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Op-Ed: Tax Plan: Get Ready for a Big Debt Hangover

CNN Money | December 13, 2010

What happened!? Just two weeks ago we were celebrating the willingness of the political class -- or at least an influential subset of it -- to finally get realistic and confront the nation's fiscal challenges.

The remarkable success of President Obama's fiscal commission came as a welcome surprise. The panel came up with an outstanding budget reform proposal that could put the U.S. budget on track and reassure credit markets.

And in highly uncharacteristic fashion, a diverse group of political leaders from Republican Sen. Tom Coburn to Democratic Sen. Dick Durbin chose to embrace the plan rather than use it to score political points.
It felt like we had climbed out of the rabbit hole, and responsible governing and leadership had returned.
And then with whipsaw speed, the White House and members of Congress came up with a stinker of a compromise tax cut plan. In typical Washington fashion, it included lots of goodies. The result was new spending; tax cuts for businesses; tax cuts for the rich; tax cuts for the middle class; tax cuts for the poor ... even tax cuts for the dead.
And it comes at a massive cost.
The Republican side of the group that struck this deal wanted to ensure that tax rates not rise while the economy is still weak (or ever, for that matter).
A temporary tax cut extension should have been accompanied by a mechanism to develop fundamental tax reform over the coming 12 months focusing on economic growth -- and not adding to the debt.
Instead, they merely extended all of the Bush tax cuts for two years, and added in a few extras for good measure, with every intention of extending them all again two years from now. (Related commentary: Will Dems fall for temporary tax gambit again?)
Did they offset the costs by suggesting spending cuts or future tax reforms? Nope.
On the other side, the White House wanted to put in place another round of stimulus (as well as find a vehicle for a slew of other measures they wanted to get through Congress).
They should have crafted a targeted and effective stimulus package -- focusing on the major weaknesses in the economy such as housing and the cash-strapped states -- with a plan to pay for the borrowing.
But did they come up with a particularly effective stimulus package: Should we expect a good return on the massive cost? Nope.
Tax cutters and would-be stimulators may try to call the deal a victory. But as for the rest of us, we get to look our children in the eye and explain how our nation just added another $1 trillion to their tab.
What has to happen now: We have a number of challenges in this country, including ensuring that the recovery sticks and controlling our national debt (which, in fact, is a necessary component of helping the recovery hold).
Yes, we should keep the overall tax burden low, but only by cutting spending, not by running up the debt.
And yes, we should put in place a well crafted stimulus package, based on good economics rather than convenient politics, that is both paid for over time and linked to a broader budget plan.
Stimulus should not be an excuse to throw in every last initiative on the wish list and pretend it is good for the economy.
Going forward, the first step will be creating a new budget framework, such as the one the Peterson-Pew Commission (which I served on) recommended.


The starting point for this plan would be to identify a particular fiscal goal, such as bringing the debt back down to 60% of GDP by the end of the decade. Then, if Congress doesn't pass a plan to meet that goal, automatic spending caps and revenue increases would kick in.

From this point forward, policymakers should not add a single dollar to the debt without combining it with this kind of a responsible budget framework. It doesn't matter what the issue is -- the budget, the debt ceiling, or any new spending and tax bills. No more blind debt.

And then over the next year, lawmakers and the president must come up with the specific spending changes and tax reforms to fill in the plan.

If they choose instead to continue borrowing hand over fist and using the weak economy as an excuse not to offset any costs or enact a debt reduction plan, no one should be surprised when credit markets cry "enough!" And that would bring about a very unhappy ending to the borrowing binge that it appears we are still on.


Op-Ed: A Debt Fix to Believe In

CNN Money | December 6, 2010

It was a gut wrenching roller-coaster ride of a week for anyone who followed the deliberations and votes of the Bowles-Simpson fiscal commission.

Would 14 members sign on to formally send the plan to Congress? (That was never going to happen.) Would the two co-chairmen, Erskine Bowles and Alan Simpson, make like Thelma and Louise and jump off the ledge alone?

Or, would they get a solid bipartisan majority? Unbelievably, that's what happened. (Rundown on the plan)
Let me start by saying -- and call me a cynic -- that I never thought the National Commission on Fiscal Responsibility and Reform would amount to much of anything.
President Obama put it in place, it seemed, just so he could do nothing until after the election and still be able to point to the never-expected-to-succeed commission as proof he was taking action.
Then he gave it a nutso mandate: Come up with 14 out of 18 votes so the lame-duck Congress would take an up-or down-vote. That threshold was out of reach, considering that some members were polarizing figures who didn't seem very committed to the commission's success.
And a vote in the lame-duck? When everyone knew the midterm elections were going to produce massive change on the Hill? That's not how to build support for incredibly tough choices that not only have to pass, but have to stick for decades.
So off the commission went with its impossible mission. But then an amazing thing happened.
Bowles and Simpson came up with an initial plan, and it was really ... really good. It did everything the country needs to do. Cut defense. Fix Social Security. Put health spending on a strict diet. Reform the tax code. Raise the gas tax.
And it found savings of nearly $4 trillion.
That opening Bowles-Simpson plan was remarkable. I thought they might as well go home because that was where the story should end. After all, it would only go downhill after that.
Bowles and Simpson then spent the subsequent weeks in shuttle negotiations to build support from other commissioners. I assumed they were watering it down and caving to individual interests, members' fears and political bullies.
And then they came out with another plan. And it was really ... really good. Watered down? Ha. In some areas it was even better.
But the most amazing thing of all was the support it got.
Not only did 11 of 18 members support it -- a bipartisan super majority. More than a few lawmakers on the commission, knowing full well they would get heat from all sides, showed true leadership and courage and lent their support.
Sens. Judd Gregg, Kent Conrad, Tom Coburn, Michael Crapo and Dick Durbin, and Rep. John Spratt, all deserve a standing ovation. Cheesy, I know, but I can tell you there were more than a few C-Span viewers --including this one -- who shed a tear. (Panel members: Full list)
The way forward
So where from here?
It looks like the House is poised to continue its posturing and political negotiating instead of moving to the next phase of cooperating. Note to lawmakers: The markets are increasingly uneasy about debt problems in Europe; the possibility of contagion is simmering.
Obviously, the president has to get in the game. He cannot expect lawmakers to make all the hard choices without showing that he is willing to do the same. And while his proposed public sector pay freeze is a savvy small start, it will take much more than that.
Obama will have to say directly that we should cut discretionary spending, raise the retirement age, eliminate the bulk of "tax earmarks" or take other such measures.
The real hope, I think, lies with the Senate.
The commission members who supported the plan are true leaders, not just on fiscal issues, but to the left and the right in their respective parties.
Those senators will have to make the case to their colleagues. Yes, this plan -- or a similar one -- is imperfect. Yes, it is filled with things we all hate. Yes, it is politically risky. But it is critical to securing the nation's fiscal and economic future.
Policy changes will have to be made to get more support. Here are a few suggestions:
Both sides seem to agree we have to do more on health care. Everyone needs to be reassured that the tough choices, once made, will stick. This is particularly important so that neither side feels they gave too much on spending or taxes while the other pulls back, and will require tough new budget enforcement measures and new sets of automatic triggers.
And outdated, inefficient and unnecessary programs have to be identified and eliminated -- both to reduce the deficit and to make room for necessary investments.
But the bottom line is that for the first time, in a very long time, we have seen a remarkable demonstration of political leadership around the debt crisis. And for the first time, in a very long time, it appears that the United States is poised for a fiscal turnaround.

It ended up being a great week.


10 Themes Emerging from the New Debt Reduction Plans

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In recent weeks, a number of plans have been released, recommending specific policies to deal with our fiscal challenges and to bring our debt back down to sustainable levels. In this paper, CRFB compares the six major reform plans and analyzes the common themes that are emerging in discussions over fiscal reform.

Op-Ed: Stop Whining About Bowles-Simpson. Let's Make It Better

CNN Money | November 15, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

The draft plan released last week by the co-chairmen of President Obama's fiscal commission started an important conversation.

The plan would cut defense and domestic discretionary spending, end most tax breaks while lowering rates and reduce health care spending. It would make Social Security solvent by raising the retirement age, lowering benefits on the upper end and raising taxes. It would also increase the gas tax.

All are good ideas. Guess what? The critics are circling.
"It a travesty, outrageous, DOA." Or, "You must be kidding: We said, NO new taxes."
"You would do what? Raise the Social Security retirement age?"
Never mind that the retirement age would go up one year by 2050, and two years by 2075 with a hardship exemption for many workers.
The attacks on the plan are completely predictable -- and utterly frustrating.
Did people really think fixing the national debt problem would be easy? In fact, if the plan had been greeted with approving "ooohs" and "aaahs," that would have been a sure sign it was not up to the job.
I think the plan is not only an excellent starting point but an excellent ending point as well.
But for their ideas to be viable, Erskine Bowles and Alan Simpson should make their proposal more appealing to all sides.
Make the budget plan part of a comprehensive economic recovery plan: One of the loudest criticisms of the plan is that it would send us back into a recession.
Au contraire -- putting a legitimate debt reduction plan in place and phasing it in gradually is one of the most important components of helping the recovery to stick.
But Bowles and Simpson should add immediate fiscal stimulus. For instance, they could call for Congress to give money to the struggling states in return for an overhaul of pension and health systems. Another idea: an immediate payroll tax cut in return for a gradual increase in the early retirement age.
Fix Social Security and improve retirement security: The plan would fix Social Security but does nothing to help our national savings problems.
Instead of raising payroll taxes for Social Security, which their plan would do over time, they should phase in some of the spending reductions more quickly. Their plan could use new revenues to build mandatory, add-on savings accounts that would sit on top of Social Security, providing all retirees with diversified benefits and helping to increase national saving. (Social Security - Take the quiz)
Tax better and tax fairly: The co-chair plan has great ideas for fundamental tax reform by broadening the base and lowering rates. But it doesn't go far enough to recognize the disturbing growth in income inequality.
In return for keeping government spending down and thus taxes under control, they should make the overall tax system more progressive.
Rather than aiming to bring the top income tax rate down to 24%, the plan should keep the top rates where they are and plow more savings into tax relief at the lower end and in the business sector to help consumers and the private sector drive the economic recovery.
Make it stick: Stronger reforms of the budget process should be part of a fiscal plan so it doesn't go off of the rails after the first year or two. Bowles and Simpson should include a specific target: Reduce the debt to a set level by a set date. If lawmakers miss, spending would be automatically cut and taxes raised.
They should also include spending caps and automatic triggers on the programs that most threaten the budget such as health care, Social Security and tax breaks.
Don't water it down: It will be tempting to make the plan more agreeable by doing less. Don't take the deal.
The Bowles-Simpson plan will not fix all the nation's fiscal problems. For instance, it doesn't balance the budget until 2037. But it will go a long way, and reassure credit markets in so doing.
Watering down the plan might not calm markets for long. No sense going through all this pain just to have to do it again in a few more years.
Now is the time: Maybe both sides think they can do better than this deal so they'd rather wait it out.
But if conservatives dig in their heels on not raising taxes, we will likely hit a fiscal wall first and be forced by markets to make large changes abruptly. That's a scenario to be avoided: The only option then would be a large add-on value added tax, which will undoubtedly turn into a dreaded money machine as rates get pushed up year after year.
Rejecting relatively small tax increases now increases the probability of very large ones later.
On the left, the risk of waiting is that Congress will be forced to dramatically scale back the safety net for the neediest. Reducing benefits now for the more well off in Social Security, health care and other areas of the budget allows us to stick to the principle of protecting those who most depend on the programs.
Waiting makes that harder to do.

Congress and the president will have to come up with something both sides can agree on. There are certainly changes that could help make a budget plan more amenable to the left and the right. But the opening bid by Bowles and Simpson is an awfully good start. Let the negotiations begin


Op-Ed: Put off Retirement

New York Times  | November 14, 2010

Maya MacGuineas is the president of the Committee for a Responsible Federal Budget and director of the Fiscal Policy Program at the New America Foundation. 

In the search for possible reforms, increasing the retirement age is a no-brainer. Doing so would help control spending in Social Security and Medicare, bring in more revenues without raising taxes and help the economy grow.

Gradually pushing up the retirement ages (currently 65 for Medicare, and 66 for Social Security — headed slowly to 67) to 68 and then indexing them to life expectancy would generate hundreds of billions in savings over the next few decades.

As we live longer, we have to work longer. Delayed retirements will protect seniors from outliving their private savings. Working longer increases the labor supply and helps economic growth, as well as increasing income tax revenues, thereby reducing the overall budgetary shortfall.
The new health care exchanges will allow seniors to purchase health care privately, so there is no longer the need for Medicare to subsidize them so early on.
We should also raise the age for early retirement age for Social Security benefits from 62. That policy signals to people that it is reasonable to stop working early, which harms the economy and increases the likelihood that seniors with those smaller benefits will fall into poverty.
This proposal is not particularly popular (few ideas that would generate large budgetary savings are.) Specific accommodations will obviously have to be made for those who cannot work longer.
But done right, raising the retirement age is one of the most defensible and sensible changes we can make.


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