Automatic stabilizers broadly refer to elements of the budget that work to increase deficits during downturns and reduce them during times of strong economic growth. In a recession (for example), programs like unemployment insurance, food stamps, and TANF see larger enrollment as employment and wages stagnate or fall, driving up outlays for these programs. A downturn also decreases the amount of payroll and income taxes collected by the government as wage and employment growth decline. Automatic stabilizers work as automatic countercylical fiscal policy.
As one can imagine, automatic stabilizers have contributed significantly to recent deficits: $315 billion in 2009, $363 billion in 2010, and $332 billion projected in 2011.
CBO's data show, not surprisingly, that automatic stabilizers track the output gap very closely, which we have compiled into the graph below. (Note: positive numbers for automatic stabilizers mean that they are reducing the deficit and vice versa.)
CBO's data also show that because the output gap has generally been greater in magnitude on the negative side than on the positive side, automatic stabilizers have a tendency to add more to deficits during downturns than they reduce them when the economy is above its potential over the longer term. More precisely, over the past fifty years, they have added about $910 billion (in nominal dollars) to the deficit. However, this number masks the fact that they will add another $1 trillion over just the next five years (demonstrating the depth of the recession and the long road back to a full recovery). But as the economy strengthens, the net effect of automatic stabilizers will be more muted, nearing zero by 2016.
Yesterday, CRFB released an analysis of President Obama's new deficit reduction framework meant to save $4 trillion dollars over 12 years. Using CBO's economic and technical assumptions and looking at a standard 10-year period, we find the plan would save $2.5 trillion and would result in a slightly increasing debt-to-GDP ratio toward the end of the decade.
Overall, this would be a substantial improvement from the President's February budget -- and a huge positive step forward. But it would still save substantially less than either the Fiscal Commission plan or the House Republican budget.
|President's Framework^||President's Budget
||House Budget||Fiscal Commission|
|10-Year Savings (billions)|
|From Adjusted Baseline*||$2,480||$0||$4,020||$4,060**|
|From Current Law||-$250||-$2,730||$1,290||$1,420|
|2021 Debt (%GDP)|
|2021 Deficit (% GDP)|
Note: Negative numbers represent costs as opposed to savings.
*Adjusted baseline assumes Congressional Budget Office estimates to extend tax cuts for all but top earners, declining war costs, and annual doc fixes.
**Excludes savings from assuming lower war costs than in the adjusted baseline.
# As re-estimated by the Congressional Budget Office.
^ Debt Failsafe is not activated.
Within the President's Framework, however, is a "Debt Failsafe" not accounted for in our analysis. This failsafe would aim to ensure a declining debt-to-GDP ratio (or a 2.75 percent of GDP average deficit) in the second half of the decade, through the threat of an across the board cut in certain spending and tax expenditures. Social Security, Medicare benefits, and programs for the poor would be exempted under the President's Debt Failsafe.
We strongly support a failsafe like this, in fact the Peterson-Pew Commission has been pushing a similar mechanism for some time. In a short analysis released on Monday, we proposed several ways that the President could improve his debt failsafe. As we wrote:
"It is encouraging that the President has embraced the idea of debt targets and a trigger....We believe that some sort of automatic, fiscal straitjacket will be helpful in getting Congress and the White House to address the nation’s fiscal problems."
In the case of the President's Framework, such a failsafe will do a tremendous amount to lock in the President's savings. It appears the Administration is projecting that debt would be at 70 percent of GDP in 2021 under the President's Framework, while our re-estimate show it at 77 percent of GDP. This is where the failsafe comes in handy. If the Administration is correct in its debt projections, the failsafe will not be triggered, and the debt would fall toward more sustainable levels. If our CBO-based re-estimates prove to be correct, however, the failsafe would force policymakers to enact further reforms -- or else face across the board cuts.
As an illustrative example, we assume the failsafe limits annual deficits to no higher than 2.75 percent of GDP (the Administration does not specify exactly how the failsafe would actually work, just that it would stabilize and reduce the debt and keep average deficits below 2.8 percent of GDP per year). Under this scenario, debt would be on a stable to declining path after 2015, falling below 75 percent of GDP. The failsafe would generate about $450 billion of additional deficit reduction by 2021. As a result, the President's Framework would genreate over $2.9 trillion in total deficit reduction over ten years (as opposed to nearly $2.5 trillion without the trigger). Moreover, hopefully the debt would be even lower as the failsafe would force policymakers to enact sensible deficit reduction measures.
Overall, the President's Debt Failsafe could be an excellent budgetary tool to help put and keep the country on a firm fiscal path -- though we believe it should be strengthened. For instance, we believe the failsafe should:
- Be matched with more aggressive savings and debt targets, such as stabilizing the debt by the end of the decade at or below 60% of GDP;
- Include annual savings targets that put the debt on a glide path to meet the medium-term debt target;
- Begin immediately with an annual savings target in place for FY 2012 and each of the subsequent years this decade;
- Include a broader base of all spending programs as well as tax expenditures, to provide added incentives to put in place the policies to avoid triggering the failsafe.
Such a failsafe would be a welcome addition to any deficit reduction plan and we are pleased the President recommended such a mechanism as part of his proposal.
This morning, CRFB released a paper analyzing President Obama's new budget framework which the President laid out last week in a speech at the George Washington University. In this paper, we find that the President's Framework saves $2.5 trillion over 10 years, a substantial improvement over the President's February budget request. By comparison, we find that the House budget plan -- based on the budget proposal from House Budget Committee Chairman Paul Ryan (R-WI) -- and the Fiscal Commission plan each save just over $4 trillion over the period.
As our readers know, CRFB is a big proponent of the Independent Payment Advisory Board (IPAB) created under health reform to control Medicare cost growth. In the health care paper from our Let's Get Specific series, we suggested potential ways to strengthen IPAB. Today, Ezra Klein offered some more good ideas for how to improve IPAB in his blog:
1) Right now, its mandate is to lower costs through the system. The agency should be similarly focused on quality. Quality is important, and it matters for both the rich and the poor.
2) Hospitals are exempt till 2018. They shouldn’t be.
3) The IPAB should have the same powers in Medicaid that it does in Medicare, and it should at least have an advisory role in the exchanges.
4) Right now, the IPAB is limited to reforming how and how much providers are paid. It’s not allowed to make reforms that “ration” care, that change benefit design, or that change the amount or structure of premiums and cost sharing. Those strictures should be removed. The president’s budget, which would allow IPAB to venture into designing value-based insurance packages, is a good first step, but it’s not enough.
As we have been looking at a number of fiscal plans for the US recently, the IMF has a useful appendix in its most recent Fiscal Monitor on what has worked and what has failed in past fiscal consolidation attempts (a topic we have delved into in the past).
Of course, there is considerable uncertainty as to how much various fiscal plans will actually reduce the deficit due to varying baselines. To see what has worked in the past and what hasn't, the IMF looked at medium-term deficit reduction attempts since 1976 from across the G-7 countries. On average, the plans studied intended to reduce their three-year fiscal deficits by 1.7 percent of GDP, but only succeeded in reducing deficits by 0.9 percent of GDP. Overall, spending cuts ended up much smaller than expected, while revenues proved higher than expected.
In doing this comparison, the IMF learned many lessons about what makes a successful fiscal plan.
- Initial ambition matters: Not surprisingly, going big makes it more likely for a plan to succeed in making the adjustments necessary. While this does not guarantee that a plan will meet those expectations, a plan that fails to meet its ambitious goals may still achieve large enough deficit reduction to successfully alter a country's fiscal path.
- Growth matters: As expected, economic growth -- or lack thereof -- makes a substantial difference in the fiscal outlook. Many plans were derailed by sudden financial crises that forced governments to reverse course (Japan in 1997, Britain in the late 2000s). On the flip side, higher than expected growth helped many plans exceed expectations, such as deficit reduction efforts in the US and Canada in the mid-to-late 1990s. To minimize risk for fiscal plans, the IMF suggests making longer term fiscal targets that allow for responses to negative growth shocks while still keeping an eye on the prize. Also, it would help to coordinate government so that, for example, monetary policy is kept looser in order to minimize the short-term economic harm of the cutbacks.
- Structural reforms: The IMF found that plans which included structural reforms seemed more likely to reach their goals than those without. This point underscores the fact that fiscal debates need to be grounded in ideas about how our government should work. This should be encouraging for the US, since any legitimate fiscal plan will likely have to contain some structural reforms, whether it be in entitlements, in the tax code, or elsewhere.
- Balance, balance, balance: There is no universal optimal spending and revenue balance in a fiscal plan, according to the IMF: "The revenue-expenditure mix of fiscal consolidation plans needs to reflect country-specific societal preferences and structural fiscal characteristics." Thus, the definition of balance may be open to interpretation based on the problems a country faces and the societal-preferences for size and scope of government.
- Get the public on board: As was hinted at in the quotation in the last paragraph, the IMF believes that public support for a plan is important. Specifically, the IMF says that governments must educate the public about their country's fiscal issues and explain how those issues could be confronted in a credible matter.
Clearly, the various lessons offered by the IMF have inherent tradeoffs. Certain structural reforms may very well be unpopular with the public. Striving to be ambitious or inclusion of certain pro-growth policies may sidetrack policymakers from getting the right balance. These are just a few examples of the challenges that lawmakers face in constructing a fiscal plan.
The IMF provides yet another useful reminder that it's not just about whether you cut and how much you cut, it's also about how you cut.
The Congressional Budget Office has released its full analysis of President Obama's FY 2012 budget request. While the new report goes into greater detail, it contains no baseline changes or budget projection changes from the preliminary analysis CBO released in March. The main new analysis in this report is the economic analysis of the President's budget in which CBO analyzes what will happen to fiscal policy under the budget request.
CBO goes into two separate analysis of the President's request: one estimating the short-term effects through 2016 and another estimating the effects from 2017-2021. Using its models, CBO finds that the President's policies will likely have an economic boost relative to current law from 2012-2016 and lower economic output from 2017-2021. From 2012-2016, CBO finds that the President's spending policies would amount to an "increase in transfer payments and reductions in purchases of goods and services." This, along with the lower tax rates scheduled relative current law leads CBO to project an overall economic stimulative effect, but would nevertheless increase the cost of his policies between $10 billion and $30 billion in this time frame.
From 2017-2021, CBO projects that President Obama's policies would decrease economic output, mainly due to the potential loss of capital stock primarily resulting from larger then current law projected deficits. While the lower tax rates would likely mitigate this effect, when combined with decreased spending and increased deficits the result is still a net reduction in economic output under this projection. CBO projects that these policies could cost up to $217 billion on the one hand, or could actually reduce fiscal deficits by as much as $8 billion on the other. The large range stems in part from different economic modeling used.
Overall, while President Obama's FY 2012 budget request is still rather lackluster when it comes to deficit reduction, he deserves significant credit for releasing his new budget framework last week, laying out $4 trillion in deficit reduction over the next 12 years. In many ways, the President's new framework is a complete revision of his FY 2012 budget request and will receive much of the focus going forward.
Today, the S&P has cut the US ratings outlook from stable to negative, while maintaining our triple-A rating. While this does not represent a direct hit to the nation's credit, it serves as yet another warning that a downgrade may be in the near future.
One of S&P's credit analysts, Nikola Swann, said that because lawmakers have not agreed on a fiscal plan and debt continues to rise, S&P believes that there is a one-third chance that the US will be downgraded.
This is not the first time that the US has been warned about possible hits to its AAA rating. Back in December, on the verge of the tax cut extension being passed, Moody's announced that passage of the deal would increase the likelihood that they would downgrade the US's rating. Also, in August of last year, S&P sovereign rating committee chairman John Chambers urged Congress to take a close look at the Fiscal Commission recommendations once released (not yet out at the time) and act soon or risk hurting our credit standing.
This time, though, assistant Treasury secretary Mary Miller shot back at the S&P warning, saying, "We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation." Given the developments of the past few weeks, we are optimistic that she may be right, but this does not change the fact that our current fiscal path is unsustainable.
Happy Tax Day – Today is about the consequences of procrastination for the great many waiting until the last minute to file their federal income tax returns. It is also the time when the most consideration is given to the costs and benefits of the federal government. To mark the occasion, CRFB issued a paper examining the top ten tax policy developments of the past year and the Bottom Line filed a “Special 10/40” to accompany it. By the way, you can thank the other government in Washington, DC for the extra weekend to work on your taxes. The District of Columbia’s Emancipation Day was observed on Friday the 15th, prompting the IRS to move the filing deadline up a business day because regulations forbid it to fall on a weekend or holiday.
Debt and Taxes – It is fitting that just ahead of the big day taxes grabbed the limelight. In his major fiscal policy address on Wednesday President Obama refused to again renew the 2001/2003 tax cuts for the wealthiest families when they expire in two years. And the strategy he offered for reducing the national debt included cutting about $1 trillion in spending from the tax code. As it so happens, CRFB offered some excellent guidance just before the speech on how to reduce tax expenditures. CRFB President Maya MacGuineas co-authored a paper with Martin Feldstein and Daniel Feenberg on Capping Individual Tax Expenditure Benefits and CRFB Policy Director Marc Goldwein co-wrote Less is More: The Modified Zero Plan for Tax Reform with Paul Weinstein. And don’t forget CRFB’s Let’s Get Specific paper on tax expenditures. Furthermore, former Federal Reserve Chair Alan Greenspan told Meet the Press Sunday that all the 2001/2003 tax cuts should expire. The debate over the role of revenue in reducing the debt will only get more heated from here on out.
President Goes on Offense – With the enthusiasm of someone who just got a big IRS refund, President Obama laid out an ambitious framework for tackling deficits and debt based on the recommendations of his Fiscal Commission in his big speech. The plan reduces the deficit by $4 trillion in 12 years or less. He argued for putting everything on the table and dealing with all parts of the budget. CRFB praised the remarks and the President’s leadership. This week President Obama will talk about his goals for debt reduction at a series of events across the country.
Gang of Six Continues Work – Like the tax professionals who are swamped this time of year, the bipartisan Gang of Six senators continues its efforts to devise a comprehensive fiscal plan. The group hopes to have something for their colleagues when they return from the two-week spring recess. Senate Budget Committee Chair Kent Conrad (D-ND), a member of the group, aims to unveil his budget resolution shortly after the recess. Group members Mark Warner (D-VA) and Tom Coburn (R-OK) both said Sunday morning that the group is close to an agreement. While some have speculated that the Gang of Six would be supplanted by the group of lawmakers that the President invited to have regular meetings with Vice President Biden starting next month, early indications are that there is no enthusiasm among congressional leaders for this approach. Republicans have yet to name any of their negotiators to the Biden talks. The Democrats named committee chairs and members of party leadership who will likley toe the party line: Senate Appropriations Committee Chair Dan Inouye (D-HI), Senate Finance Committee Chair Max Baucus (D-MT), House Budget Committee Ranking Member Chris Van Hollen (D-MD) and House Assistant Democratic Leader James Clyburn (D-SC).
FY 2011 Budget Finally Resolved – The President signed a resolution funding the federal government for the rest of the fiscal year on Friday, exactly one year after Congress missed a deadline to adopt a budget blueprint and a full six months into the fiscal year. [If only we could be so lax in doing our taxes.] Total discretionary spending for 2011 is set at $1.050 trillion. The whole affair underscored the desperate need for fixing the dysfunctional budget process. The Peterson-Pew Commission on Budget Reform provided a sound blueprint for budget process reform in the report, Getting Back in the Black.
The Other Deadline – April 15 isn’t only the traditional deadline for filing federal income tax returns, it is also the date by which Congress is obligated by statute to adopt a budget resolution for the upcoming fiscal year. The House met the deadline, barely, passing on Friday the FY 2012 budget blueprint crafted by House Budget Committee Chair Paul Ryan (R-WI). The budget reduces the deficit by over $4.4 trillion over ten years. The odds of this passing the Senate are not good and with Congress being on recess for the next two weeks, the deadline has been completely missed. Absent a bipartisan breakthrough, we could be going through the whole drama again.
Limits, Caps and Triggers – Raising the statutory debt limit will be the next big fiscal battle in Washington and it could make the 2011 budget fight look as straightforward as the 1040EZ. Many lawmakers want to pair a debt limit increase with measures to limit spending such as a balanced budget amendment and/or spending caps. Although he prefers a “clean” debt ceiling increase, in his speech President Obama discussed a “debt failsafe” trigger that could possibly be the basis for a compromise. A trigger would kick in if the debt does not fall as far as projected, prompting additional spending or revenue changes to meet the debt target. The Peterson-Pew Commission has done a lot of work on the concept and proposed a trigger mechanism last year in Getting Back in the Black to ensure that fiscal targets are achieved. A new paper from CRFB offers recommendations for how the President's debt failsafe can be improved and implemented. For additional reading, see CRFB’s recent paper on responsibly raising the debt limit.
Key Upcoming Dates
- Deadline for filing federal income tax returns.
- Conference Board releases U.S. Leading Economic Indicators for March.
- Weekly unemployment claims data from the Department of Labor.
- Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.
- Treasury Secretary Geithner says that the U.S. will default on its obligations around July 8 if the statutory debt ceiling is not increased before then.
In the spirit of Tax Day today the Bottom Line presents its own special “10/40” (don’t worry; we aren’t filing this with the IRS).
Just saying the term “taxes” sends a shiver down one’s spine. We equate them with death and likewise avoid discussing the topic. As such, even though Tax Day is here, the fiscal discussion in Washington has been driven by a myopic focus on spending. The fact is that revenues are also a part of the federal budget equation and must have a prominent role in the conversation on how to get our fiscal house in order. Instead of death and taxes, we should be talking about debt and taxes, as well as spending. While you were assiduously avoiding the topic a great deal has transpired in the tax front.
A new paper from CRFB observes the top 10 tax policy developments of the past year. One of the biggest issues has been the growing prevalence (and increasing scrutiny of) tax expenditures. Below is a summary of the top 10 tax policy developments that are examined in more detail in the paper, along with a list of the top 40 tax expenditures, thus, 10/40.
Top 10 Tax Policy Developments of the Past Year [See a fuller description of each development here]
10. Record Low Revenue and Higher Spending in the Tax Code
Federal revenue has declined to its lowest level as a share of the economy (14.9% of GDP) since the mid point of the last century while tax expenditures—the exclusions, exemptions, credits, preferences and deductions that reduce tax liability and, thus, decrease revenue—have increased to over $1 trillion.
9. Senators Wyden, Gregg, and Coats Lead the Charge for Fundamental Tax Reform
If you think you have procrastinated when it comes to taxes, Congress has been particularly lax in addressing the subject. The last major reform occurred in 1986, but a few senators helped change the debate in Washington by putting forth bipartisan, comprehensive tax reform legislation that streamlines the tax code and broadens the tax base while lowering rates by eliminating many tax expenditures.
8. The 2010 Tax Deal Where Everyone Got Something (And Charged it to the National Credit Card)
A legislative stalemate over renewing the 2001/2003 tax cuts was resolved in December, not by compromising in the middle or finding ways to offset the costs, but by adding even more to the deficit—sacrificing fiscal responsibility in the name of political expediency. Compromising federal finances is not the type of breakthrough we need.
7. The Disappearing, Reappearing Estate Tax
The estate tax was in a state of flux last year. The so-called “death tax” lived up to its name when the tax itself died in 2010, only to be resurrected in 2011.
6. The VAT Gets Voted Down
Although a number of tax experts have called on the United States to augment (and/or partially replace) its income tax with a consumption tax, last April the Senate voted 85-13 on a “Sense of the Senate” against a Valued-Added Tax (VAT).
5. The Making and Breaking of Tax Pledges
A recurring theme through the year has been how tax pledges from politicians have constrained policy choices for lawmakers and obstructed the way for sensible policy reforms. Pledging what one will not do makes negotiation and collaboration much more difficult by taking options off the table at the outset.
4. Non-Story of the Year: Politicians Patched the Alternative Minimum Tax
Every year lawmakers enact an “AMT patch” to keep the AMT from hitting more people, and do so at great cost to the Treasury. This year, as part of the 2010 tax deal, policymakers extended AMT patches for another two years—adding about $140 billion to the deficit.
3. CUTGO Cuts Out PAYGO
One of the major rules changes undertaken by Republicans after they took control of the House involved replacing the “pay as you go” (PAYGO) rule with a new “cut as you go” (CUTGO) rule. Not only does it make it harder to pay for new legislation, but it leaves the door open for budget-busting tax cuts.
2. Not “Making Work Pay” Anymore
When the stimulus bill was enacted in 2009, CRFB and others were worried that many of the supposedly-temporary provisions in the legislation would be made permanent. Yet, in a rare occurrence in Washington, the “Making Work Pay” tax credit ended last year.
1. The “Zero Plan” Offers a Way Forward
The National Commission on Fiscal Responsibility and Reform (Fiscal Commission) zeroed in on tax expenditures with a sweeping tax reform proposal known as the “Zero Plan.” The idea behind the Zero Plan was to wipe out all tax expenditures in the code, set aside money for deficit reduction, and then lower tax rates as much as possible.
Top 40 Income Tax Expenditures Going Forward
|1||Exclusion of employer contributions for medical insurance premiums and medical care||1,071,210|
|2||Deductibility of mortgage interest on owner-occupied homes||609,180|
|3||Step-up basis of capital gains at death||357,080|
|5||Exclusion of net imputed rental income||302,800|
|6||Deductibility of nonbusiness state and local taxes other than owner-occupied home||292,290|
|7||Accelerated depreciation of machinery and equipment (normal tax method)||269,680|
|8||Capital gains (except agriculture, timber, iron ore, and coal)||256,280|
|9||Deductibility of charitable contributions, other than education and health||248,930|
|11||Exclusion of interest on public purpose state and local bonds||230,440|
|12||Capital gains exclusion on home sales||216,820|
|13||Deferral of income from controlled foreign corporations (normal tax method)||212,840|
|14||Deductibility of state and local property tax on owner-occupied homes||142,290|
|15||Exclusion of interest on life insurance savings||129,060|
|16||Social Security benefits for retired workers||129,040|
|18||Exception from passive loss rules for $25,000 of rental loss||83,750|
|19||Deduction for U.S. production activities||82,000|
|20||Individual Retirement Accounts||80,490|
|21||Exclusion of benefits and allowances to armed forces personnel||65,500|
|22||Deductibility of medical expenses||60,020|
|24||Earned income tax credit||45,060|
|25||Social Security benefits for disabled workers||41,240|
|26||Exclusion of workers' compensation benefits||40,940|
|27||Self-employed medical insurance premiums||38,840|
|28||Credit for low-income housing investments||36,070|
|29||Expensing of research and experimentation expenditures (normal tax method)||35,080|
|30||Exclusion of veterans death benefits and disability compensation||30,850|
|31||Exclusion of income earned abroad by U.S. citizens||30,500|
|32||Lifetime Learning tax credit||28,620|
|33||Deductibility of charitable contributions (education)||28,300|
|34||HOPE tax credit||28,280|
|35||Deductibility of charitable contributions (health)||28,110|
|36||Exclusion of interest on hospital construction bonds||26,760|
|37||Credit for employee health insurance expenses of small business||20,640|
|38||Inventory property sales source rules exception||18,770|
|39||Graduated corporation income tax rate (normal tax method)||17,840|
|40||Exclusion of interest on bonds for private nonprofit educational facilities||17,710|
Source: Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2012, Office of Mangement and Budget.
So, what can we expect for tax policy moving forward? In the immediate future the role of revenue in reducing the national debt will be a critical and hotly-contested debate. Calls for fundamental tax reform will steadily grow. The term “tax expenditures” (or perhaps “tax earmarks”) will increasingly become a part of the public lexicon as scrutiny intensifies and bipartisan support for addressing them solidifies. And quarreling over renewing the 2001/2003 tax cuts will heat up during the campaign season. Hopefully, by this time next year we will be able to talk about how comprehensive tax reform became reality.
Congressman Ryan has come under attack, recently, for the tax reform framework in the House Republican budget proposal. CBPP calls it "huge tax benefits for wealthy Americans" -- a point Paul Krugman echoes by arguing the Republican plan includes "huge tax cuts for corporations and the rich." Like these critics, we don't believe that now is the time to be cutting taxes given our current fiscal situation. But it isn't clear that the plan is any more regressive or progressive than the current tax code -- that depends on the precise details.
The plan in Congressman Ryan's budget calls for the Ways & Means committee to enact comprehensive tax reform, which reduces the top individual and corporate rates to 25 percent in a revenue-neutral manner. True, that means substantial rate cuts for those at the top -- but whether they disproportionately benefits from the plan depends on how the cuts are paid for.
Presumably, the Committee would finance the reduced rate by eliminating and scaling back tax expenditures. These deductions, exclusions, and preferences are for the most part regressive -- benefiting upper income taxpayers far more than those near the bottom.
An analysis from the Tax Policy Center, for example, found that the top quintile pays 11 percent less of their income in taxes due to tax expenditures, while the bottom quintile pays only 6.5 percent less. If you exclude the effects of the child tax credit and EITC, the bottom quintile pays only 1 percent less as a result of tax expenditures, compared to 11 percent at the top.
As can be seen, tax expenditures are not a progressive form of spending (in the tax code, yes, but spending nonetheless). This is true for a number of reasons, including that higher earners participate more in tax preferenced activities (like retirement savings and mortgages) and are more likely to be able to itemize their deductions. In addition, for many tax expenditures, the more you earn the more you get; someone at the 15 percent rate gets a 15 cent subsidy for spending a dollar on the same activity for which a high earner may get a 35 cent subsidy.
Given that, even rate reductions can be done in a way that is progressive after reducing/reforming tax expenditures. For example, the Fiscal Commission's "modified zero plan" would bring the top rate down to 28 percent, but still ask those at the top to contribute a higher share of their income to taxes (compared to a small tax cut for the bottom quintile).
CRFB policy director Marc Goldwein and Paul Weinstein explain this in a recent paper, arguing that rate-lowering, base-broadening reforms can increase economic efficiency and increase progressivity at the same time, in addition to reducing the deficit.
Whether the House Republican plan will do this of course depends on the details. There is currently not enough specificity to say one way or the other.
It is true that the House Republican tax reform plan does nothing to reduce the deficit, and could be greatly improved by dedicating a portion of the savings from reducing tax expenditures to improving the country's fiscal situation. But on the question of progressivity, critics should take a wait-and-see approach.
Just in time for Tax Day on Monday, the White House website has launched a taxpayer receipt. By entering what one has paid in federal taxes, the new tool allows users to view where their tax dollars go, with results broken down by category. Not only does the receipt improve transparency regarding how taxpayer money is spent, but it is a useful educational instrument that complements interactive tools like CRFB’s “Stabilize the Debt” online budget simulator in helping Americans get a better idea of the composition of the federal budget.
A bipartisan, bicameral group of legislators have also introduced legislation intended to make a taxpayer receipt mandatory. The bill requires an itemized tax receipt for each taxpayer. Senators Bill Nelson (D-FL) and Scott Brown (R-MA) are co-sponsors of the Senate version of the bill. Congressmen Jim Cooper (D-TN), Mike Quigley (D-IL), Todd Platts (R-PA), Aaron Schock (R-IL) and Dave Reichert (R-WA) introduced the legislation in the House.
The Peterson-Pew Commission on Budget Reform recommended making more information about the federal budget easily accessible to the public as a part of comprehensive reform of the budget process. The taxpayer receipt is a good step in that direction.
Last night, Congressman Jim Cooper (D-TN) withdrew from consideration his substitute amendment to the FY 2012 budget resolution that will be voted on today. His remarks submitted for the Congressional Record (presented in full below) explain his reasoning for withdrawing the measure and make the case for bipartisan, comprehensive action. Rep. Cooper is to be applauded for stepping up and improving the budget debate while building more momentum toward bipartisan action on the debt and deficit.
M. Chairman, I believe that America should solve its biggest problems in a bipartisan fashion. It takes Democrats, Republicans and Independents working together to find the best solutions. This is particularly true of budgets, which determine so much of the future of our great nation. Unfortunately, budget season is one of the most partisan times in Congress, despite the fact that the public has been demanding that we stop the bickering.
I have been working hard to offer this House the chance to vote on a budget that is modeled on the President’s Fiscal Commission, known as the Bowles-Simpson Report. I support this approach to budgeting because it is, so far at least, the only serious, bipartisan plan for reducing our runaway federal budget deficits. The Bowles-Simpson Commission received the support of Commission members as diverse as the liberal Democratic Senator Dick Durbin and the conservative Republican Senator Tom Coburn. The Commission received such widespread support because it did three things:
• Cut the deficit by $4 trillion over the next ten years;
• Shared the sacrifice: put every federal program on the table; and
• Provided a balanced approach: 2/3 spending cuts and 1/3 tax reform.
While there are many other important features of the Bowles-Simpson Report, it is important to understand that budget resolutions never include detailed recommendations of any reform plan. Budget resolutions only include a broad framework and mandate that the committees of jurisdiction figure out ways to achieve the necessary savings and reform. That’s why the Cooper Substitute makes House committees reduce the deficit by as much as Bowles- Simpson recommends, but does not tell them exactly how to do it.
I am proud to have the full support and vote of my Republican colleague, the gentleman from Virginia Frank Wolf, who worked with me to pass the Cooper-Wolf SAFE Commission Act to form a Fiscal Commission last Congress. The SAFE Act became the model for the Bowles-Simpson Commission. Frank Wolf has worked harder than any member I know to get the leadership of both parties, in both houses, and the White House, to take our budget deficit problems seriously and to act promptly in order to reduce their burden on future generations. Frank Wolf is a true leader, and he is, in my opinion, a genuine American hero on fiscal responsibility.
I appreciate the Rules Committee making the Cooper Substitute in order. I hope that this return to more open debates in the House becomes the norm so that the best ideas, not just the most partisan ideas, can reach the House floor. Chairman Dreier has already taken important steps in this regard so that the House can once again work its will, regardless of politics or party.
M. Chairman, I had hoped to offer my Substitute tonight, even though the hour is late, not believing that it ever had a ghost of a chance of passage, but believing that the votes deserved to be counted on this important proposal. The timing is not right, however, for several unforeseeable reasons.
Yesterday, the President made an important speech on the budget that, temporarily at least, has inflamed partisan passions on both sides of the aisle, making a vote tomorrow less likely to be a reasoned one. I think the President should be complimented for moving the debate in a positive direction, regardless of the spin that each side has given it. For example, if the President had called for $4 trillion of deficit reduction as recently as two months ago, he would have been denounced by many people. Yesterday, he was more favorably received. I give Republicans, particularly my friend, the gentleman from Wisconsin and Chairman of the Budget Committee Paul Ryan, credit for having moved the debate so far. Mr. Ryan, just like the President, has been unfairly vilified, which does nothing to reduce the debt burden on future generations. Finger-pointing does not solve problems.
Another crucial development is the sensitive nature of the quiet Senate negotiations on deficit reduction, particularly the so-called Gang of Six. We all realize that, because the other body is less partisan than today’s House, a comprehensive solution is more likely to originate in that chamber. The fact that Senators ranging from Durbin to Coburn have already supported Bowles-Simpson is proof. I do not think it is wise to risk doing anything to derail or impair those behind-the-scenes negotiations, which I am told by key senators in both parties could be the result of a premature House vote.
The day will come, probably with the necessary debt ceiling increase this summer, for a comprehensive, bipartisan solution to our deficit problem. For that to happen, the partisan passions of this budget debate must burn out. Members must go back home and brag about their favorite budget before they get realistic and agree on a spending plan that can actually pass the House and Senate and be signed into law by the President. Every day we wait to solve these problems costs us dearly; by some estimates, as much as $8 billion a day. I wish that this cycle of additional politics were not necessary – and I have done everything I can to avoid it – but there are no shortcuts in a democracy.
The time spent on the Cooper Substitute has not been wasted. Countless members in both parties have learned the contents of the Bowles-Simpson Report because they thought they might have to vote for a budget that embodies spending cuts of such size and tax reforms of such nature that it would actually make a difference. Nothing so concentrates the mind as the fear of voting. Numerous members of both parties have told me that they intended to support Bowles-Simpson either on a stand-alone basis or in addition to supporting another budget of their choice. I appreciate the interest and genuine goodwill that so many members have shown in asking questions, comparing alternatives, and making the tough decisions that are required by budgeting. I think that the work that I, and my allies like Frank Wolf, have done is important for laying the groundwork for an eventual bipartisan budget that will be required, no later than this summer, in order to start solving our nation’s deficit problems.
M. Chairman, this Congress must act very soon indeed to start solving our nation’s fiscal problems. I wish today were that day. I voted today for $38 billion in cuts to appropriations for the remaining few months of this year, but that is only a tiny beginning and only affects 12% of our federal budget. Serious reform means getting the House to pass something as large, as important, and as bipartisan as Bowles-Simpson-sized reforms. Bowles-Simpson is not the only solution for our problems, but it is the fastest, fairest, and most feasible solution that we know of today. As soon as this House is able to consider it calmly and sensibly, the House must do so.
Unlike the haggling over spending for this year, which finally ended today with passage of legislation funding the federal government for the rest of the year, the debate over the FY 2012 budget has produced a broader, longer-term focus on our problems and possible solutions.
Several thoughtful and ambitious proposals have been put forth recently. While each has its merits and has furthered the debate, none of them alone has offered the type of approach that can achieve the bipartisan support necessary to be enacted. Fortunately, Congressman Jim Cooper (D-TN) has enhanced the debate by presenting as an alternative a bold, yet balanced plan that can garner votes from both sides of the aisle. Cooper’s substitute amendment to the FY 2012 budget being debated in the House is based on the bipartisan plan produced by the White House Fiscal Commission. Unlike other Congressional alternatives presented thus far, it takes the approach that everything must be on the table and tackles all parts of the budget in a significant way.
Among its provisions, the measure sets annual discretionary spending caps and provides specific deficit reduction targets for each committee to meet. It also calls for fundamental tax reform that broadens the tax base, simplifies the tax code, and reduces or eliminates tax expenditures. It also sets specific annual deficit and debt targets, and sets a target for total revenue at 21 percent of GDP by 2020.
The budget plan also includes an “across-the-board abatement” to ensure that discretionary spending caps are met and a “debt stabilization process” to keep the budget on track to meet long-term targets. The trigger mechanism to enforce the budget targets is a critical provision. The Peterson-Pew Commission on Budget Reform has recommended annual targets and triggers to enforce them. The trigger specified in the Cooper amendment only prescribes a process in which Congress and the President must consider additional actions to ensure that the debt and deficit targets are realized, while the Peterson-Pew approach would provide for automatic reductions in spending and increases in revenue if Congress and the President failed to act.
The budget votes on the House floor planned for tomorrow, unfortunately, will be more about political posturing than finding common ground. The votes will fall along ideological lines and it is a foregone conclusion that the budget proposal from House Budget Committee Chair Paul Ryan (R-WI) will pass. It is equally certain that the Senate will not support the Ryan plan.
The proposal from Rep. Cooper, along with the ongoing work of the bipartisan Senate “Gang of Six”, advance the fiscal debate in the right direction.
The House and Senate today approved of legislation funding the federal government for the rest of the fiscal year, ratifying the agreement reached late last week that averted a government shutdown. For good measure, lawmakers flirted with one more deadline as the “bridge CR” that has been financing government operations since last Friday night’s last-minute deal was set to expire tomorrow.
The resolution cuts federal spending by about $38 billion from the 2010 spending level, providing approximately $1.050 trillion in total funding for FY 2011.
The House passed the bill first on a 260-167 vote. While 59 Republicans voted against the measure because it did not cut enough, their votes were more than offset by 81 Democrats who voted for the bill. The Senate then followed suit on a 81-19 vote.
When President Obama signs the legislation, it will bring an end to the 2011 budget process six months after the fiscal year began and a full year after the date Congress is required to produce a budget blueprint. Under law, Congress was supposed to enact a budget resolution by April 15 of last year.
Suffice it to say, the budget drama has underscored how severely dysfunctional the federal budget process has become and how ill-equipped it is to deal with the substantial fiscal challenges we face. The Peterson-Pew Commission on Budget Reform has issued ambitious, yet sensible recommendations for reforming the process that would not only make it more effective and transparent, but would also facilitate concrete action to reduce the federal budget deficit and national debt.
As the FY 2012 budget process moves forward with a House vote tomorrow and debate continues on how to reduce deficits and debt, we must keep in mind that budget process reform will play a key role in putting the country back on a sound fiscal course.
Rep. Chris Van Hollen (D-MD), the ranking member of the House Budget Committee, has released his own budget proposal to counter that of Committee Chairman Paul Ryan (R-WI).
Van Hollen's plan reaches primary balance in 2018 by reducing the deficit by over $1.2 trillion more than President Obama's official FY 2012 budget proposal. The Van Hollen budget:
- Echoes the President's call for a five-year non-security spending freeze, but with different policy recommendations.
- Cuts security spending $308 billion below President Obama's request.
- Provides no funding for Overseas Contigency Operations past 2015, saving $309 billion.
- Reduces Agriculture Subsidies by $20 billion.
- Patches the AMT and SGR.
- Approves the level, but not the specifics, of President Obama's tax reform.
- Extends 2001/2003 tax cuts for families earning below $250,000.
- Creates Infrastructure Bank and fully funds Pell Grants and Food Stamps at the President's level.
This plan, while not as aggressive in strict deficit reduction as the other plans released, does have some meaningful deficit reduction. It does not go after the main drivers of our long-term debt, notably health care, but it does deserve praise for offering some specifics.
Additionally, the Congressional Black Caucus has released a budget blueprint of its own. The plan lowers deficits by $3.96 trillion over the next ten years. This represents yet another serious plan to reduce the nation's debt and deficits, including options for reforming the tax code and dealing with health care.
Some of the things the plan calls for are (savings are over ten years):
- Tax capital gains and dividends as ordinary income, raising an additional $950 billion.
- Financial Speculation Tax of 0.25 percent on stock transactions, raising an additional $835 billion.
- Millionaire surcharge tax of 5.4 percent, raising an additional $573 billion.
- Close certain corporate tax loopholes, raising an additional $1.3 trillion.
- Creation of a public option for health care, which would save $88 billion.
- Various increases in spending for investment.
Yesterday, Senators Lindsey Graham (R-SC), Rand Paul (R-KY), and Mike Lee (R-UT) introduced the Social Security Solvency and Sustainability Act – Social Security reform legislation which would bring the program into 75-year actuarial balance through significant increases in the retirement age and by slowing the growth of benefits for higher earners. As CRFB has said before, raising the retirement age is a good idea. Working longer is one of the best things people can do for their own retirement, for the economy, and for the fiscal situation. And raising the retirement age would significantly improve Social Security's long-term finances.
The plan would speed up the increases in the normal retirement age that exist under current law, increasing 3 months each year starting in 2017 and reaching 67 by the year 2020 instead of 2027. The plan would continue to increase the retirement age 3 months a year thereafter until reaching 70 in 2032, and would then index it to life expectancy. By 2085, the retirement age would reach 72 and 3 months.
The plan would also increase the early retirement age from 62 to 64 by 2028, which many experts believe would substantially improve work incentives (though it would have almost no direct effect on Social Security's finances).
The plan also limits benefit growth for higher earners for new retirees. Beginning in 2018, new retirees will have benefits calculated based on wage-growth for their first $43,000 of lifetime earnings, and based on price-growth for earnings over the first $43,000.
This is a serious and thoughtful proposal, and we need more of them if we are going to put Social Security on a sustainable path. Some mixture of benefit cuts and tax increases will be necessary and should be enacted sooner rather than later.
Today, President Obama outlined his plan for putting our country back on a firm fiscal path to deal with our long-term debt problem. This is a huge step forward and an important development in confronting our fiscal challenges. (Click here to read CRFB's reaction to the President's plan.)
- Cutting non-security discretionary spending by $750 billion by 2023
- Cutting $400 billion in security spending by 2023
- Strengthening the Independent Payment Advisory Board (IPAB) to reduce health-care spending growth
- Eliminating the 2001/2003 tax cuts for upper income tax brackets when they expire in two years
- Reforming the tax code in a manner that simplifies the system and raises revenue, namely by limiting itemized deductions for the wealthiest 2 percent of Americans (saving $320 billion over ten years) and building on the Fiscal Commission’s tax reform plan that substantially reduces tax expenditures
- A “debt failsafe” trigger to ensure that, if by 2014 the debt-to-GDP ratio is not projected to stabilize by the end of the decade, spending cuts and reductions to tax expenditures will be required. The trigger is an important addition along the lines recommended by the Peterson-Pew Commission on Budget Reform.
Today, the Congressional Progressive Caucus (CPC), a liberal group of Democrats in the House, released its own FY 2012 budget, "The People's Budget," which offers "a clear contrast" to the budget proposed by House Budget Committee Chair Paul Ryan (R-WI).
CPC's plan, coming on the same day that President Obama releases his long-term fiscal blueprint, takes a more liberal approach focused on defense cuts, and tax increases on upper-income Americans that are larger than those proposed by President Obama in his FY 2012 budget. The plan would lower the deficit by $5.6 trillion over the next ten years, achieving a surplus of $30.7 billion and debt of 64.1% of GDP in 2021, according to estimates provided by the CPC.
To reach these levels CPC proposes spending cuts of $869 billion and revenue increases of $3.9 trillion. It covers most areas of the budget including tax reform, defense, education, transportation and housing, and changes to Social Security and health care. Estimates of the plan avoid two major gimmicks by including in its baseline an extension of the AMT patch and "doc fix," two costly provisions not included in CBO's baseline, but which are routinely added by Congress. Overall, major measures in the plan include:
- Allowing all of the 2001/2003 tax cuts to expire at the end of 2012, except those on upper incomes, which are eliminated immediately, but the CPC would retain some tax credits dedicated to middle-class families and children.
- Implementing Rep. Schakowsky's Fairness in Taxation Act, which creates several new high-income tax brackets and taxes capital gains and qualified dividends as normal income for those with incomes above $1 million.
- Limiting itemized deductions to 28% (although the CPC is not clear on this, we assume that itemized deductions can only reduce up to 28% of an individual's tax liability).
- Modifying the estate tax to include a $3.5/$7 million exemption with progressive rate increases as the value of the estate rises.
- Taxing U.S. corporate foreign income as it is earned.
- Eliminating tax expenditures for oil, gas and coal companies, and reinstating Superfund taxes.
- Enacting a financial crisis responsibility tax (the same as the one proposed by President Obama) and a financial speculation tax.
- Enacting a health care public option.
- Increase the taxable maximum to 90% on employee side of earnings for the payroll tax and eliminate the taxable maximum on the employer.
- Ending emergency funding for Overseas Contingency Operations.
- Investing $1.45 trillion in job creation, education, clean energy, broadband infrastructure, housing and research and development.
- Creating a National Infrastructure Bank focusing on transportation at a cost of $213 billion.
- Increasing motor fuel taxes by 25 cents, dedicated to the Highway Trust Fund.
This plan, which does achieve significant debt and deficit reduction, is unlikely to receive bipartisan support. Whereas Ryan’s budget left revenue unscathed (and barely touched defense spending) the CPC plan goes in the opposite direction, relying heavily on tax increases. While it is a serious proposal with specific recommendations, as we said about the Ryan budget, it is time to develop a solution that can garner broad support. Only by working together across the partisan divide can policymakers achieve the Goldilocks plan that is "just right" -- an effective plan that is realistic enough to be passed by Congress and enacted by the President.