The Bottom Line
For today's 10-year anniversary of the 2001 tax cuts (EGTRRA), CRFB issued a release this morning calling for any extensions of the 2001/2003/2010 tax cuts to be fully paid for. The 2001 tax cuts, along with the expansions and extensions in 2003 and 2010, will have cost the Treasury well over $2 trillion by 2012 when they are scheduled to expire.
Simply paying for any extensions in the tax cuts, whether through spending cuts or revenue increases elsewhere in the budget, could almost stabilize the debt this decade - which would be a great start on getting control of our longer-term challenges. Without patching the AMT the tax cuts would cost roughly $2.4 trillion over the next ten years, and nearly $3.2 trillion including interactions with the AMT. As you can see, the tax cuts are quite costly. Lawmakers should not extend them unless they're paid for.
In this blog we wanted to go a bit further than we did in our earlier release, and show you the costs of the main pieces of the tax cuts both with and without the interaction effects with Alternative Minimum Tax (AMT) patches.
|Numbers in Billions||
|Extend Tax Cuts on Income Below $200,000/$250,000||$1,285||$2,085|
Extend Ordinary Income Rate Reductions
Extend Child Tax Credit Expansion
Extend Preferential Capital Gains and Dividends Rates
Extend Marriage Penalty Relief
|Extend Tax Cuts On Income Above $200,00/$250,000||$710||$790|
|Extend Estate Tax at 2011 Levels||$365||$345*|
|Costs of Tax Cuts||$2,360||$3,215|
|Total Costs of Tax Cuts (Including AMT and Interest)||$4,705||$4,705|
Note: Numbers combine extensions supported by President Obama and House Republicans. All numbers rounded to the nearest $5 billion.
The AMT was enacted in the late 1960s, well before the Bush tax cuts were passed. The AMT was designed to ensure that high-income earners who qualified for many tax deductions, credits, and exclusions paid at least a minimum amount of taxes. . However, the AMT was not indexed to inflation. In addition it was not adjusted to take into account the 2001/2003 tax cuts, which pushed tax burdens low enough to subject more people to the AMT. To account for the lack of indexing and the failure to adjust the AMT in 2001, lawmakers indexed the AMT thresholds to inflation to help prevent more people becoming subject to the tax. Since then, Congress has repeatedly enacted AMT "patches" to prevent millions of Americans from facing higher taxes.
Making these patches permanent would cost about $700 billion over the next 10 years--however, the interaction with all the tax cuts would more than double those costs. If you attribute the interaction to the tax cuts, their cost increases from $2.4 trillion to $3.2 trillion, and the middle-income tax cuts increase from $1.3 trillion to $2.1 trillion (excluding the estate tax).
In our release we call on policymakers to fully pay for any extensions in the tax cuts, including making the tax code simpler, more efficient, and fairer. In addition, they should consider fixing this AMT problem once and for all.
There seems to be no lack of commentary and analysis from the media and think tank community on our fiscal challenges in both this decade and beyond. Much of this, however, can seem a little wonky and esoteric for those who have not been following the debate inside the beltway.
To remedy this situation, CRFB has recently released a PowerPoint backgrounder on our fiscal challenges, which we encourage policymakers and concerned citizens alike to read over and share. This Powerpoint is meant to offer an objective, non-partisan view of our country's fiscal situation as an educational tool meant to help foster open and honest debate about these issues.
In order to avert a fiscal crisis, policymakers must immediately address our rising public debt by enacting a comprehensive fiscal plan. Our long-term debt drivers—mainly, rapidly growing health care costs and an aging population—are placing a greater and greater strain on our budget. As our debt continues to grow, the U.S. will face less and less budget flexibility as interest payments on our enormous debt will squeeze out other available resources and joepardize strong economic growth over the long-term. Everything needs to be on the table, including spending cuts, tax reform, and budget process reforms. We need a fiscal plan.
Be sure to check out our Powerpoint, which outlines these challenges and some of the solutions offered.
This afternoon, the University of Maryland's School of Public Policy is hosting a panel on the budget deficit and national debt. Panelists include former Congressional Budget Office directors and CRFB board members Alice Rivlin, Doug Holtz-Eakin, Rudolph Penner, and Robert Reischauer. The event starts at 3:00 pm so be sure to check it out.
Click here to watch the event live on C-SPAN.
Rep. Darrell Issa, (R-CA), Rep. Dennis Ross, (R-FL), and Rep. Jason Chaffetz, (R-UT) recently introduced legislation that would cut the federal workforce by 10 percent by 2015. H.R. 2114, the Reducing the Size of the Federal Government Through Attrition Act of 2011, would allow one federal employee to be hired for every three who retire or leave their job.
The bill is modeled after a recommendation from the President's Fiscal Commission, though it is slightly more aggressive. The Fiscal Commission recommendation called for two workers to be hired for every three who leave their job, and estimated that this would save $13.2 billion by 2015.
CRFB commends Reps. Issa, Ross, and Chaffetz for introducing legislation that would produce concrete savings and reduce the budget deficit. Hopefully more lawmakers will follow their example and start putting forth concrete proposals to improve our country's fiscal situation.
Clay Masterpiece – Rafael Nadal and Roger Federer played yet another classic tennis match yesterday, with Nadal once again emerging victorious for his sixth French Open title. The distinctive red clay of Roland Garros produces slow-moving tennis characterized by long rallies and lots of spin on the ball. Much the same can be said of the budget debate in Washington. Finding fiscal solutions is a slow, drawn-out process, with lots of back-and-forth. And both sides are using plenty of spin to find the winning shot.
Biden Group Tries to Hold Serve – The Biden talks are set to resume Thursday as the bipartisan, bicameral group of lawmakers convened by Vice President Biden looks to make progress on finding a deal pairing a debt limit increase with substantial deficit reduction. So far, both parties are seemingly content to stay at their respective baselines and pound away at the other. Republicans say they won’t budge on keeping revenues out of play and Democrats are digging in on no Medicare changes. CRFB has offered lots of ideas to bring the opposing sides closer to the net: providing a list of common-ground deficit reduction policies based on recent budget plans and specific ideas for Medicare and taxes that can draw bipartisan support.
Moody’s Blue on Debt Limit – Credit rating agency Moody’s stepped in as the chair umpire in the debt limit debate last week and it called fault on both sides. Stating that "the degree of entrenchment into conflicting positions has exceeded expectations," the agency warned that a default caused by a failure to raise the debt limit would likely result in a downgrade of the U.S. credit rating. Moody’s also cautioned that the lack of a “credible agreement on substantial deficit reduction” could result in a negative outlook on our cherished Aaa credit rating. See here for responsible approaches to raising the debt ceiling that combine a debt limit increase with a deficit reduction strategy.
Appropriations Mostly Keeps Pace in House – The House of Representatives is moving along with its end of the FY 2012 appropriations process. The full House approved of a Homeland Security spending bill on Thursday that appropriates $40.6 billion in regular discretionary spending, 2.6 percent less than current levels. However, the Military Construction-Veterans Affairs spending bill slipped from its schedule and now is expected to be voted on the floor when the House returns next week from recess. On the other hand, the Senate is not keeping pace, having not approved of a budget resolution. Without a top line spending figure to work with, the appropriations process cannot move in that chamber. The Peterson-Pew Commission on Budget Reform has solid recommendations for improving the broken budget process.
Key Upcoming Dates
- Presidential Candidate Tim Pawlenty gives a speech on his views for boosting the economy, including deficit reduction, in Chicago.
- Senators Mark Warner (D-VA) and Saxby Chambliss (R-GA) discuss the federal budget and deficit reduction before the Economic Club of Washington at 11:30 am.
- The Biden group resumes its talks on the debt limit and deficit reduction.
- CIA director, and former OMB director, Leon Panetta, has his confirmation hearing to be the next secretary of defense before the Senate Armed Services Committee at 9:30 am.
- Federal budget deficit numbers for May released.
- Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.
Yesterday, Treasury announced that it would be selling its 6.6 percent equity stake in Chrysler to Fiat, which represents the last outstanding TARP investment in the company, which has been receiving assistance from the program since January 2009. The move is expected to bring in about $600 million in proceeds, which would bring the amount of funds recovered from Chrysler up to $11.2 billion. TARP has committed $12.5 billion to the company, but Treasury says it's unlikely they will get back the full $1.3 billion difference.
Treasury's full exit from Chrysler is just one move that the Administration has been making in its efforts to wind down TARP's remaining investments. Last week, Chrysler also repaid a $5.1 billion loan and terminated its ability to draw another $2.1 billion. The repaid loan was scheduled to mature in 2017, so the repayment came six years early.
In addition, Treasury sold 200 million shares of AIG common stock for proceeds of $5.8 billion the same day as the Chrysler repayment last week. The sale reduced Treasury's holdings of common stock to 1.455 billion shares and reduced its ownership stake in the company from 92 percent to 77 percent. CBO's March 2011 Report on TARP anticipated that the AIG investment program would cost taxpayers $14 billion in total.
Another small move that the Administration announced yesterday is the sale of securities that back the Small Business Administration's 7(a) loans. TARP invested $368 million in these 7(a) securities starting in March of last year. It's not clear how much this sale will bring for the Treasury, but either way, it likely will not impact TARP's overall cost much.
As a side note, the latest projection for TARP's cost is $19 billion (down from a $356 billion estimate in April 2009). It's unclear if these moves will push that cost estimate further down.
TARP is clearly winding down, so we will keep you posted on further developments. Also, check out Stimulus.org to stay updated on what is happening with TARP and other economic recovery measures the government has taken.
We can't just seem to catch a break from ratings firms. About a month and a half after S&P downgraded the U.S. rating outlook from stable to negative, Moody's is warning the U.S. that it will definitely review and possibly downgrade our debt if we fail to raise the debt ceiling.
According to Moody's, "the degree of entrenchment into conflicting positions has exceeded expectations," which has put debt-limit-related default on their radar. They say that assuming the August 2 date still holds in a few months, Moody's will put the US rating on review by mid-July. So, for those who see no problem waiting until the last minute to raise the debt ceiling, the damage might be done before then if Moody's decides to downgrade the US.
As Moody's further explains:
If a debt-ceiling-related default were to occur, Moody's would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government's fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome.
But the short-term warning is just one part of Moody's update. They also warn that a downgrade to a negative outlook, like S&P already did, is likely if the we do not change our current debt trajectory.
If this current opportunity passes, Moody's believes that the likelihood of anything significant being accomplished before the next presidential election is reduced, in part because the two parties each hopes to capture both a congressional majority and the presidency in the 2012 election, after which the winning party could achieve its own agenda. Therefore, failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place.
This warning shows the conundrum we face in raising the debt ceiling. Obviously, being downgraded to Aa in the event of lawmakers failing to raise the debt ceiling on time would be more severe than being downgraded to a negative outlook due to our unsustainable path. But, as Moody's says, this may represent the best "near term opportunity" to get a handle on our debt path. The message is clear: the country needs a comprehensive fiscal plan.
Click here to read our ideas on responsible approaches to raising the debt limit.
In an op-ed today in the Washington Post, CRFB board members Erskine Bowles and Senator Alan Simpson argue that the Gang of Six -- despite hitting a few speed bumps -- are not only still relevant, but "it offers the last, best hope for a comprehensive bipartisan deficit reduction agreement in this Congress," as policymakers on both sides of the aisle have recognized.
Bowles and Simpson write that the Gang of Six continues to work together, and call for those who support the work of the Gang of Six to rally behind them. They write:
"[W]e simply cannot afford gridlock and delay as each party stubbornly holds out for its ideal solution.
The truth is, there is no perfect plan — we all know that. We also know that the only way this works is through a bipartisan effort where everyone prods their own sacred cows into the cattle chute, and everyone gives up something they like to protect the country they love.
The remaining members of the Gang of Six have said they will go forward with their proposal if there is support for it among their colleagues. Many rank-and-file senators have said they share the nation’s frustration with gridlock and expressed support in concept for a comprehensive plan. This is exactly why a bipartisan group of 64 senators wrote to President Obama urging action on a comprehensive deficit reduction plan, and it is why members of that group must now stand up and do what’s right. The time for action is now."
Click here to read the full op-ed.
Today's edition of USA Today features an editorial advocating increasing premiums for military retirees enrolled in TRICARE. The editorial correctly notes that since premiums have not risen since 1995, they remain at extraordinarily low levels compared to other health insurance plans -- a disparity that USA Today says "is simply too big to defend in the time of strained budgets." CRFB agrees with this assessment, though we are well aware that changes to health benefits for military retirees are not exactly popular. To understand the situation and the potential effects on the defense budget, one must first have some background.
Military retirees who have 20 or more years of service are entitled to receive coverage under TRICARE's basic health plan -- TRICARE Prime. The premiums for this coverage are the same today as when they were set in 1995 -- $230 for individuals or $460 for family coverage. These premiums have never been increased, nor have they been indexed to inflation or adjusted to reflect rising health care costs. As a result, the percentage of total health care costs paid by the military retiree has shrunk significantly over the past 16 years.
Last week, in what is to be one of his final policy speeches as Secretary of Defense, Robert Gates said that controlling and prioritizing defense spending "will require doing something about spiraling health care costs -- and in particular the health insurance benefit for working age retirees whose fees are one-tenth those of federal civil servants, and have not been raised since 1995." Under his proposal, the premiums would only be increased $5 a month, to $520 a year for families.
CRFB strongly supports this premium increas, and believe that premiums will have to grow further as health care costs continue to rise. However, it would be unwise to only look at premiums when there are proven ways to actually reduce -- rather than shift -- health care spending.
Take, for example, TRICARE for life -- the Medigap policy for military retirees. TRICARE for Life essentially protects military retirees from all of the cost-sharing in Medicare, and therefore makes them completely insensitive to prices. The Fiscal Commission had a recommendation to limit first-dollar coverage for TRICARE for Life and to limit how much cost-sharing it could cover beyond that.
A similar option scored by CBO, which would eliminate coverage for the first $550 of costs and to half of the next $4,950, would reduce the deficit by over $40 billion -- with more than a 20 percent of the savings coming from lower Medicare costs. Regulating private Medigap plans to comply with a similar policy could save another $50 billion.
This type of creative policy thinking can help us to reduce the deficit in the most effective and efficient way, and actually find secondary benefits -- like lower overall health care costs. But at the end of the day, there can be no sacred cows.
This morning, Speaker of the House John Boehner (R-OH) released a statement signed by more than 150 economists furthering the call for spending cuts that exceed any raise in the debt ceiling. This is just one more in a series of letters and statements from Senators, experts, former Administration officials, and business leaders all calling for serious and responsible solutions to dealing with our fiscal situation. The statement comes the morning after the House voted down a bill that would have increased the debt limit $2.4 trillion, but which included no spending reductions.
The statement reads:
An increase in the national debt limit that is not accompanied by significant spending cuts and budget reforms to address our government’s spending addiction will harm private-sector job creation in America. It is critical that any debt limit legislation enacted by Congress include spending cuts and reforms that are greater than the accompanying increase in debt authority being granted to the president. We will not succeed in balancing the federal budget and overcoming the challenges of our debt until we succeed in committing ourselves to government policies that allow our economy to grow. An increase in the national debt limit that is not accompanied by significant spending cuts and budget reforms would harm private-sector job growth and represent a tremendous setback in the effort to deal with our national debt.
Today, House Republicans went to the White House to meet with President Obama to discuss increasing the statutory debt ceiling. Reports suggest that meeting produced little movement toward an agreement.
As we noted in our Debt Ceiling Watch blog, today the Treasury Department reaffirmed that August 2 is still the date it projects that the Federal government will reach the debt limit. Congress and the President must responsibly increase the debt limit as soon as possible in order to avoid a default while giving confidence to the markets that we will rein in our debt.
Feeling the Heat – As most of us return to work this week nursing sunburns and swapping stories of grilling glory, the heat is on in Washington, at least on one side of Capitol Hill. Senators are out of town this week, but Representatives are working on appropriations. Meanwhile, the debt limit deadline continues to draw closer.
Coming Clean Doesn’t Work – The House of Representatives late Tuesday soundly voted down a “clean” $2.4 trillion increase in the statutory debt limit on a 97-318 vote. The vote was a symbolic one to show that there is not enough support for an increase that does not include debt reduction measures. See the CRFB paper on how to responsibly couple a debt ceiling increase with policies to decrease the deficit.
Senate Votes for Budget Gridlock – Symbolic votes are quite the trend. The Senate held four last week regarding the FY 2012 budget, voting down the House-passed budget (40-57) and the original budget proposed by the White House in February (0-97). Proposals from Sen. Rand Paul (7-90) and Sen. Pat Toomey (42-55) also failed. The votes were more about political theater than results. The Senate is resigned to holding off on a budget resolution until a bipartisan deal is reached.
House Moves on Appropriations – Once again the House and Senate are going on divergent paths regarding the federal budget. While the Senate is stalled over a budget resolution, the House is moving through the appropriations process with floor votes this week on the Homeland Security and Military Construction/Veterans Affairs spending bills. Those bills are expected to be considered under open rules, allowing for numerous amendments where members will seek to lower spending even more. The Appropriations Committee also marked-up the Agriculture spending bill on Tuesday and subcommittees will mark up bills including the Defense spending measure this week. The House is working off of the top line spending amount approved in the House budget resolution, $1.019 trillion, which will be officially “deemed” as a part of the rule on the Homeland Security bill. The Senate has not agreed to that figure, meaning that yet another budget train wreck may await, underscoring the need for budget process reform. The Peterson-Pew Commission on Budget Reform offered a blueprint for reforming the budget process in the report, Getting Back in the Black.
Disaster Spending Dilemma – In a real sign that the fiscal times are changing, Congress is having a serious debate about how it budgets for disasters. The Homeland Security appropriations bill the House will vote on this week includes an extra $1 billion in emergency spending for the Federal Emergency Management Agency (FEMA) to assist with recovery and rebuilding efforts in the aftermath of recent tornados and flooding. However, in a break with previous practice, the funding is offset with cuts elsewhere, namely to the Energy Department’s Advanced Technology Vehicle Manufacturing Loan program, which provides support for producing alternative energy vehicles. In the past, funds designated for disaster relief have not been offset and pay-as-you-go rules have an exemption for emergency spending. Lawmakers in the past have not budgeted in advance for disasters, arguing that they can’t be predicted. However, as the Peterson-Pew Commission on Budget Reform pointed out (p. 28), we know for certain that disasters in some form will occur each year. Failing to budget for the inevitable and then not offsetting the cost of emergency spending distorts the budget.
Issues, Schedule Hamper Biden Talks – The deficit group led by Vice President Biden has fairly clear goals – finding $1 trillion in specific spending cuts and devising some sort of trigger mechanism that will produce another $3 trillion in deficit reduction. These goals are not unrealistic – CRFB has identified over $1 trillion in common-ground deficit savings based on recent fiscal plans from both parties and we recently offered recommendations on making a debt trigger work. However, ideological differences threaten to encumber progress. Republicans demand that Medicare cuts be a part of the deal while Democrats want revenues in the mix. CRFB has some ideas for Medicare reform that could get bipartisan backing, while eliminating or reducing tax expenditures could also achieve support on both sides of the aisle (see here and here for tax expenditure reform ideas). The congressional schedule may be the biggest obstacle to timely action before the August 2 default deadline set by the Treasury Department. The group is not meeting this week because the Senate is out of town and with the House out next week, it is not clear when the principals will meet again.
Meetings Galore – Even though the Biden talks aren’t convening this week, there are still many high-level meetings going on. President Obama meets with House Republicans Wednesday and House Democrats Thursday to discuss budget matters. And Treasury Secretary Geithner meets with House freshmen Thursday to discuss fiscal issues.
The Washington Post has a story today saying that ending retirement savings tax expenditures would save little money. The argument is a familiar one, and one that requires an understanding of how tax expenditures are scored.
The article cites a study by the American Society of Pension Professionals and Actuaries, which finds that limiting tax expenditures for retirement saving would not save very much, despite large yearly estimates in lost revenues for the federal government. Because 401(k)s have only been around for a few decades, tax-free contributions to these plans significantly exceed taxable withdrawals, making the tax expenditure appear larger than it will save.
This may be true, but the article makes this point--that tax expenditures don't save as much as we think--for the cutting of other tax breaks as well (the title in the print version reads "Ending tax breaks won't fix budget, study says"). As the article states:
For example, if the mortgage interest deduction were eliminated, people would probably shift their investments to other tax-preferred vehicles, thereby denying the tax man a portion of his expected rewards, said Ed Kleinbard, a former director of the congressional Joint Committee on Taxation, which, along with the Treasury, estimates the value of federal tax expenditures.
It's likely that eliminating an individual tax expenditure would save less than it currently costs the government, since taxpayers could shift towards other tax preferred activities. The $1 trillion estimate that we see from Treasury or JCT simply measures how much revenue we forgo each year by having these breaks in place. It says little about how much we save from doing away with individual tax breaks.
Regardless, though, even when we talk about individual tax expenditure changes, it is clear that they will save a significant chunk of change. For example, eliminating the deduction for state and local taxes would save $97 billion in 2016 (according to CBO's Budget Options), while the estimate for the size of the deduction in 2016 is $98 billion. Or consider the charitable deduction, as we did on Friday. Simply putting a two percent of income floor on the deduction would raise $23 billion in 2016, or one-third of the size of the deduction in that year. Also, note that these are actual cost estimates, which account for the effects of taxpayers responding to these changes.
However, we know that comprehensive reform of tax expenditures would minimize the differences between static cost estimates for various expenditures and the savings potentially achieved by reducing or eliminating them. Simply put, the fewer preferences there are in the tax code, the fewer places there are for taxpayers to put their money in an effort to lower their tax burden. Thus, the shifting that might occur if we eliminate only one large tax expenditure would be less pronounced if we get many of them in one fell swoop, as some fiscal plans have proposed.
And even if potential savings don't quite reach the sum of the current cost estimates for various expenditures, the totals would still be significant, as we showed in a paper looking at some potential reforms to certain tax expenditures. Revenues will have to be part of the equation if there is to be a bipartisan deal on a long-term debt reduction package. Raising revenue by scaling back or eliminating tax expenditures would have the added benefit of simplifying the tax code. Cleaning up the code would help make our tax system fairer and more efficient, especially if the tax breaks on the chopping block are poorly targeted, overly generous, or distributionally upside-down.
Though recent discussion about "spending in the tax code" has brought fresh attention to tax expenditures, much of the discussion has been about how to deal with them comprehensively. For example, CRFB President Maya Macguineas recently put out a plan with Martin Feldstein and Daniel Feenberg to limit how much an individual could collect in tax expenditures, and the Fiscal Commission proposed a Zero Plan to wipe out most of the tax expenditures and use a portion of the money for rate reduction. However, it is also useful to break down some of the bigger tax breaks and examine them individually. Fortunately, CBO provides us with a new report outlining options for changing the charitable deduction.
The charitable deduction, for donations to qualified nonprofit organizations, is one of the larger tax expenditures in our tax code -- OMB estimates that it will cost over $300 billion in the next five years. And although the goal of promoting charitable giving is certainly a noble one, a number of policies have the potential to reduce the cost of the deduction while continuing to promote charitable giving.
CBO's options break down into four categories:
- Adding a floor to the current deduction
- Making the deduction available to taxpayers who don't itemize
- Replacing the deduction with a 25 percent non-refundable credit
- Replacing the deduction with a 15 percent non-refundable credit
Each of the latter three options come in three variations: no floor, a $500 floor ($1,000 for families), or a two percent of income floor. The floor would make it so the tax benefit would not be available on the first dollar of charitable giving, and instead would only be available on giving above that floor (for example, an individual who gives $600 under the 25 percent credit/$500 floor scenario would recieve a tax subsidy of $25 -- 25 percent of their last $100). Many economists see a floor as a very efficient way to limit the subsidy, since it would be unlikely to impact incentives on the margins but could still limit the "windfall subsidy" for charitable giving which would have been done anyway.
For each option, CBO estimates the savings/costs and the impact on charitable giving in 2006. The budget impact ranges from increasing the 2006 cost by $7 billion (25 percent credit, no floor) to reducing the cost by $25 billion (15 percent credit, two percent floor).
We've attempted to roughly re-estimate those savings if the policy were to be in effect over the next decade.
|Charitable Deduction Options|
|Option||2012-2021 Savings (billions)
||Percent Change in Subsidy||Percent Change in Giving
|Two Percent of AGI Floor||$220||-38.5%||-1.5%|
|Extend Deduction to All Filers||-$70||12.8%||1.0%|
|Extend Deduction With $500/$1000 Floor||$30||-6.1%||0.4%|
|Extend Deduction with Two Percent Floor||$180||-32.1%||-0.9%|
|Convert to 25 Percent Credit||-$100||17.4%||1.3%|
|25 Percent Credit With $500/$1000 Floor||$30||-5.8%||0.7%|
|25 Percent Credit With Two Percent Floor||$170||-29.2%||-0.5%|
|Convert to 15 Percent Credit||$190||-32.6%||-3.9%|
|15 Percent Credit With $500/$1000 Floor||$270||-46.5%||-4.2%|
|15 Percent Credit With Two Percent Floor||$340||-60.1%||-4.9%|
CBO's numbers bear out the fact that limiting the charitable deduction, especially through the use of a floor, would have a very limited effect on giving compared to the savings. For example, enacting a 25 percent credit with a 2 percent of income floor would reduce charitable giving by $1 billion but would save $12 billion. Note that two of the deficit-reducing options, both involving the $500/$1,000 floor, would actually increase charitable giving. And even for the options that reduce charitable giving, the government could, for example, directly spend on causes that are typically supported by charitable organizations--offsetting, and then some, the decrease in donations--and still have money left over to reduce the deficit.
Two of the major bipartisan plans out right now, the Bowles-Simpson Fiscal Commission plan and the Domenici-Rivin Debt Reduction Task Force plan, would both make changes to the charitable deduction along these lines. The Fiscal Commission's illustrative tax plan would replace the deduction with a 12 percent credit with a floor at two percent of AGI, for savings similar to the most stringent option. The Domenici-Rivlin tax reform plan would simply replace the deduction with a 15 percent refundable credit with no floor. Both of these options would limit the subsidy for high earners and make it available to non-itemizers while significantly reducing the expenditure's cost.
In addition, our Let's Get Specific paper on tax expenditures recommends instituting a floor at two percent of AGI for the current deduction.
The charitable deduction is just one of many tax expenditures that need to be scrutinized in any serious budget debate. Many of these tax breaks are poorly targeted, regressive, and costly. They must be on the table as part of any tax reform or deficit reduction discussion.
Trading of credit default swaps (CDS) insuring U.S. treasuries has doubled in the last year in response to fears over our inability to deal with our debt and deficit problems in addition to fears about lawmakers not raising the statutory debt ceiling to avoid a U.S. default.
Credit default swaps act as an insurance policy against a default on a loan. Just like other types of insurance, the purchaser of a credit default swap makes a series of payments to the insurer, and in exchange receives a payout if the borrower defaults on the (now insured) debt or loan. In the case of U.S. Treasuries, those who hold our debt may choose to purchase credit default swaps as a protection against a potential U.S. default this summer or down the road.
Increased trading suggests a higher level of fear over U.S. default on its debt obligations. As of May 20, 819 contracts insuring $4 billion in U.S. debt were outstanding, up from 449 insuring $2 billion of U.S. debt last year, according to Depository Trust & Clearing Corp (DTCC). Average daily trading just jumped to $490 million last week from $10 million the week prior, putting the U.S. at fourth most traded among those tracked by DTCC -- up from 633rd!
This is certainly an unsettling sign for the U.S. Our creditors will not lend to us indefinitely, and appear to be waking up to our unsustainable fiscal path and our rapidly approaching August deadline when Treasury estimates we'll hit our debt limit.
We need to responsibly raise the debt ceiling and put our debt on a downward path.
Today's editorial in the Washington Post, "The Chained CPI, an easy way to save money," endorses switching to the chained CPI for indexation of all inflation-indexed federal programs and provisions in the tax code -- a change CRFB has long supported. We even included the change in our recent list of common-ground deficit reduction measures that could be a foundation for a long-term debt reduction plan.
The editorial cites the recent paper "Measuring Up: The Case for the Chained CPI," published by the Moment of Truth (MOT) project -- a project of CRFB -- and written by MOT and CRFB analysts Adam Rosenberg and Marc Goldwein. The paper explains the problems with the current measure used to estimate inflation (the CPI-W and CPI-U), the improvements made under the chained CPI (the C-CPI-U), and the budgetary effects of making the switch.
We recently estimated that changing to the chained CPI would save $255 billion over ten years by reducing Social Security outlays by $112 billion, reducing other spending by $56 billion, and increasing revenue by $87 billion. Including interest savings, the switch would achieve roughly $300 billion in savings over 10 years.
Hopefully, this and other common-ground proposals get enough traction to be a part of bipartisan budget negotiations in Congress, perhaps as a down payment toward a larger long-term budget deal.
Yesterday, the Senate voted on four budget resolutions (Sen. Rand Paul (R-KY), Sen. Pat Toomey (R-PA), Rep. Paul Ryan (R-WI)/ House Passed Budget and President Obama's Febuary Budget) and all failed to meet the 60 vote threshold. This was done in part to show that none of the current budget plans will be able to garner the bipartisan support necessary to pass the Senate, signaling that more negotiation will be needed to agree on a budget for FY 2012.
|Sen. Rand Paul (R-KY)||7/90|
|Sen. Pat Toomey (R-PA)||42/55|
|Rep. Paul Ryan (R-WI)/ House Passed Budget||40/57|
|President Obama's Febuary Budget*||0/97|
*The President's February Budget is different from and not to be confused with the President's new Budget Framework offered in April.
Both parties have affirmed that a budget plan will only be passed if it can garner bipartisan support. We hope bipartisan negotiations on the budget and debt can produce a plan that can meaningfully address our nation's fiscal challenges. CRFB has identified over $1 trillion in common ground deficit reduction measures, which suggest that negotiations should continue to move forward.
Yesterday at the Peterson Foundation's 2011 Fiscal Summit, six think tanks--Heritage, AEI, EPI, Center for American Progress, Bipartisan Policy Center, and the Roosevelt Institute--released their plans to cut our medium- and long-term deficits and debt. We won't get into the details of each plan (you can check them out here), but we will quickly compare the metrics for each of them.
First, debt as a percent of GDP. Heritage is the most aggressive here, getting debt down to 58 percent of GDP by 2021 and 30 percent by 2035. Also, with the exception of EPI, debt is lower in 2035 than in 2021 in all of these plans.
Next up are spending levels. Once again, Heritage is the most aggressive, getting spending down to 17.7 percent of GDP in 2035. Every other plan would also cut spending below current law to varying degrees, ranging from 20.9 percent to 24.5 percent in 2021 and 23 percent to 27.8 percent in 2035.
And finally, revenue levels. Four of the plans raise as much or more revenue than CBO's extended baseline, with the most in 2021 being CAP at 22.3 percent of GDP and the most in 2035 being EPI at 24.1 percent. Two plans, by Heritage and AEI, hold revenue at or below 20 percent through 2035.
It was great to see all of these plans released yesterday. Together, they present a wide variety of very interesting ideas to push the current debate forward. Lawmakers certainly would do themselves a favor by reading through these plans in their search to find at least $4 trillion in savings.
With all the ideas out there now, it's time for lawmakers to come together and enact a fiscal plan.
Now, as we argued last September in a post titled "It Depends What You Mean by 'Equal'" after suggestions that the costs of both the upper-income tax cuts and Social Security shortfall were equal, we're again discussin claims that we could finance our Social Security shortfall by letting the upper income tax cuts expire at the end of 2012.
This suggestion comes out of a graph from the Center on Budget and Policy Priorities which shows that "the revenue loss just from extending the tax cuts for people making over $250,000 — the top 2 percent of Americans — would itself be almost as large as the Social Security shortfall over the 75-year period." (Note that while CBPP does not suggest this means one should be used to pay for the other, others have made this suggestion.)
CBPP makes this claim by taking the present value of Social Security's 75-year shortfall (0.8 percent of GDP) and comparing it to their present value projections of extending the upper income tax cuts over the next 75 years (0.7 percent of GDP).
Unfortunately, as we did last year, we think this methodology has a few flaws.
First, the measure of Social Security's 75-year shortfall includes the assets it currently holds in its trust funds. To be comparable to the cost of the tax cuts, it may be preferable to look at it's future shortfall. Viewed that way, we estimate an imbalance of about 1 percent of GDP rather than 0.8 percent.
Secondly, while present value matters, cash flow matters too. Attempting to replicate CBPP's methodology, we find that the Social Security (OASDI) shortfall exceeds the cost every year after 2020 -- quite substantially in most years. This is not reflected well in a present value estimate since it weights the earliest year (and the trust fund balance) most heavily. But looking at this chart, it is hard to argue that the costs are equal:
Third, even this chart may overstate the case somewhat. As we pointed out last year, "projecting forward the value of the tax cuts... appears to be highly sensitive to a few uncertain assumptions...tiny changes in some of the numbers they use can drastically alter this number." We haven't aimed to re-project the numbers, but here is what we projected the long-term costs of the upper-income tax cuts to be last year, under a variety of scenarios:
As you can see, our estimates from last September show that the difference between the cost of the tax cuts and the shortfalls could be even larger than shown in the top graph.
And finally, it is important to understand just what it takes to actually bring the fiscal situation under control. We face an enormous fiscal gap which would not be closed even if we let all the tax cuts expire and we make Social Security sustainably solvent. We're going to need a combination of Social Security reform, new revenue, discretionary spending cuts, and other mandatory cuts to even start to address this problem -- and ultimately that will have all been for nothing if we cannot slow the long-term growth of federal health spending.
Everything has to be on the table.
The Biden group of debt negotiations resumed on Tuesday with the fourth meeting of the bipartisan group of lawmakers chaired by Vice President Biden. The talks continued to focus on forging a debt reduction deal that will facilitate an increase in the statutory debt limit.
The negotiators are looking for $1 trillion in spending cuts as a “down payment” towards larger debt reduction. So far the group has only agreed to between $150-$200 billion in cuts. CRFB has identified between $1-$2.5 trillion in common-ground deficit savings through an analysis of recent budget plans from both parties. Much of the discussion reportedly focused on finding savings in healthcare. CRFB offered some ideas for health care reform that can reduce the debt here.
The group will meet again on Thursday, where they are poised to discuss “trigger” mechanisms to get the rest of the $4 trillion in deficit reduction that is the goal of many. Triggers can play a major role in meeting debt reduction goals, though they are no substitute for specific debt reduction policies. The Peterson-Pew Commission on Budget Reform (a project of CRFB) has been a leader in formulating debt targets and triggers that would effectively complement strong fiscal policies in significantly reducing the national debt. The Commission recently provided ideas for making targets and triggers work as part of a fiscal plan.
Revenues will be a key sticking point in the negotiations. Biden says that taxes must be on the table, while House Majority Leader Eric Cantor (R-VA), one of the negotiators, says that is not going to happen. Eliminating or reducing tax expenditures, which are really just spending through the tax code, are an area of possible compromise. See here, here, and here for how tax expenditure reform can simplify the dysfunctional tax code while broadening the tax base so that tax rates can be lowered with more revenue available to reduce the debt.
As CRFB has pointed out, the debt ceiling will have to be raised because the economic consequences would be disastrous otherwise. However, refusing to confront the mounting debt will also have grave economic effects, only more drawn out. The ideas, and agreement in many cases, are there; what is needed now is the political will among lawmakers to make the tough choices together in a bipartisan manner.
Fiscal policy experts and policymakers gather today for the second annual Fiscal Summit in Washington, DC, convened by the Peter G. Peterson Foundation. In addition to speeches from luminaries such as former President Bill Clinton, former Senator Alan Simpson, and several sitting members of Congress, the event will also feature new fiscal plans from groups spanning the political spectrum, including the American Enterprise Insitiute, Center for American Progress, and the Bipartisan Policy Center. CRFB will live-tweet highlights of the proceedings at http://twitter.com/budgethawks and it can also be followed at twitter.com/fiscalsummit. The event will also be webcast here. The live feed is embedded below. The event starts just after 9 am eastern time.