The New York Times | August 29, 2012
The federal debt is the nation’s most pressing economic problem because our dangerously high debt levels are a threat on every issue — be it jobs, growth, competitiveness or public under-investment. The deficit is already harming the economy, and could eventually lead to a devastating fiscal crisis.
To suggest we must decide between debt reduction and economic recovery is to present a false choice. To the contrary, we cannot achieve one without the other. The key will be to implement a comprehensive debt deal large enough to fix the problem, phased in gradually enough so as not to derail the recovery, and designed to promote economic growth through reforms to the tax code and cuts in government spending that protect productive government investments.
We must be willing to reform all parts of the budget, including health care, Social Security, defense and taxes.
The upcoming fiscal cliff will soon cause the moment of reckoning. If we hurdle ourselves off the cliff, doing too much deficit reduction, too fast, and in the wrong ways, we will plunge the nation back into recession; whereas if we punt, we will surely endure further downgrades and quite possibly frighten credit markets into no longer favoring the U.S.
Instead, we must be willing to use this moment as the first step of putting in place a comprehensive debt deal. We will have to be willing to reform all parts of the budget — including health care, Social Security, defense and taxes. Doing so would not only be good policy, but good politics. Already, more than 140,000 Americans have signed a petition called Fix the Debt, asking our leaders to pass a comprehensive debt plan.
Any plan will have to be bipartisan, because quite frankly this will be just too hard for either party to do alone. And if we let the presidential election deteriorate into political posturing, we will make the job of passing the needed reforms even harder. It’s not enough for the candidates to accuse each other of touching the budget’s sacred cows; they must present their realistic plans to fix the debt — plans in which those sacred cows will have to be touched.
Changes will have to be made. We can do it on our own terms, or we can wait until we are hit with a crisis and are forced to — as we have seen in Greece and Portugal. Let’s hope our leaders are willing to come together to fix the debt while we still have time.
Coeur d'Alene Press | August 16, 2012
With the election season moving into higher gear and a “fiscal cliff” on the economic horizon, the American public will be hearing more and more about the crushing debt our country faces. As it happens, Idaho is extremely lucky to have two Members of Congress, Senator Mike Crapo and Representative Mike Simpson, who have been spearheading a growing, bipartisan charge to tackle the issue.
That’s why I was honored to be joining these two leaders in Boise to discuss the work of the Campaign to Fix the Debt. We launched the campaign in July as a non-partisan push to put America on a better fiscal and economic path. Members of the campaign have come together from a variety of social, economic and political perspectives, united around a common belief that America’s growing federal debt threatens our future prosperity and that we must address it.
Over the coming months, we will mobilize key communities—including leaders from business, government, and policy—and voters all across America to urge our elected officials step up and solve our nation’s serious fiscal challenges by passing a comprehensive deficit reduction plan.
Luckily, courage and leadership on this issue are not exclusive to the Idaho delegation. Senator Crapo and Representative Simpson are part of a small but expanding circle of lawmakers from both houses of Congress and both sides of the aisle who are willing to discuss, and seek common ground on, the hard choices necessary to set us on a sustainable budget track.
The case for action on this front is stark. Public debt is equal to more than 70 percent of the U.S. economy and is on track to rise well over 100 and 200 percent in the next few decades. That’s way above historical levels we’ve experienced here in the U.S., where debt has averaged about 40 percent of our economy, and way above levels economists consider to be safe.
The corrosive effects of such deep debt threaten our standard of living and our fitful recovery from the Great Recession. Unchecked, it will almost certainly mean higher interest rates throughout the economy. That will make it much harder to buy a new car, buy a new house, or start a new business. It will also make the cost of everyday activities more expensive. On a national scale, this translates into a slower economy, with fewer jobs and lower wages.
But it’s not all doom and gloom. Since its launch a few weeks ago, our campaign has been getting a great deal of attention and support. I can tell you from the emails, letters, phone calls and Tweets we receive that the American people are hungry for an adult conversation on what we are up against and how we can fix the debt.
I am often asked what everyday people can do to influence this crucial debate. My answer is to (1) thank those elected officials who have already committed themselves to the cause and (2) make sure, during the fall campaign and beyond, to press candidates and officeholders to explain exactly what they will do to fix America’s finances and avoid saddling our children and grandchildren with a crippling debt burden. I also encourage them to sign up to receive more information on the issue and join the cause at www.FixTheDebt.org.
Despite all of the roadblocks and inertia that confront those seeking to bring people together, across party lines, to find common ground on this issue, I am convinced that it can and will happen. But not without a groundswell of grassroots support that lets every politician know that kicking the fiscal can down the road is no longer acceptable—and may be harmful to their political health.
While there certainly are brave lawmakers in Washington trying to forge a bipartisan consensus on debt reduction, we’re not there yet. We need every American’s help to get a meaningful deal done. In the past, this country’s greatest challenges have inspired some of our finest moments. I am confident that this can be one of those moments.
The Hill | May 1, 2012
Since the Social Security Trustees report was released last week, we’ve heard a lot about the year 2033. That’s the year when the Social Security trust funds as a whole will run out of money and will no longer be allowed to pay full benefits. The real year to pay attention to, though, is 2016, when the Social Security Disability Insurance fund runs out of money.
What does this mean? It means that within half a decade, during the next presidential term, the disability program will no longer have the legal resources to fully pay its 12 million beneficiaries. At that point, current law calls for an immediate 20 percent benefit reduction for all disabled individuals.
Most observers don’t worry much about this year. They assume that when 2016 comes around, politicians will simply reallocate money from the old age program into the Social Security program and viola, problem solved. I wouldn’t be so sure that transferring the money will be so easy – and I’m not sure it should be.
The Social Security disability system is broken in many ways. Not only is the program financial insolvent, but the system is wrought with fraud, needlessly complex, difficult to navigate, inconsistent and unfair in determining eligibility, inflexible to changes in the structure of the workforce, administratively overburdened, almost completely uncoordinated with other government policies, and unable to help or reward those who are interested in reentering the workforce.
Making the disability system solvent simply by taking money from the already-underfunded old-age system would represent a double policy failure by committing a disservice to both programs. Instead, policymakers should use the fast-approaching insolvency date in the same way they did when the trust funds ran low in 1983 – come together and fix both programs for this generation and the next.
Specifically, any plan which reallocates money from the old age program to the disability program should do the following:
Enact reforms to improve Disability Insurance over the short-term
When lawmakers worked to prevent the Social Security trust funds from running out of money in 1983, the primary focus was on identifying the $150 to $200 billion necessary to keep the program solvent through 1989. Similarly, they should work to identify savings approaching $200 to $300 billion through 2022 in order to keep the DI trust fund intact.
On the spending side, savings could come from enhanced anti-fraud efforts, reductions in duplicative benefits, limits to retroactive benefits, and changes to the way we treat beneficiaries who collect disability as an alternative to reduced early retirement benefits. On the tax side, one option would be to gradually increase or remove the “taxable maximum” on the 1.8% disability payroll tax in order to ask high earners to contribute more without dramatically increasing their marginal tax rates.
Take steps toward more structural reform
At the same time we identify short-term savings, we should be asking more fundamental questions about the program. How should disability be defined? How can we offer different types of support across various state and federal programs? Is there room for partial disability in the system? How can we help to train and reward beneficiaries to go back to work, or to avoid entering the disability system in the first place?
We need a disability system for the 21st century, a system which answers these and many more questions. Such a fundamental rethinking to the 55-year old program will take time, but we can more aggressively pilot new ideas starting today, and combine that with a study and review process to make bolder reform possible in the coming years.
Fix Social Security: Make it sustainable solvent
The 1983 reforms focused on the short term, but used the opportunity to enact long-term changes as well. The combined Social Security program is incredibly underfunded over the long-run -- by one to one and a half percent of GDP depending on how one measures it. We can eliminate this gap through a comprehensive plan which slows benefit growth for higher earners, gradually increases the retirement age, and makes other tax and spending changes to make the old-age and disability programs sustainable over the long run.
Undertaking such reforms today would give workers plenty of time to plan and make changes, and offer them the security of knowing the program will be there for them and the next generation.
Ideally, we wouldn’t need a looming insolvency to force action on this important issue. But if politicians need the threat of a crisis in order to act responsibly, there is no shortage of these in the months and years ahead. Hopefully they will act in time to avoid them.
RealClearMarkets | April 24, 2012
We have already absorbed more campaigning from the Republican contenders than most people can stand. We have also seen President Obama, and friends, fire back when his programs were under attack in the Republican primaries. From all sides we have heard sound-bites, catch-phrases, and answers to questions never asked.
Sad to say, it's only going to get worse. You can run from the presidential campaigning, but you can't hide.
There will be more than enough money for general election spending to saturate TV and radio airwaves with political advertising. All of it will be loud. Much of it will be negative. Little of it will have to do with major problems which ought to be discussed by the candidates. In keeping with their managers' instructions, candidates will try to stay "on message" and "off-issue."
The fall debates will be better than the primary debates if only because there will be two candidates rather than 10. But the debates, if they follow precedents, are not likely to shed much light on the problems that really concern people.
Not since 1992 when Ross Perot asked us to "peek under the hood" have Americans been given much of a chance to hear about the long-term, persistent debt and deficit problems of the U.S. During the 8 year Clinton presidency which followed, we enjoyed 4 consecutive no-deficit years. Good fortune may have been partially responsible for that black-ink, but it was achieved in a period when control of the government was divided between the parties just as it is today.
The 2012 candidates, President Obama and Governor Romney, have now been identified. Each has had plenty of time to look under the hood for a careful study of the U.S. debt/deficit problem. So far, their proposals fall well short of the target supported by many budget analysts of stabilizing the debt at about 60% over the next decade.
Both candidates can improve their platforms on fiscal and budget issues, and both probably will. Even so, in an aggressive, noisy campaign, the public may not fully understand the candidates' positions. After all, precision and clarity have never been the hallmarks of presidential campaign advertising.
The incumbent Democrat has eschewed the high standards of his own Debt Commission (Bowles-Simpson) Report, and instead has proposed small tax increases and small spending cuts. The challenging Republican has promised tax cuts aplenty, but his overall economic plan needs clarification, especially since he endorsed the rigorous expense-cutting of the Paul Ryan Budget Plan.
The American people deserve a full debate and discussion on our fiscal problems. With four $1 trillion deficits in row and a debt ratio over 70%, the Washington response of both political parties has been to "kick the can down the road." Kicking the can is political-speak for saddling future generations with this generation's refusal to meet its own obligations.
Full debate for presidential candidates has come to mean the officially blessed TV debates, which began in 1960. These debates, and the questioners, are often justly criticized. Nevertheless, the TV debates remain the best way to probe the candidates' positions on the difficult issues. In contrast to the loud advertising wars of candidates and super-PACS, the debates are the public's best information source.
Because the fiscal problem is so important, the public interest would be well served if at least one of the fall debates were reserved for discussion of the debt, the deficit, and the budget. But, to ensure that the public is fully informed, searching questions should phrased by experienced, bi-partisan budget experts, and put to the candidates, as often as necessary, by skilled questioners.
Candidates can be as evasive as they wish, but slippery answers will be as revealing as bad answers, especially if the question is posed more than once.
The general idea is to guarantee, insofar as possible, that the candidates respond directly to unpleasant questions about the country's dire financial condition. Candidates love to talk about more tax cuts, and about preserving entitlements. That's easy. The hard part is telling the people about the difficult decisions that must be made so that future generations will not be subjected to slow growth, high interest rates and a lower standard of living.
A request has already been made that at least one of the presidential TV debates be reserved for a thorough discussion of the fiscal problem. Whether it will be granted is not yet known. There ought to be strong public support for it.
Many Americans know that we are now living on borrowed money from foreigners. They know that one rating service has already downgraded our debt, and that others may shortly follow. They know low interest rates won't last. They know about our recurring deficits that are always supposed to decline, but never do. Those Americans ought to be demanding at least one Fiscal Debate.
The Hill | April 17, 2012
It is fitting, and perhaps ironic, that today is both Tax Day and Financial Literacy Day. Taxes and finances are intimately intertwined, and as the U.S. budget crisis underscores, that relationship is not always a positive one. Today, as our elected leaders ask households around the country to take a look at their own balance sheets, they might be wise to do the same. What they will find isn’t pretty — a ledger filled with a mountain of debt and no real long-term plan to bring spending and revenues more closely in line.
Having already grown from its historical average of below 40 percent of the economy to about 70 percent today, the nation’s debt is on course to rise to 85 percent of the economy by 2022, and 150 percent by 2040. By contrast, federal revenues have historically been at about 18 percent of the economy. It doesn’t take a financial literacy class to know that if you owe eight times as much as you earn, you are probably in trouble.
The consequences of continuing to accumulate this debt are substantial. Higher government debt means slower economic growth as investors will buy U.S. Treasuries instead of investing in new, more productive business ventures. It means that an increasing share of our tax dollars will go to paying interest on our debt instead of important investments for the future and social programs. It means that the government will have less flexibility to respond to future crises — whether they are economic, military or natural disasters. And it means that, eventually, global markets will get fed up and no longer trust that the United States will pay back its debt. At that point, we’ll have a serious crisis on our hands, and instead of making gradual reforms on our own time we’ll be forced to make abrupt spending cuts and tax increases — and they won’t be pretty.
Time is running short to bring the country’s finances in order. If we don’t choose to address rising debt in a smart way now, there is a set of policies scheduled to occur at the end of the year that will — at least temporarily — solve it automatically for us, but in a manner that is not in the best interests of the country. As a result of the temporary extension of the 2001/2003 tax cuts at the end of 2010, the failure of the congressional supercommittee at the end of 2011 and the payroll tax holiday renewed in February of 2012, and other expiring provisions, a series of deficit-reduction policies are scheduled to hit all at once at the very beginning of 2013. Described by Federal Reserve Chairman Ben Bernanke as a “fiscal cliff,” these policies would put in place the eventual magnitude of savings we need — but their timing and composition could wreak havoc on the economy in the short term and would do little to improve our long-term growth prospects.
The two largest components of this fiscal cliff are the expiration of all of the 2001/2003/2010 tax cuts — which means higher rates and higher taxes for everyone — and an across-the-board spending “sequester” that would immediately cut defense spending by 10 percent and non-defense programs across the board by 8 percent.
Do we need more revenue and more spending cuts? Absolutely. But the revenue should come from comprehensive tax reform that lowers rather than raises marginal tax rates and that reduces the deficit by cutting the various deductions, exclusions and credits, which are really just spending in the tax code. And the spending reductions should be focused on cutting wasteful and anti-growth spending and controlling the growth of entitlement costs — not mindless wholesale cuts that hit good spending as well as bad.
Before year’s end, lawmakers must replace the prospect of a fiscal cliff with a set of smart reforms throughout the federal budget to gradually put debt on a stable and downward path. Done right, such a plan would not only avoid the dangers of abrupt tax and spending changes but also reprioritize revenues and spending toward what Americans care about most — a pro-growth budget and tax code that invests in the members of the next generation rather than borrowing from them.
Changes set to occur at the end of the year offer an incredible opportunity for our leaders to act proactively and replace the automatic and abrupt savings with smart reforms. We must not let the moment pass us by.
The Atlantic | December 12, 2011
A solution to pay for $300 billion of stimulus that doesn't include the words "tax hike" or "spending cut"
It's become a Christmas tradition for Congress to end the year by extending all the policies which expire at year's end. There is the Alternative Minimum Tax, which has to be "patched" every year so that it reaches only four million taxpayers instead of thirty million. There is the looming 27% cut in Medicare payments to doctors which policymakers will need to protect with a "Doc Fix." And on top of that, this year, we're dealing with the expiration of a payroll tax holiday and extended unemployment benefits meant to help boost a weak economy.
Extending these provisions every year is really expensive. It comes out to about $275 billion for a single year. That's more than a quarter-trillion dollars added to nation's credit card.
But here's the good news. For the first time in a long time, our politicians are actually talking about finding spending cuts and tax increases to finance the costs of these extensions. Democrats are focusing on a new tax for millionaires. Republicans are focusing on cuts that will impact the size and cost of the federal workforce. With our debt already on a dangerous path, anything worth having is also worth paying for. But Democrats will balk at an all-cuts solution, and Republicans have made it clear they don't want to raise taxes.
I have a different solution. It's a single, simple change. It wouldn't drastically cut domestic spending. It wouldn't change tax rates. Instead, it would pay for a payroll tax cut, AMT patch, and unemployment extension with a slow, phased-in policy called "chained CPI." Don't know what that is? Let me explain.
WHAT'S CHAINED CPI?
Every year, wages and prices go up. The government wants to measure this inflation to index everything from Social Security checks to tax brackets. The government makes these measurements by focusing on a "basket of goods" to compile its so-called consumer price index, or CPI.
The weakness of regular CPI is that we don't account for when consumers start changing their relative buying habits. If the prices of apples skyrocket, the regular CPI assumes cost-of-living will go way up. But in the real world, most people just buy fewer apples and more oranges.
Moving to the "chained CPI" corrects for this technical flaw by trying to provide an honest assessment of each month's basket and creating a "chain" between them. Moving to a more realistic measure of inflation would save well over $200 billion over the next decade, including from Social Security, other inflation-index programs, and from the tax code.
5 REASONS IT'S A GREAT IDEA
1) Social Security Savings Pay for Social Security Losses: Since the payroll tax is used to finance Social Security benefits, a payroll tax holiday necessarily takes revenue out of the system -- about $120 billion worth. Last year, we made up that money through a transfer from general revenue; but those types of transfers -- necessary as they might be -- threaten the contributory nature of the program. The chained CPI, though, would lead to savings within the Social Security program from lower COLAs. This would allow the Social Security trust funds to make up the lost revenue in ten years; and after that the chained CPI would help to close over a fifth of the long-term funding cap.
2) Income Tax Revenue for an Income Tax Cut: Patching the AMT will cost us $90 billion worth of income tax revenue over the next year or so. But because the income tax has so many parameters indexed to inflation, switching to the chained CPI can help us make that money back. The main reason chained CPI raises revenue is because of something called "bracket creep," where growing incomes push people into higher income tax brackets over time. Because we over-measure inflation, though, income is not being pushed as fast as they should in an inflation-indexed tax code. Using the chained CPI to index the tax code would reduce the deficit by about $60 billion through 2021, and make future AMT patches roughly $40 to $50 billion cheaper.
3) Other Spending Cuts for Other Spending: In addition to the Social Security and revenue savings, switching to the chained CPI would save over $50 billion over a decade by slowing the growth of various government benefits and eligibility thresholds. This mandatory savings should be enough to pay for an extension of unemployment benefits.
4) A Pro-Growth Phase-In: Sharp immediate deficit reduction could prove economically dangerous in a time of weak growth, but the markets also need to see a credible plan to reduce the deficit over the medium and long-term. The chained CPI saves money because it grows a tiny 0.25% slower than the current CPI measure. Because of this, savings are very small up front but compound and grow over time in a way that provides substantial deficit reduction over the long-term.
5) It's a No Brainer: The chained CPI is the right measure of inflation -- economists and experts from the left and right agree on that. Ideally, it shouldn't even be an offset for new deficit spending -- we should just do it. Of all the hard and painful choices we need to make to right out fiscal situation, measuring inflation right is not one of them. We should get it done now, and move on to the serious choices.
Ripon Forum | November 16, 2011
The coming months will be filled with arguments over whether we as a nation should be focusing on fixing the jobs problem or the debt problem. No question, the sluggish economy, signs of a double dip recession, and persistent unemployment are not only troubling signs for what lies ahead for growth, but devastating to the millions of families directly affected.
The mounting federal debt also gives off ominous signs for the future. Our debt as a share of the economy is higher than it has ever been in the post-war period, and we are on track to continue adding to it forever. By the end of the decade we could easily be paying interest payments of nearly a trillion dollars per year, which can be described as nothing other than a tremendous waste. We know not only is the debt already probably a drag on the economy, but that at some point, unless changes are made, it will lead to a fiscal crisis.
It’s harder, however, to see the direct effects of the debt. Unlike someone who can’t find a job where the profound effects are felt each and every day, the debt is more like a quiet cancer on the economy, eating away at our well-being from a number of less visible angles.
High debt levels harm the economy by diverting capital away from productive investments. Higher interest payments in the budget squeeze out other priorities – whether they are other spending or lower taxes – and leave the budget highly vulnerable to increases in interest rates. Excessive debt also leads to a loss of fiscal flexibility. We no longer have as much fiscal space to respond to emergencies whether they are economic, natural disasters, or security threats.
From an intergenerational perspective, debt reflects the basic policy of our spending, yet refusing to pay the bills, instead passing them to future generations, along with a lower standard of living than they would otherwise enjoy. This inequity is exacerbated by the fact that the bulk of our government spending goes to consumption — much of it for the elderly — rather than investments, which would at least have the potential to boost longer-term growth. Finally, numerous studies have recently found that the debt is already at such a high level that it is likely a drag on growth.
Still, because it is not an in-your-face kind of problem, the debt doesn’t have the same sense of urgency that dealing with our jobs crisis does. “Let’s just fix this jobs problem -- then we can deal with the debt,” is a comfortable fall-back position. And instead of looking at what is becoming increasing clearly the interconnectedness of these two issues, as is too often the case in Washington, many policymakers are lining up in one camp or the other.
On one side there is the focus on “stimulus camp” (though we don’t call it stimulus anymore in polite circles, so I mean “jobs camp.”) The policies coming out of here are primarily temporary in nature and involve ramping up spending or targeted tax cuts on particular areas of the economy.
There is the infrastructure bank. Spending on green jobs. Broadband. Investment incentives in all shapes and sizes. Rarely are these ideas paid for — though, to the President’s credit, his are. But many of them manage to feel both tired and like they are trying too hard at the same time — not to mention the propensity to take one’s favorite program and repackage it as a jobs measure.
We have had multiple rounds of stimulus in the past few years, and while it is frankly impossible to say how well they worked since we don't know what would have happened without them, it is also impossible to look at the economy and call them a rip-roaring success. So it ends up feeling as those further rounds of these stimulus/jobs measures will be the same mediocre medicine dressed up in slightly different packaging. Given that the definition of insanity is trying the same thing over and over again and expecting different results, we might then considering trying a different approach.
On the other side, there is an approach to deficit reduction that is shortsighted in nature and at odds with the recovery. Whereas stimulus dominated the economic agenda for the past few years, these deficit reduction measures have dominated for the past few months. First with the negotiation to avoid a government shutdown, then with the negotiation to avoid a default, the outcome continues to be immediate spending cuts from the discretionary side of the budget. This ignores: 1) that deficit reduction right now, as the economy is struggling to recover, should not be the goal; and, 2) that the discretionary part of the budget is not where the actual problems lie.
So, neither of these approaches will work to successfully grow the economy. Or fix the budget.
The solution, which has been laid out by Ben Bernanke of the Federal Reserve, Christine Lagarde at the International Monetary Fund, and Erskine Bowles and Alan Simpson and the President’s Fiscal Commission, to name a few, is instead a multi-year, comprehensive fiscal plan that would set the budget on a glide path to stabilize the debt, but leave enough fiscal space up front keep to pushing the economy along.
Putting in place a deficit reduction plan to bring the debt back down to around 60 or 65 percent of GDP over a decade (still significantly higher than the historic average of below 40 percent, but more manageable at least) creates the opportunity to grow the economy in a number of ways that will not be achieved either through one-off stimulus measures or incremental spending cuts.
First, it would take off the table the risk of a fiscal crisis. I know that only a few years ago, comparing the U.S. to Greece seemed inflammatory and absurd. However, recent events – including the well-deserved downgrade and the paralysis of our political system – now show the possibility of a full-blown fiscal crisis to be not nearly as remote as we would have liked to believe. Only by charting a new fiscal course will we remove that risk.
Second, implementing fiscal reforms that are comprehensive in nature, rather than incremental, offers the opportunity to restructure our budget and tax systems in ways to promote growth. The key here is switching from a consumption-oriented to an investment-oriented budget.
It is well-known that changes need to be made to Medicare, Medicaid and Social Security to deal with their internal imbalances and potential insolvency. But making reforms to entitlements also gives us the needed push to rethink our national priorities in general. Our budget emphasizes consumption over investment in a dangerously shortsighted manner. We spend many times more on people over 65 than we do in investing children under 18. The single largest commitment made by politicians of both political stripes when discussing how to fix our fiscal situation is to not touch benefits for anybody over the age of 55. Really? How about changing that to protect all at risk-children? Sorry, Dad -- but come on!
Instead, we should think about how to fix entitlements – I would argue through means testing and raising the retirement age – to both ensure the people who depend on the programs are not affected and to encourage longer, more productive working lives. Much of the savings will be needed to close the fiscal gap, but a significant portion should be set aside to increase public investments that work, including investments in early education, skills development, modernizing our infrastructure, and basic R&D.
On taxes, the revenue fight in Washington is a distraction. Of course we will need more revenues as part of a fiscal deal. Closing the gap without revenues would require such tremendous cuts that very few voters or politicians would support them once the trade-offs were made clear. But it is absolutely legitimate to point out that our fiscal problems are the result of spending growth, that revenues should not be increased until the necessary spending reforms have been made, and that even then, they should be increased through tax reform -- which is more likely to grow the economy -- rather than marginal tax rate increases -- which will harm it.
Tax reform is a no brainer. With lower individual and corporate tax rates and fewer tax expenditures, along the lines of what the Bowles-Simpson Commission recommended, the tax code could be simpler, fairer, and more pro-growth while also raising revenues to bring down the debt. Our mess of a tax code is littered with over 250 special credits, deductions, exemptions, and exclusions that cost us nearly $1.1 trillion a year. These “tax expenditures” are truly just spending by another name. By focusing tax reforms on this area of the budget, we can reduce tax rates to more effectively encourage work and investment, and grow the economy and jobs, while also helping to reduce deficits. No, this is not the same as saying that tax cuts pay for themselves. It merely reflects that when your starting point is such a crappy tax code, benefits of reform can be significant.
Without tax and spending policies to spur innovation and investment in human capital, there is little hope that we will achieve the economic growth and job expansion that we need to have. But again, none of this will come from the small-ball, incremental approach to deficit reduction.
Third, a credible, multi-year debt reduction plan can help free up enough fiscal space upfront to allow the economic recovery to continue to take hold. Rather than implementing immediate spending cuts and tax hikes, which would be economically disruptive, budgetary changes could be phased in more gradually, putting the debt on a glide path to stable and then declining levels. From a political perspective, the chances of including some bread-and-butter stimulus and jobs measures such as extending unemployment, payroll tax cuts, and aid to states, as part of an overall fiscal package rather than as a standalone, are significantly greater.
Finally, a multi-year plan will provide businesses and households more confidence and stability, allowing them to spend, invest, and plan in ways that will help the economy. For years in this country, we have been bubble hopping. We jumped from a stock market tech bubble, to a housing bubble, to a consumer credit bubble, to where we currently landed in a government debt bubble. There is no more space for either consumers to spend our way out of the sluggish economy or the government to borrow our way out. And there are no more bubbles to hop to.
Instead, we need to look to a business-driven recovery, but that will only happen if and when businesses have enough stability and understanding of the policies that will affect them for the coming years that they start spending the cash on their balance sheets in ways that will grow the economy and create jobs.
Notice how those were focused solely on the jobs agenda may give lip service to the need to reduce deficits somewhere down the road, but are rarely willing to offer a specific plan? And notice, too, how those for the incremental spending cut only approach to deficit reduction rely on nonspecific frameworks like a Balanced Budget Amendment or Cut Cap and Balance instead of focusing on what their real agenda should be -- specific reforms to entitlement programs?
Neither of these approaches will get the economy back on track, and neither will fix our structural fiscal problems. To accomplish this, lawmakers need to go big and put in place a multi-year debt deal that saves $4 trillion. In so doing, we can provide the space for further stimulus measures, create better investment and growth incentives, and set the debt on a manageable course. It would also prove immensely reassuring to markets and rating agencies.
Other than political timidity, it is hard to see why anyone would pursue any other course. RF
Maya MacGuineas is the President of the Committee for a Responsible Federal Budget and the Director of the Fiscal Policy Program at the New America Foundation.
The Atlantic | October 22, 2011
We've spent a quarter-century undoing the smart, simple tax reforms of 1986. Here's to hoping Washington can act like its old self before it's too late.
Today marks the 25th anniversary of the Tax Reform Act of 1986, the last major overhaul of the federal tax code. Signed into law by Republican President Ronald Reagan and championed by Democrats such as Bill Bradley and Richard Gephardt, the enactment of the law was a remarkable bipartisan achievement. It dramatically lowered marginal rates with a top rate of 28 percent, removed millions of working poor off the tax rolls, and simplified the tax code by closing a myriad of tax loopholes.
Unfortunately, many of the loopholes that the 1986 reform eliminated have returned, with a few extra ones slipped in for added measure. Since the law's enactment, more than 15,000 changes have been made resulting in a tax code that is several volumes longer than The Bible and requires 71,684 pages to spell out the rules. Because of this complexity, 80 percent of American households use a tax preparer or tax software to help them prepare and file their taxes.
But complexity is only part of the problem. The other is cost. Year-after-year, elected officials in Washington shovel more tax breaks into the trough (tax breaks now account for $1.1 trillion) causing both deficits and marginal tax rates to be higher than is necessary or optimal for the economy.
Despite the obvious need for tax reform, some in Washington are advocating that congressional Super Committee charged with finding a balanced deficit reduction package not tackle tax reform. They claim it's too complicated, too hard, or too long-term.
They're wrong. Delaying tax reform will only make implementing the solution harder and more painful. There has never been a better time in which to enact tax reform. The Super Committee was created as part of last summer's debt ceiling agreement to require Congress to vote up or down, without amendment, on tax reform as part of its plan to address the federal government's medium and long-term fiscal imbalance. This BRAC-like power is designed to limit the influence of special interests whose work in the past has littered the tax code with loopholes. This opportunity is not likely recur anytime soon. It is, therefore, in the Super Committee's interest to act now rather than wait.
Tax policy is complicated. But lawmakers on the Super Committee don't have to start from scratch. There are already a number of plans that would dramatically lower marginal rates for individuals and businesses, eliminate tax expenditures, and grow revenues for deficit reduction. For example, the Zero Plan put forward by the Bowles-Simpson Fiscal Commission (what some refer to as 1986-style tax reform on steroids), would lower marginal rates and simplify the tax code from six to three tax rates, tax capital gains and dividends as ordinary income, eliminate the burdensome Alternative Minimum Tax, align the corporate and the top individual rate, move our corporate tax code to a territorial system, and eliminate all or most of the $1.1 trillion in tax expenditures.
Furthermore, the Super Committee does not to choose between writing a full tax reform bill in two months or agreeing to an open ended process for tax reform in the future. The Bowles-Simpson Fiscal Commission, Gang of Six, and others have proposed setting up a procedure for expedited consideration of tax reform that sets out parameters and criteria for what tax reform must include in addition to the revenue target while leaving details to the Senate Finance and House Ways & Means committees. Such an approach ensures true tax reform will be voted on while leaving the details to those who have the expertise to get the job done.
In addition, fundamental reform, which broadens the base by reducing deductions, credits, exemptions, and other tax expenditures; simplifies the code; and lowers individual and corporate tax rates, has the potential to substantially improve economic growth. The Joint Committee on Taxation has estimated that income tax reform that wipes out most tax expenditures in order to lower marginal rates, could increase the size of the economy by 1.2 to 1.9 percent of GDP over the medium-term, and even more over the long-term.
Finally, the new revenues generated by fundamental tax reform would help the Select Committee to achieve substantial deficit reduction. The Super Committee is charged to identify $1.5 trillion over ten years in deficit reduction, though $1.2 trillion over ten years would be enough to avoid an automatic sequester. While this would represent significant savings, members should be shooting t at least double, or triple this target in order to put the debt on a sustainable course. Relative to a realistic budget baseline, it would take about $3 trillion in deficit reduction just to reduce the debt to below 70 percent of GDP by 2021 and put it on a modestly downward path. Identifying an amount of deficit reduction significant enough to put the debt on a downward path will almost certainly require looking beyond discretionary spending to major entitlements, other mandatory programs, and ways to produce more revenue.
No doubt taking up tax reform will be a difficult challenge for the Super Committee. But the benefits of enacting fundamental reform are worthy of the effort. Besides, enacting tax reform is a whole lot better for the economy, and for politicians of both parties, than continuing the on-going fight over extending the Bush and Obama tax cuts for another year.