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"

(Reuters)

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.

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.

CRFB has compiled a brief background on the scope of our nation's fiscal challenges and the drivers of our debt and deficits, while outlining some of the types of solutions available to address the problems. 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.

CNN Money | April 5, 2011

I have been thinking a lot about the many lawmakers who have sworn to never -- never ever -- raise taxes.

First, how on earth did Grover become a single-name celebrity? Cher, Madonna, Fabio ... Grover? I'm not talking about the little blue furry puppet. I'm talking about Grover Norquist. He's the leading anti-tax advocate in Washington. And his "Taxpayer Protection Pledge," to which many members of Congress have signed on, is playing an outsize role in the fiscal debate.

In general, I think it's totally fine to oppose tax increases.

However, an ironclad pledge leaves Congress without flexibility -- even when the situation changes, as it has as a result of the recession. It's like handcuffing yourself without having a spare key. Also, it's not like there is an abundance of plans to fix the fiscal mess we are in through spending cuts alone.

Still, let me defend those who don't want to raise taxes.

I understand the politics: "Let's raise taxes" is never a big winner at the ballot box. On the substance, tax increases are bad for the economy.

While I worry far more about the damaging economic effects of excessive debt levels, the no-new-taxers are right to worry about the damaging effects of higher taxes. Particularly since our largest taxes are on income, higher rates create disincentives for work and saving.

That said, our current income tax rates are not troublingly high. Yes, it would be preferable to switch to a different tax base, such as consumption or carbon. But even increasing income tax rates somewhat would not be terribly damaging.

A second point that anti-taxers make is that going forward, the problems we face are on the spending side of the budget. Again, they are right.

In the past, taxes have averaged about 18% of the economy and spending about 20% to 21%. Revenues are projected to rise to above their historical averages -- even assuming the Bush-Obama tax cuts are extended -- while spending is expected to grow to an astronomical 25% to 30% of GDP primarily because of aging and health care costs.

This is a spending problem indeed, and a whopping one to boot.

But the real problem here is retirement and health related entitlements: Social Security, Medicare and Medicaid.

The budget problems with these programs and the massive voting strength of retiring baby boomers mean there will be immense pressure to raise taxes significantly on everyone else to pay for these programs.

So the anti-tax crowd does not want to oblige and raise taxes a bit now without making major structural adjustments to these programs.

I get it.

But there are legitimate arguments on the other side as well.

No one actually wants to pull back completely from the country's promises to the elderly.

And it is not surprising that there will be some growth in government spending in the coming decades given the aging of the population. More of our resources will go to paying for retirement and health care benefits.

Should the growth be as large as current projections? Absolutely not; we already spend too much on the elderly compared to what we spend on the young. It would make more sense to devote those additional resources to investing in the next generation.

That said, political promises have been made, no politician appears willing to walk away from them, and thus, spending in these areas will have to grow.

Also, the disturbing trends in income inequality cannot be ignored. Part of dealing with these disparities will undoubtedly involve asking the well-off to pay more in taxes; they have, after all, received virtually all of economic gains over the past decade.

So there are legitimate arguments on both sides of this issue.

The bottom line: If we want to get a budget plan in place to avert fiscal disaster, there will have to be compromise.

Democrats are not even going to come to the table if taxes can't be part of the equation. Republicans digging in over tax issues means we risk running out of time. And if we end up fixing this situation after a fiscal crisis hits, taxes will have to go up far higher than they otherwise ever would have.

So here's the pledge I'd like to see: "I promise to act as a responsible fiscal steward for the United States of America and do my best to ensure that the economy remains strong and competitive and that standards of living continue to grow."