The Bottom Line
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.
On Tuesday, April 12, the Moment of Truth (MOT) project and the Progressive Policy Institute (PPI) co-hosted an event at the Johns Hopkins University School of Advanced Governmental Studies to focus on the urgent need for comprehensive reform of the U.S. tax code. PPI president Will Marshall got the event started and introduced the first speaker, Sen. Michael Bennet (D-CO), who spoke of the many reasons we must tackle our fiscal problems comprehensively and in a bipartisan manner. He noted from his recent experiences on the campaign trail and what he has seen at the many local town-hall meetings he has attended that our nation’s debt and deficits “came up in every single meeting”. He emphasized that voters are ready for Washington to lead on fixing our fiscal problems, that they understand that it will require shared sacrifice, and that the time to act is now.
Following Sen. Bennet was a panel discussion between Diane Rogers of the Concord Coalition, Paul Weinsten of PPI, Alan Viard of the American Enterprise Institute, and moderator Howard Gleckman of the Tax Policy Center on Reforming the Tax Code: The Case for the Modified Zero Plan. The panelists’ discussion focused on the tax provisions included in the final report of the National Commission on Fiscal Responsibility and Reform (Fiscal Commission). Specifically, they discussed the “Modified Zero Plan”, which called for reducing and consolidating tax rates; eliminating the Alternative Minimum Tax, eliminating most tax expenditures; reforming provisions for housing, health, charitable giving, and retirement; and raise $800 billion in revenue over the decade. The Modified Zero Plan’s potential bipartisan appeal in that it would drastically lower tax rates while also raising revenue was a main focus of the conversation, as was the important progress made by the Fiscal Commission on moving the tax reform debate forward.
Paul Weinstein and Marc Goldwein (CRFB’s policy director and a speaker on the event’s second panel) also released their paper on the Modified Zero Plan at the event. Less is More: The Modified Zero Plan for Tax Reform offers a more in-depth analysis of the plan, which both authors helped develop while working on the staff of the Fiscal Commission. (Click here to read the paper.)
Following the first panel were speakers Sen. Ron Wyden (D-OR) and Sen. Daniel Coats (R-IN). Sen. Wyden spoke about the tax reform legislation he and Sen. Coats recently co-sponsored and a few of its many advantages, including job creation, increased global competitiveness, and the fact that a simplified tax code would drastically reduce its significant administrative burden. Sen. Coats talked about the more wide-ranging goals of comprehensive tax reform, including simplicity, economic growth, and bipartisan appeal. He reemphasized the point that comprehensive tax reform must be part of any upcoming fiscal reform.
After a quick break for lunch, former Fiscal Commission member Dave Cote (president and CEO of Honeywell International) gave a great talk about tax policy’s essential role in increasing the United State’s global competitiveness. He was followed by the second panel of the day, which discussed possible failsafes and triggers designed to cut tax expenditures across the board in order to force action on reform. Panelists included Leonard Burman of Syracuse University, Marc Goldwein of CRFB, Joseph Minarik of the Committee for Economic Development, and moderator Derek Thompson of The Atlantic. The discussion focused on the need for tax expenditure reform and that any tax reform fail-safes should encourage action as well as ensure reasonable results if action is not taken.
Event Participants and Agenda
Johns Hopkins University, DC Campus
1717 Massachusetts Ave, NWWashington, DC 20008
Lecture Hall LL7
Tuesday, April 12, 2011
- Sen. Michael Bennet (D-CO)
- Sen. Ron Wyden (D-OR)
- Sen. Daniel Coats (R-IN)
- Dave Cote, National Commission on Fiscal Responsibility and Reform
- Diane Lim Rogers, Concord Coalition
- Paul Weinstein, Johns Hopkins University
- Alan Viard, American Enterprise Institute
- Howard Gleckman, Tax Policy Center (Moderator)
- Leonard Burman, Syracuse University
- Marc Goldwein, Committee for a Responsible Federal Budget
- Joseph Minarik, Committee for Economic Development
- Derek Thompson, The Atlantic (Moderator)
This event was cosponsored by The Progressive Policy Institute and the Moment of Truth project, and is being hosted by the Center for Advance Governmental Studies at The Johns Hopkins University.
With Tax Day rapidly approaching and our nation’s fiscal problems being fiercely debated, the timing of today’s events couldn’t be more perfect. We’re talking about this morning’s event – Tax Reform Now: Cutting Rates and Deficits – and the publication of two new papers, each of which present a unique approach to tax reform.
Capping Individual Tax Expenditure Benefits, written by Martin Feldstein, Daniel Feenberg, and CRFB president Maya MacGuineas, presents a new approach to tax reform: capping the amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, the paper's analysis focuses on the effects of setting the cap at two percent of the individual's adjusted gross income. It estimates that in 2011, this reform would raise $278 billion in revenue and simplify the tax code by pushing 35 million people into the standard deduction. The paper looks at how this approach would affect individual tax expenditures and revenues in general, as well as the effects of setting caps at different levels. (Click here to read the full paper)
Less is More: The Modified Zero Plan is written by CRFB policy director Marc Goldwein and Paul Weinstein and published by the Progressive Policy Institute. The paper explains the evolution of the Fiscal Commission's "Modified Zero Plan" for tax reform, a plan which both authors helped to develop while on the Commission staff. The Modified Zero Plan would reduce and consolidate tax rates, eliminate the Alternative Minimum Tax, eliminate most tax expenditures, reform provisions for housing, health, charitable giving, and retirement, and raise $800 billion in revenue over the decade. The authors argue that this approach would encourage economic growth, simplify the tax code, reduce the tax gap, increase progressivity, and improve the nation's fiscal situation. (Click here to read the full paper)
The Modified Zero plan was also the focus of one of the panels at today’s tax event hosted at Johns Hopkins University, Tax Reform Now: Cutting Rates and Deficits. Much of the conversation about the plan focused on its potential bipartisan appeal; a plan that lowers rates across the board, broadens the base, and manages to raise more revenues (not to mention makes the system fairer, simpler, and more efficient) is a reform that could have something for members of both parties. Co-sponsored by the Moment of Truth project and the Progressive Policy Institute, the event also featured a panel on designing enforcement mechanisms or triggers in order to force action on tax reform. Both panels featured expert speakers and offered interesting and thoughtful insight into reforming our tax code.
The event also featured several prominent speakers, including Sen. Michael Bennet (D-CO), Fiscal Commission member Dave Cote, as well as Sens. Ron Wyden (D-OR) and Sen. Daniel Coats (R-IN), who recently proposed their own tax reform bill. All of the speakers emphasized the urgency of comprehensive, bipartisan tax reform. Many also praised the tax reform proposals put forth in the final report of the Fiscal Commission.
The event was a wonderful success and really showed how much bipartisan support there is behind comprehensive tax reform. Hopefully momentum behind this issue will continue to build and real progress will be made in the near future.
PS: Click here for some of CRFB's ideas on tax expenditures.
In her recent column for the Economix blog of The New York Times, CRFB board member Laura D'Andrea Tyson focuses on an issue that's received considerable attention in recent weeks -- the U.S. corporate tax system. She mentions various approaches to reforming the way we tax corporations and potential advantages of reducing the corporate tax rate.
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.
Today, lawmakers released the final details of the budget deal struck late Friday night. CBO also released a final score of the appropriations for the remainder of the year. The deal will cut spending by $38 billion compared to 2010 levels and $78 billion compared to the President's budget.
Looking at each of the appropriations categories, most will be seeing a reduction from 2010 levels--with the largest savings (percentage-wise) coming from Commerce-Justice-Science (21 percent reduction) and transportation spending (24 percent reduction). Overall, defense spending will increase by $5 billion this year.
It should be noted that of the $38 billion in spending cuts, nearly half stem from changes in mandatory programs (or CHIMPS in budget-speak) and so do not represent a permanent reduction in allocations for some appropriations categories. For instance, changes to highway contract authority and other mandatory savings will be re-categorized as mandatory savings at the end of the year. In addition, a reduction of $6.2 billion came from the 2010 census, which was just a temporary increase for 2010 and helped to make overall Commerce-Justice-Science cuts appear larger.
|(Budget Authority, Billions)||FY 2010 Enacted||President's 2011 Request
||FY 2011 Budget Deal||FY 2011 Budget Deal (Percent Below 2010)|
|Agriculture, Rural Development, FDA||$23||$23||$20||15%|
|Commerce, Justice, Science||$64||$61||$53||21%|
|Energy and Water Development||$33||$35||$32||3%|
|Financial Services and General Government||$24||$25||$22||9%|
|Labor, Health and Human Services, Education||$164||$171||$158||4%|
|State, Foreign Operations||$50||$57||$48||4%|
|Domestic and International Spending (Subtotal)||$462||$478||$422||9%|
|Defense, Security, and Veterans Spending|
|Military Construction, Veterans Affairs||$77||$76||$73||5%|
|Security Spending, Subtotal||$627||$651||$628||0%|
|Total, Regular Discretionary||$1,087||$1,128||$1,050||4%|
* Numbers rounded to the nearest billion. Totals may not compute due to rounding.
It was reassuring to see lawmakers reach a bipartisan agreement--albeit in the 11th hour (literally!)--on an issue that became very contentious. Now the debate in Washington can move on to more important issues, including the debt ceiling and our broader fiscal challenges. We hope that lawmakers can continue to search for bipartisan solutions to our mounting deficits.
Update: Rep. Chris Van Hollen (D-MD), the ranking Democrat on the House Budget Committee, also offered his support for Fiscal Commission's recommendations saying that "The basic approach of Bowles-Simpson, which is to look at both sides of the deficit equation, that is revenue and spending ... I believe does provide, in that sense, an important starting point."
We blogged yesterday that President Obama will be putting forth his own plan to reduce the deficit this week. It's now being reported that in presenting his plan, he will offer support for the final report put forth by his National Commission on Fiscal Responsibility and Reform late last year.
The final report of the Fiscal Commission was supported by a bipartisan majority of Commission members and reduces the deficit by nearly $4 trillion through 2020. The bipartisan group of senators known as the "Gang of Six", led by Sens. Mark Warner (D-VA) and Saxby Chambliss (R-GA), have been working on a comprehensive deficit-reduction plan based on the Fiscal Commission's recommendations.
Click here to read the full article in this morning's Washington Post, and make sure to check back with The Bottom Line for important updates.
Deal on FY 2011 Spending Reached – A government shutdown was averted on Friday by an 11th hour agreement on federal spending for the rest of the fiscal year. The deal will cap 2011 appropriations at just under $1.050 trillion, reducing spending by about $38 billion from current levels. Congress passed a one week extension shortly after the deal was announced to allow time for the agreement to be drafted into legislation and enacted. The House is scheduled vote on the legislation enacting the budget agreement on Wednesday, with the Senate likely voting afterwards. With the often-tense negotiations resulting in an accord which prevents an embarrassing shutdown of federal government operations, the question is: did the process improve the prospects for more bipartisan consensus down the road by establishing trust and good will between the leaders who conducted the negotiations, or will the bases of both parties that are unhappy with the deal entrench deeper for the next battle, making agreement more difficult?
On to the Next Budget – The day after voting on the budget for the remainder of this year, the House is set to begin consideration of next year’s budget on Thursday and a vote on the floor is scheduled for Friday. The GOP-controlled House is expected to pass the budget resolution unveiled by House Budget Committee Chairman Paul Ryan (R-WI) last week, which would reduce the deficit by more than $4.4 trillion over the next decade as compared to President Obama’s FY 2012 budget proposal issued last month. The Ryan budget would reduce the national debt to 67.5 percent of GDP by 2021, largely through deep cuts to domestic discretionary spending and major restructuring of Medicaid and Medicare. Ryan’s plan will have some company in the budget debate; last week the Republican Study Committee (RSC) released a budget with even more ambitious spending cuts, reducing debt to just over 55 percent of GDP in 2021. The RSC’s polar opposite, the Congressional Progressive Caucus (CPC), also plans to produce a budget plan. According to the CPC outline, it will reduce national debt to 64.4 percent of GDP by 2021. The CPC relies heavily on increased revenues, wheareas the Ryan and RSC proposals do not raise taxes. The CPC plan would result in spending and revenues both balanced at 22.3 percent of GDP by 2021, while the RSC plan would freeze both levels at 18 percent of GDP. The House Democratic leadership and the Congressional Black Caucus are also expected to produce budget plans. While all these ideas are welcome and the shared goals of reducing the debt are a very encouraging sign, it is time for both sides to put everything on the table and get to work on developing a plan that can achieve bipartisan support and that deals with all parts of the budget. Senate Budget Committee Chair Kent Conrad (D-ND) is holding off on his budget resolution while the “Gang of Six” senators continue their talks on a comprehensive fiscal plan that is based on the recommendations of the White House Fiscal Commission. According to the New York Times, the group is close to announcing an agreement.
Debt Ceiling Debate Reaching a Peak – With the concerns over a government shutdown addressed, eyes are turning to the next big battle, over increasing the statutory debt limit. The debt ceiling fight could make the just concluded shutdown showdown look mild in comparison, with the stakes much higher. Treasury Secretary Tim Geithner warned last week that the limit will be reached no later than May 16 and that the Treasury can only take action to avoid a U.S. default until around July 8 if the ceiling is not raised before then. Economists warn that allowing the U.S. to default on its obligations would have catastrophic implications for the economy. Many lawmakers want to pair an increase with deficit reduction measures such as a balanced budget amendment, while the White House prfers a clean debt limit increase. See CRFB’s ideas for responsibly raising the debt limit here.
As Pressure Mounts, President Steps Up – The White House became more and more involved as the budget negotiations reached a climax. Now it looks as though President Obama will maintain a high profile in the ongoing fiscal debate. On Wednesday the President will outline his ideas for reducing the national debt in a speech. President Obama was criticized by CRFB and many others for not adequately addressing the debt in his recent budget. His entry into the debt discussion is welcome and could advance the search for solutions, depending on how specific he is willing to get. We will be watching.
Don’t Forget About Taxes – All the discussion over spending cuts and shutdowns has drawn attention from the fact that Tax Day (April 18) is fast approaching. Fortunately (unless you’re still scurrying to file your taxes) several events this week will call attention to the issue of tax reform. On Tuesday, the Moment of Truth Project and the Progressive Policy Institute will co-host a forum on the urgent need for comprehensive tax reform. Speakers include Senators Michael Bennet (D-CO), Ron Wyden (D-OR) and Dan Coats (R-IN) as well as Fiscal Commission member and Honeywell CEO Dave Cote. Wyden and Coats no doubt will discuss their recently-introduced legislation to fundamentally revamp the tax code. On Wednesday both the Senate Finance and House Ways and Means Committees will hold hearings respectively examining how tax reform can help reduce the deficit and how the burdens imposed by the complexity of the tax code illustrate the need for reform.
Coburn-ing Budget Calories – Sen. Tom Coburn (R-OK) took advantage of the open-amendment process on popular legislation (S. 493) to renew the Small Business Innovation Research and Small Business Technology Transfer programs to advance several deficit-reduction measures last week. One of the approved amendments (SA 273) requires the federal government to eliminate, consolidate or streamline programs identified in a recent Government Accountability Office report as duplicative or overlapping. It includes review of tax expenditures. It is supposed to save at least $5 billion. Sen. Mark Warner (D-VA) was a co-sponsor. It passed 64-36. Another amendment (SA 223) ends federal jobless benefits to people who earned $1 million or more the previous year. Coburn says it will save $20 million a year. It passed 100-0. And two other amendments accepted eliminate funding for the National Historic Covered Bridge Preservation Program, saving $8.5 million, and require that every year the federal government identify and list publicly every federal program, including their mission, goals, purpose and budget.
What Panetta Could Mean for the Pentagon – CIA Director Leon Panetta is reportedly one of the names being considered to replace Defense Secretary Robert Gates, who will be stepping down. Panetta is a former House Budget Committee chair, OMB director and White House chief of staff, as well as a former CRFB chair. One of his initiatives at the CIA has been to prepare the agency for budget changes due to rising federal budget deficits. An appointment as Secretary of Defense could bring such planning to the Pentagon.
Key Upcoming Dates
- March federal budget deficit figures from the Department of Treasury.
- February international trade deficit figures from the Department of Commerce.
- Moment of Truth Project/Progressive Policy Institute forum on “Tax Reform Now: Cutting Rates and Deficits” from 10 am to 1:30 pm.
- Federal Reserve releases its “Beige Book” economic outlook survey based on anecdotal information gathered by each Federal Reserve Bank by district and sector.
- House Ways and Means Committee hearing on “How the Tax Code’s Burdens on Individuals and Families Demonstrate the Need for Comprehensive Tax Reform” at 10 am.
- Senate Finance Committee hearing on tax reform and perspectives on deficit reduction at 10 am.
- Weekly unemployment claims data released by the Department of Labor BLS.
- House Oversight and Government Reform Committee hearing on “State and Municipal Debt: Tough Choices Ahead” at 9:30 am.
- • IMF/World Bank Spring Meetings in Washington, DC.
- The current “bridge” continuing resolution (CR) funding government operations expires. Congress must adopt legislation reflecting the spending agreement for the rest of Fiscal Year 2011 by then.
- Statutory deadline for Congress to enact a Fiscal Year 2012 Budget Resolution.
- Inflation figures for March released.
- Deadline to file federal tax return.
- Treasury Secretary Tim Geithner says that the statutory debt limit will be reached no later than May 16.
- Treasury Secretary Tim Geithner says that U.S. will default on its obligations by around July 8 if the statutory debt limit is not increased before then.
Keeping us on the edge of our seats until the very end, Speaker John Boehner (R-OH) announced late Friday night that a deal had been reached on spending levels for the current fiscal year, just an hour before a government shutdown was set to occur. Though the President and leaders in Congress agreed to a six-month CR, a one-week CR was enacted to give Congress time to put the agreement into legislative language. The details of that CR are not crystallized yet except for the overall funding level (about $38 billion below 2010 levels, $78 billion below President Obama's 2011 request), but we do have some idea of what is in it, which you can see in today's Wall Street Journal.
- Agency cuts: According to WSJ, the CR would cut $13 billion from the President's request for 2011 from the Departments of Labor, Education, and Health and Human Services. This represents about a $5 billion reduction from 2010 levels. Still, it seems that Obama's priorities, specifically Head Start and Pell Grants, were preserved. State Department and foreign-aid programs will be frozen at 2010 levels, which represents an $8 billion cut from the President's budget. The Defense Department will get off easy, getting a $5 billion increase in its budget from 2010 levels, although this is less than the levels proposed by both the President's budget and Congressional Republicans.
- Policy riders: The most talked about policy rider in the final days before the shutdown was a provision which would have denied Planned Parenthood the ability to use federal funds for abortions. However, this rider was not included in the final package, nor were any of the other proposed riders, including one which would have prevented EPA from regulating greenhouse gases and another to defund health care reform. The package did include two DC-related riders -- one that would revive a school voucher program and another that would prohibit the DC government from funding abortions. As part of the deal, the Senate also agreed to hold two up-or-down votes: one on Planned Parenthood funding and one on defunding health care reform.
- CHIMPs/Mandatory cuts: As Senator Schumer (D-NY) and other Democrats had called for, the package includes "changes in mandatory programs" (CHIMPs) which essentially allows some mandatory cuts to be counted as discretionary. In fact, almost half the savings -- $17.8 billion of the $38 billion -- comes from cuts to mandatory programs. This does include two changes to the health care reform law that will affect mandatory spending. These changes would cut $2 billion from the budget for non-profit health insurance co-operatives (the CO-OP program, which is intended to function as a weaker version of the public option) and it would eliminate a part of the law that would allow low-income earners to opt out of employer-sponsored health insurance to purchase insurance on the new exchanges. Other details about the CHIMPs are unknown at this point.
We will have further coverage of the deal in its entirety when the final specifics are announced. With the battle over funding for FY 2011 behind us, leaders in Congress and the Administration must now look toward dealing with some much more significant fiscal challenges in the coming weeks, with the debt ceiling limit due to be reached just as negotiations over the budget for FY 2012 and beyond heat up.
In her latest commentary for CNN Money, CRFB President Maya MacGuineas discusses her experience at a budget forum in Colorado this weekend and says that unlike many Washington politicians, voters are ready for real fiscal reform.
Click here to read the full commentary.
Ms. MacGuineas also wrote a Washington Post op-ed this weekend focused on the need for a "Goldilocks budget" that's just right -- not President Obama's proposal ("too tepid") or Chairman Ryan's ("too lopsided"). She also tell us not to lose hope, saying:
As contentious as the political environment seems today, remember that the last government shutdown was followed by an eventual budget deal between President Bill Clinton and the GOP. If we replace denial with reality and posturing with cooperation, we might just pull it off again.
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.
Yesterday, White House senior adviser David Plouffe appeared on several Sunday talk shows announcing that President Obama would be presenting his own deficit reduction plan this week. Specific aspects of the President's plan are still unknown, as is the level of detail it will include. However Mr. Plouffe did say that taxes would have to be part of the equation as well as reduced spending on entitlement programs, and that the President is looking for savings in "all corners of government."
The announcement comes two days after a late-night deal was reached between leaders in both parties on spending levels for the current fiscal year, narrowly avoiding a government shutdown. It also comes after weeks of criticism that President Obama and the White House have failed to lead on critical budget issues.
We'll be keeping a close eye on developments related to President Obama's upcoming proposal, so make sure to check back with The Bottom Line for updates throughout the week.
With a possible federal government shutdown looming in only a few short hours, it is worth noting some of the costs if such an action occurs. With a lot hanging in the balance, a shutdown could have some serious consequences.
A government shutdown will cost taxpayers money. This may seem counterintuitive at first, but the experience from previous shutdowns bears this out. A very basic estimate from the Office and Management and Budget (OMB) on the last government shutdown (which was actually two partial shutdowns in late 1995 and early 1996 that totaled 27 days) put the price tag at over $1.4 billion. As OMB deputy director Jeffery Zients said yesterday, "When you have to shut something down, that costs money, and ramping something back up costs money." For instance, government-funded construction projects around the country have to be stopped and secured, and when they are re-opened, started again. There will also be lost revenues -- various fees will not be collected and gift shops at places like Smithsonian museums and national monuments will be shuttered, though costs will still be incurred in securing these sites.
Salaries for furloughed government employees must also be considered. In previous shutdowns, federal employees received back pay for work days the government was closed, even though they did not work. The White House has already indicated it would request back pay for government employees if there is a shutdown. Plus, there will be costs associated with the loss of productivity as federal workers stay home.
There could also be some economic effects of a shutdown. Federal institutions like national parks can be significant sources of income for local communities, attracting tourists and business. Families of federal workers will likely restrict their spending due to the uncertainty of getting a paycheck. Government contractors and businesses that receive assistance from government agencies, such as the Small Business Administration, could see their business impacted as well.
It's also possible that, if long enough, a shutdown could also impair the fragile economic recovery. It is difficult to predict how a shutdown would affect market confidence, but with creditors increasingly becoming concerned about the ability of the U.S. to confront its mounting debt, an impasse resulting in a shutdown is only likely to compound those fears. As CRFB policy director Marc Goldwein explained in an article today, "the government shutdown will call into question whether politicians can raise the debt ceiling, and more fundamentally, whether they can deal with our long-term fiscal issues."
A shutdown would also have costs that cannot be measured in dollars. The electorate already has a historically low opinion of Washington. A shutdown would worsen the sentiment. The lack of trust could make it even more difficult for policymakers to sell the public on tough measures down the road to get our fiscal house in order. The episode could also further sour the already poisonous political atmosphere among the parties, making bipartisan solutions more difficult to achieve.
A government shutdown could be expensive on many levels. Let's hope it can be avoided.
Update 04-09-11 10:15 am: The shutdown has been averted. Details here.
Update 6:51 pm: Conflicting reports on whether deal close on Planned Parenthood rider. Check out @BudgetHawks on Twitter for more updates tonight.
Update: 5:55 pm: Sen. Harry Reid orginally scheduled to speak on Senate floor at 6 pm. Now will happen at 8 pm at earliest.
Update 5:10 pm: Many Republicans saying it is time to move on to bigger battles. Sign of a deal?
Update: 1:25 pm: Speaker Boehner emerged from the meeting with his caucus to say that "almost all" policy issues have been resolved. But still no deal. He is hopeful an agreement can be reached before midnight. Majority Leader Reid meeting with his caucus now. Both Reid and Boehner say they will forgo their pay if a shutdown occurs.
Update 12:21 pm: Senate Minority Leader Mitch McConnell (R-KY) said he believes there will be an "agreement here shortly." Speaker Boehner meeting with House GOP conference now. Senate Democratic conference meeting at 1 pm.
The federal government is headed for a shutdown at midnight tonight unless agreement is reached on either federal spending for the rest of the fiscal year or a stopgap measure to keep government operating temporarily. Budget negotiations involving House Speaker John Boehner (R-OH), Senate Majority Leader Harry Reid (D-NV) and the White House continue.
Negotiators are reportedly close to an agreement on cutting spending about $38 billion below 2010 spending levels. Yet, disputes over funding for Planned Parenthoood and certain Environmental Protection Agency activities remain a sticking point.
The budget talks are ongoing. Speaker Boehner is set to address the House GOP Conference at noon today. The reaction of his colleagues to the latest developments will significantly influence the ability to work out a deal in time.
A federal government shutdown is in no one's interest. Not only will a shutdown adversely affect the budget (as the Office of Management and Budget pointed out yesterday, shutting down and then ramping government operations back up costs money), it will also affect the economy and market confidence in our ability to deal with our fiscal challenges.
We will be updating throughout the day on the situation. Follow us on Twitter (@BudgetHawks) to get immediate updates.
The federal budget this week has been on everyone’s mind and television set. With the federal government set to shut down tonight at midnight if no budget is passed, markets have been keeping an eye on what is happening here in Washington. Currently, no agreement is in place and signs increasingly point to a government shutdown with agencies and leaders in both parties preparing.
This is bad news for everyone; markets will almost certainly react negatively. A government shutdown could have significant economic effects, and would impact government contractors, federal employees, taxpayers expecting refunds, tourists, and homebuyers, among others. More significantly, a shutdown could hurt market confidence. If policymakers cannot come to an agreement on funding government for only a few short-months where the differences are only several billion dollars, how will they come together to raise the debt ceiling? And how will they be able to deal with our looming fiscal challenges?
On the international front, Portugal has chosen to seek international aid from the EU to deal with their excessive debt. The prospect of this bailout has eased market fears about Portugal’s finances; according to Erik Nielsen, chief European economist at Goldman Sachs, “[t]his is good news. We've been saying for a while that Portugal's finances were not sustainable at these rates. We think the contagion stops here.” They are expected to recieve between $86 billion and $115 billion.
Meanwhile, food and gas prices have continued in their upward trend; oil prices have risen from $107.94 last friday, to $111.90 today. Some analysts have argued that these price increases will offset the positive stimulative effect of the tax cut deal (which included a payroll tax holiday) last year. They could also lead to increases in overall inflation, which could put more pressure on the federal reserve to increase interest rates, as some central banks have already begun doing.
UPDATED 4/8/11 to include a link to the budget framework released by the Congressional Progressive Caucus.
Apparently, neither side is completely happy with their respective party’s spending blueprint. Nearly two months ago, President Obama released his budget. And along with today's RSC contribution, additional proposals from across the aisle are expected to be released soon by the House Democratic leadership, the Congressional Black Caucus, and the Congressional Progressive Caucus (pdf).
As expected, the RSC budget is the most aggressive of the bunch. Under its proposal, the budget achieves balance in FY 2020, projecting surpluses of $50 billion that year and $115 billion in FY 2021. This would be achieved by bringing spending down to 18 percent of GDP by 2017, allowing revenues to creep back up to 18 percent of GDP by 2014, and freezing both at those levels thereafter.
On the spending side, the RSC would return FY 2012 non-defense discretionary spending to FY 2006 levels, which they estimate equates to a 25 percent cut compared to the enacted FY 2010 budget. For 2013-2021, non-defense discretionary spending would never rise above 2008 levels. The RSC also proposes larger Medicaid reductions than in the Chairman's budget -- cutting to 2006 levels and restricting Medicaid's spending growth to the rate of inflation. The RSC's Medicare plan includes a slightly more aggressive approach to raising the eligibility age, but is otherwise the same as the Chairman's proposal -- except that the RSC's premium support plan begins in 2017 as opposed to 2022. The RSC also proposes to gradually raise the Social Security normal retirement age to 70 for younger workers. While this does not have an immediate significant revenue effect, it is notable for its specificity compared to the Chairman and President's plans.
On the revenue side, the RSC proposal is very similar, if not the same as the Chairman’s proposal. It makes permanent the 2001 and 2003 tax cuts and does not allow the Alternative Minimum Tax (AMT) to hit additional households. It also repeals all tax increases included in the recent health care law.
Additionally, the RSC proposal would reduce the corporate tax rate to 25 percent. However, aside from those details, they propose few other specific tax policy changes beyond elimination of a handful of agriculture subsidies.
CRFB commends the RSC and others for putting specific ideas on the table. This is another bold proposal intended to right the country’s floundering fiscal ship. But we continue to warn that bold proposals alone are not enough. Bipartisan support is necessary for actual agreement on a solution, and that requires an honest discussion which includes revenues and defense spending as part of the equation.
UPDATE: In a memo to House Budget Committee Ranking Member Chris Van Hollen (D-MD), Progressive Caucus co-chairs Raul Grijalva (D-AZ) and Keith Ellison (D-MN) summarized their group's as-yet-unreleased FY 2012 budget proposal, which they call "The People's Budget." Their plan would reach budget surplus by 2021, bringing debt to 64.4 percent of GDP in that year. They would achieve this through revenue from a mixture of individual and corporate tax changes as well as defense cuts, enactment of a public option, and other health care reforms, while increasing investments in things such as education, R&D, and infrastructure. The Progressive Caucus would also enact Social Security reforms which would bring the program into solvency through an increase in the payroll taxable maximum on the employee side and removal of the payroll taxable maximum on the employer side while increasing benefits.
Considering its role as the biggest driver of long-term deficits and debt, health spending has to be addressed in any serious long-term budget plan. And to Rep. Paul Ryan's credit, he has definitely done that in his FY 2012 budget proposal. There are numerous provisions in the proposal that deal with federal health care spending. Let's go through them:
- Medicaid Block Granting: Starting in 2013, Congressman Ryan's budget converts Medicaid into a block grant to the states that would grow each year by population growth and inflation. This would save the federal government $771 billion over the next decade, and significantly more in later years. Along with some other small changes, the proposal would reduce base (non-PPACA, or health care reform) Medicaid spending by about one third in 2022 and one half in 2030. By giving states full responsibility over their own Medicaid costs and by reducing their federal subsidy, block granting the program would likely lower overall (not just federal) Medicaid spending and lead to some new efficiencies -- particularly since the budget calls for granting additional flexibility to the states. However, the reductions in spending are quite deep, and would therefore likely cause states to cut provider payment rates, scale back the benefits package, limit eligibility, and/or find additional money from other tax and spending changes.
- Medicare Premium Support: Beginning for those who turn 65 in 2022, Medicare would be transformed into a premium support system. Beneficiaries would receive an $8,000 subsidy -- adjusted each year for inflation and age composition -- to be spent on one of a number of private insurance plans. The plans would all be required to comply with a standard for benefits package, accept all enrollees, and charge everyone of the same age the same price (HHS would manage various risk subsidies and transfers to avoid adverse selection problems). In addition, under the Ryan plan, subsidies would be reduced for higher earners, and lower earners would receive additional government funds through a Medical Savings Account. Though these changes will have no impact on the deficit over the next decade, they will result in substantial government savings over time -- savings which will come largely from higher beneficiary contributions since health spending is projected to grow far more quickly than the rate of inflation (which is roughly how fast the premiums grow).
- Raising the Medicare Retirement Age to 67: In addition to changing the structure of Medicare, Congressman Ryan would increase the eligibility age for the program. Beginning in 2022, the plan calls for increasing it from 65 to 67 at a rate of 2 months every year (so that it reaches 67 by 2033). In isolation, CBO has estimated this measure would eventually reduce Medicare costs by 7 percent.
- Medical Malpractice Liability Reform: Congressman Ryan's budget calls for comprehensive medical malpractice liability reform, or tort reform. According to CBO, a proposal like this could save $60 billion in total.
- Health Reform Repeal: This move is an expected one, given continuous Republican calls to repeal the Affordable Care Act (ACA). However, in contrast to what some in his party have proposed, Congressman Ryan actually keeps most of the Medicare cuts from ACA and dedicates them to deficit reduction. Whatever one thinks of the merits of repealing the coverage provisions, Congressman Ryan deserves credit for doing so in a fiscally responsible way -- subtracting from rather than adding to the budget deficit. That said, the Congressman's repeal would axe two of the provisions with the most promise for "bending the cost curve": the excise tax on high-cost insurance and the Independent Payment Advisory Board (IPAB). In addition, he repeals the other revenue provisions (such as the Hospital Insurance surtax) at a time when we need more revenue, not less. Congressman Ryan would do better to keep IPAB and the revenue provisions, as well as the other Medicare cuts.
- (Not) Paying for the Doc Fix: Like President Obama, Congressman Ryan calls for a "Doc Fix" to prevent a roughly 30 percent cut in Medicare physician payments. Also like the President, though, the Congressman relies on a "magic asterisk" to pay for this fix -- in other words he counts on savings which he doesn't specify. We criticized President Obama for relying on this gimmick for eight years of offsets; Congressman Ryan's budget goes the extra mile by relying on it for ten. Absent this gimmick, his debt numbers would be more than $350 billion (1.5 percent of GDP) higher in 2021.
With a few exceptions (such as the magic asterisk for the Doc Fix), Congressman Ryan deserves an incredible amount of credit for taking on the largest driver of our growing debt -- federal health spending -- head on. Not only would these changes reduce federal health spending substantially over the next decade, but they would also bend the federal health care cost curve in a way that makes these programs more than sustainable over the long-run.
CBO can attest to the magnitude of the changes. Under their extended-baseline scenario (current law extended beyond ten years), federal spending on health care programs grows from 5.5 percent of GDP in 2010, to almost 9 percent in 2030, and over 12 percent by 2050. Under Congressman Ryan's plan, it would grow to only 6 percent in 2030 and then decline to less than 5 percent of GDP in 2050.
Of course, it is important to recognize that a substantial portion of these savings will come from higher premiums for beneficiaries and higher costs to states. While it's true that both block granting and premium support have the potential to change incentives in a way that encourages efficiencies and slows cost growth, few if any analysts believe it is possible to slow per-capita health spending down to the rate of inflation; getting down to GDP+1 percent will be tough enough.
Those who would argue that this rate of growth is too slow have a fair point (Ryan-Rivlin allowed growth at GDP+1 percent), as do those who would prefer to control costs in alternative ways (the Fiscal Commission listed several). But we have to get health care spending under control, and to the extent we are more lenient on health care than Congressman Ryan, it's important to identify savings elsewhere in the budget (for example, from Social Security and defense spending) or new revenues (especially from tax expenditures) to make up at least the lion's share of the difference.
Even with substantial revenues and cuts elsewhere, though, federal health spending must be brought under control. Congressman Ryan has presented one way forward; now others must step up with alternatives.
Today, Sen. Al Franken (D-MN) introduced legislation to require Congress to offset war costs with other tax or spending changes.
The bill, the Pay for War Resolution, would require Congress to pay for the costs of a future war over the subsequent ten-year window. With regards to the wars in Iraq and Afghanistan -- which have cost over $1 trillion so far -- the bill would allow continued spending at the levels requested by the President, requiring offsets for additional spending. Beginning in 2017, all war costs would have to be paid for, absent a waiver voted on by three-fifth of the Senate (60 votes).
In a statement on the floor, Sen. Franken said,
"We have to ensure that Iraq and Afghanistan remain anomalies in American history. And that’s what my resolution seeks to do. It will ensure that future wars don’t make our deficit and debt problem worse. It will ensure that Congress and American citizens must face the financial sacrifice of going to war. And it will force us to decide whether a war is worth that sacrifice."
We applaud Sen. Franken for authoring thoughtful legislation on an important topic. In the past, CRFB has supported measures to pay for war (see here and here). Absent an immediate and unforeseen emergency, there is no reason war funding should be exempt from the basic principles of budgeting. CRFB President Maya MacGuineas called the bill “a sensible approach to ensuring that we budget for war.” We wish the Senator the best of luck in passing the bill.
Yesterday, Congressman Paul Ryan released his budget proposal, which would bring the federal debt down to 67.5 percent of GDP by 2021, and significantly further thereafter.
Ideally, it is best to think about a proposal like this by looking at where takes future deficits and debt in absolute terms. However, it's also important to understand where the cuts come from, which means determining their magnitude relative to a "baseline".
Compared with current law, Congressman Ryan's budget would reduce deficits by $1.6 trillion over ten years. Compared to the President's Budget, it would reduce it by $4.4 trillion.
|Savings Compared to CBO Baseline
||Savings Compared to President's Budget
|Cut Non-Security Spending to FY 2006 Levels, Freeze, and Hold to Inflation
|Limit Growth in Security Spending and Assume $50 billion per year Plug for War Spending^||$830||$0|
|Block Grant Medicaid||$771||$735|
|Repeal Coverage Provisions and Tax Increases from PPACA||$590||$590|
|Enact Medium-Term Medicare Savings
|Fully Extend 2001/2003 Tax Cuts*||-$3,820||-$812|
|Other Revenue Changes||$0||-$415|
|Reduce and Block Grant Food Stamps||$126||$129|
|Increase Contributions for Federal Retirement Program||$123||$123|
|Reduce Agricultural Subsidies||$28||$22|
|Other Mandatory Spending Policies||$909||$1,734|
|Enact Doc Fixes||-$298||$0|
|Total Deficit Reduction||$1,288||$3,932|
Unspecified Offsets for Doc Fix and Transportation (Including Interest)
|Total Deficit Reduction, Including Unspecified Offsets
*Includes outlay effects from refundable portions of credits and deductions.
^Savings compared to CBO baseline largely reflect scheduled reductions in war spending, not deficit-reducing policies.
However you cut it, the largest savings in his plan come from reducing non-security discretionary spending, block granting Medicaid, and repealing the tax and coverage provisions of PPACA. Moving in the other direction, Congressman Ryan actually reduces revenues substantially relative to current law -- mainly by calling for the extension of all of the the 2001/2003/2010 tax cuts.
This is certainly a bold and honest way to bring the deficit under control. But getting bipartisan support will require putting defense and revenues on the table.
House GOP Budget Unveiled – On Tuesday, House Budget Committee Chairman Paul Ryan (R-WI) unveiled his fiscal year 2012 budget proposal, titled “The Path to Prosperity.” It is the Republican response to the White House budget released last month. The House Budget Committee will mark-up the bill today in an all-day session with the goal of voting on the House floor next week. House Budget Committee Ranking Member Chris Van Hollen (D-MD) says that Democrats will offer an alternative ahead of the House vote. The Ryan budget aims to reduce debt to 67.5 percent of GDP by 2021. It seeks to accomplish this goal by making steep cuts to non-security discretionary spending and substantial changes to Medicaid and Medicare. It leaves defense spending mostly untouched and makes significant reforms to the tax system without raising additional revenue. In a preliminary analysis of the proposal, CRFB praised it for its debt reduction goal and for undertaking entitlement reform, but called for defense and revenue to be on the table in order to achieve a plan with enough support to be enacted. Stay tuned for more analysis. Ryan's counterpart, Senate Budget Committee Chair Kent Conrad (D-ND), says he is holding off on his budget proposal to give the "Gang of Six" senators that he is a part of more time to develop a bipartisan, comprehensive fiscal plan.
Congress Faces Budget Deadline – While the debate is turning to the FY 2012 budget, Congress has yet to put away the FY 2011 budget. The current continuing resolution (CR) funding the federal government expires on Friday at midnight and further stopgap measures appear unlikely. President Obama summoned negotiators to the White House on Tuesday and promised to do so each day if progress is not made. He also stated that he will not approve another CR without a deal for the rest of the year. Speaker of the House John Boehner (R-OH) upped the ante by asking for $40 billion in spending cuts. So lawmakers face a basic choice: a deal to finance federal operations for the rest of the year or a government shutdown.
Blue Dogs Will Run with a Bipartisan Pack – Leaders of the Blue Dog Coalition of moderate and conservative Democrats on Monday sent a letter to President Obama calling for bipartisan compromise in the negotiations over spending for the rest of this year so that policymakers can move on to “a more serious conversation about the structural issues that plague our nation’s fiscal health.” They state “we believe that it is imperative that both Democrats and Republicans work together and make compromises to avoid a government shutdown.” This could signal that Speaker Boehner will have some Democratic support on a compromise to offset conservative Republicans who may refuse to back anything less than the $61 billion in cuts the House has already passed.
Treasury Details Limits of Avoiding Debt Limit – On Monday, Treasury Secretary Tim Geithner sent a letter to Congress providing the clearest picture yet for when the statutory debt ceiling will be reached and the limited options he has to delay a U.S. default if Congress does not increase the limit. Geithner said the debt limit will be reached "no later than May 16" and that he had authority to take “extraordinary measures” to delay a U.S. default on its debt obligations for only about eight weeks afterwards. He said he will have no more “headroom to borrow” after around July 8 if the limit is not increased before then and pointed out that the high deficit restricts his flexibility to act. Geithner also stressed that “[t]he longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations” and that “[d]efault would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”
Lots of Tax Reform Talk – With the April 18 deadline for filing federal income tax returns fast approaching, talk of reforming the tax code is accelerating. The Congressional Joint Committee on Taxation convened a roundtable discussion this morning with former Treasury Secretary James Baker III and former House Minority Leader Dick Gephardt to discuss reforming the tax code. The nonpartisan Tax Policy Center also hosted a tax reform event today examining whether eliminating the numerous breaks in the code will improve the system. Senators Ron Wyden (D-OR) and Dan Coats (R-IN) introduced fundamental tax reform legislation this week that abolishes many of these so-called tax expenditures while lowering tax rates, and the budget proposal from Rep. Ryan also calls for a similar approach, though he is less specific. Next week, the Moment of Truth Project, led by White House Fiscal Commission co-chairs Alan Simpson and Erskine Bowles, will host a tax reform forum in advance of Tax Day. The Fiscal Commission's debt reduction plan also included tax reform that repeals most tax expenditures and lowers rates while raising additional revenue to reduce the debt. See the CRFB paper on tax expenditures here.
Processing Budget Process Reform – As the seemingly endless FY 2011 budget deliberations continue and lawmakers gear up to go through it all again with the FY 2012 budget, fixing the dysfunctional budget process is gaining steam with a variety of ideas being floated. Rep. Mike Quigley (D-IL) recently introduced sweeping legislation to improve transparency in the process. The Senate GOP is rallying behind a balanced budget amendment to the U.S. Constitution, House Republican leaders are considering biennial budgeting, and the Ryan budget also includes some process reforms. The Peterson-Pew Commission on Budget Reform has provided a comprehensive set of reforms to enhance the budget process and advance the setting and implementation of fiscal goals through targets, triggers and transparency.
Tax Receipt Idea Gets Good Reception – One of the ideas promoted by Rep. Quigley and others is a receipt for taxpayers detailing how their taxes are spent by the federal government. The nonpartisan group Third Way has created an online Tax Receipt Calculator that shows an individual where their tax dollars have gone. Along with CRFB’s Stabilize the Debt online budget simulator, it is a useful educational tool to help Americans understand the budget.
Amendments Provide Opportunities – Popular legislation moving through the Senate to renew two small business programs is being used as a vehicle to get votes on a variety of proposals. Several amendments involving fiscal policy will get votes today. One is from Senators Tom Coburn (R-OK) and Mark Warner (D-VA), SA 273, that will call on the federal government to “eliminate, consolidate, or streamline Government programs and agencies with duplicative and overlapping missions” that were identified in a recent Government Accountability Office report.
Today, Senators Ron Wyden (D-OR) and Dan Coats (R-IN) introduced bipartisan legislation to comprehensively reform the existing U.S. tax system in a revenue-neutral manner. The "Bipartisan Tax Fairness and Simplification Act of 2011" fundamentally reforms the U.S. tax code by eliminating many tax expenditures (but not some of the most popular ones like the mortgage interest deduction, charitable giving, the employer-provided health care exclusion, and the state and local tax deduction), reducing the number of individual income tax brackets from six to three, creating a single corporate tax rate, and creating a one-page tax form for most taxpayers.
Specifically, this bill--which is nearly identical to the bill sponsored by Wyden and former Senator Judd Gregg (R-NH) in the last Congress--would set three total tax brackets at 15 percent, 25 percent and 35 percent (changing the current brackets of 10, 15, 25, 28, 33, and 35 percent). The bill would also eliminate the Alternative Minimum Tax (AMT) and roughly triple the standard deduction. One major difference is that the newer version includes a temporary tax holiday that would allow multi-national American companies to bring overseas profits to the U.S. at a lower tax rate.
The bill also includes broader corporate tax reforms. It creates a single corporate tax rate of 24 percent through the reduction of various corporate tax breaks. Additionally, it creates a 100 percent deduction for all companies with annual gross receipts of less than $1 million to expense all equipment and inventory costs in a single year.
The new bill and its previous version represent important contributions to the vital tax reform conversation--that seems to be gaining steam--in that they highlight modernization and simplification of the tax code in a way that promotes economic growth. In particular, targeting tax expenditures for repeal and reform is a necessary step that has bipartisan support (see some ideas for reforming tax expenditures here).
Although Wyden-Coats offers an important starting point for reform, given the depth of our fiscal challenges the Senators must look beyond revenue-neutral reforms. Recent proposals, such as the Fiscal Commission's recommendations, show that lawmakers could be even more aggressive in tackling tax expenditures and reducing marginal tax rates while also contributing significant savings to deficit reduction. In a blog post last year on the Wyden-Gregg bill, we contended it did not go far enough in eliminating tax expenditures and we raised concerns over its deficit impact and made some suggestions for improvement.
There is widespread consensus that the tax code needs to be updated and streamlined. There is also growing agreement that fundamental tax reform will be an essential part of a much-needed comprehensive plan to get the U.S. on the right fiscal track. Everything, including increased revenue, will have to be on the table.