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Op-Ed: Dear Congress: Don't Blow It On Bush Tax Cuts

CNN Money | October 12, 2010

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

Ahem. Excuse me, Congress? I don't mean to nag, but there are 58 more working days until the Bush tax cuts expire. Trust me, I get it: I always waited to cram until the night before the test. Still, shouldn't you get a move on?
 
I know there are a lot of possible combinations of tax extensions floating around. To help move things along, here are a number of options, ranked in order from best to worst.
 
Bingo! Fundamental tax reform
By far the best option would be an overhaul of the tax code.
 
No one needs to be convinced that our current system is a mess. It is outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman's dingy.
 
There is really nothing to love there.
 
Reforms with the most potential:
 
  • close many of the more than $1 trillion in loopholes that permeate the code;
  • modernize the corporate income tax so we don't stifle business with one of the highest marginal tax rates in the world;
  • shift away from taxing income toward taxing consumption;
  • and replace some of our less desirable taxes such as the payroll tax with a broad-based energy tax.
This will take some fortitude. For example, those "loopholes" include things we all love like the home mortgage interest deduction or the tax break for state and local taxes, not just pernicious corporate welfare which is so easy to oppose.
 
And even though Sens. Judd Gregg and Ron Wyden have a bipartisan bill that could serve as a solid starting point, and former President Bush's tax commission issued a report chock full of good ideas, getting this done in 58 days is a tall order. This one may have to come later.
 
Next best: Let cuts expire but enact temporary stimulus
The economic argument for keeping the tax cuts in place, even in the face of immense fiscal pressures, is that now is not the time to pull so much liquidity out of the economy.
 
True. However, these tax cuts are not particularly stimulative.
 
A better option would be to let all the tax cuts expire, but use the money they would have cost over the next two years for more targeted and effective stimulus measures -- such as unemployment benefits, aid to states, a payroll tax cut, business incentives or more help for the weakest sectors such as housing.
 
All told, such an approach would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. And, importantly, it would surely do at least twice as much good for the economy.

Hold your nose: Temporary extension
 The political compromise many are leaning toward is extending some or all of the tax cuts temporarily and then deciding what to do.
 
Yes, punt.
 
This approach could be useful if it came with an ironclad commitment not to extend the tax cuts again without combining them with a full-fledged budget reform deal or a pledge to offset their costs.
 
Of course, the risk is that they just become another Alternative Minimum Tax patch or Medicare "doc fix." These supposedly "temporary" budget maneuvers actually cause budget mayhem year after year as policymakers enact last-minute extensions with no budgetary offsets.
 
In terms of particulars, extending the tax cuts only for those making less than $250,000 is preferable to extending them all, and would save around $100 billion over two years. (I refuse to call this the middle class, because really, since when did the 98% percentile become the middle class?)

A one-year extension is too short if we want to get even some stimulative effect, but if they end up being extended for all income levels, it's worth staggering them so that tax cuts for the wealthiest expire after one year and the rest do after two or three years.

Don't fall for it: Extend cuts temporarily for all making less than $1 million
This is one of those compromises that makes you want to say, "just stop already." It's the kind of slippery slope policymaking that happens too often in Washington. Soon we'll be hearing about extending all the tax cuts except specifically those for Bill Gates and Warren Buffett.
 
For sure, we need to address the country's growing income inequality problem. The tax code and spending side of the budget should be more progressive. But we can't just lump all the responsibility for paying taxes on a few hedge-fund types. The government needs more revenue, and everyone has to be part of the solution.

No! No! No! Permanent extension
Don't do it. We can't afford it. It will make climbing out of the fiscal hole we are in nearly impossible.
 
It is absurd that there's even a debate. Extending all of the Bush tax cuts will add $3.7 trillion to the debt, and extending them for those making less than $250,000 a year will add $3 trillion.
 
So what will Congress do? My bet is on a two-year temporary extension for all of the tax cuts -- or maybe three years to get us through the next election.
 

But hope springs eternal: I am not giving up on fundamental reform.

 

Op-Ed: Stimulus Even A Deficit Hawk Could Love

CNN | October 5, 2010

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

Am I alone in thinking that all the ideas for economic stimulus and debt control are the handiwork of political pollsters -- and not experts? I know it's election season, but the nature of the discussion pretty much ... um, how to say this? It stinks.

It is particularly alarming since the economic threats the country faces are so real.

In the short-run, the jobs picture is bleak and consumers and businesses aren't spending. In the long run, the growing national debt could lead to many years of substandard growth or even an abrupt fiscal crisis.

The politicized solutions being tossed around fall into one of two camps: stimulus or fiscal responsibility. The economy needs both -- and that's coming from a full-fledged deficit hawk like me.
 
There's a big risk, however, and it is that we will do additional stimulus now, and then continue to punt on closing the budget gap. After all, pushing through hundreds of billions of dollars in tax cuts and spending is easy. Paying for these measures is the hard part.
Fortunately, there is a solution: Tie stimulus to budget reforms. That would create a "twofer" out of each policy -- first help the economy and then the budget.
 
Fix No. 1: Aid to states -- with strings attached
 
The states are hurting badly. They are raising taxes and cutting spending to close their gaps, which is putting pressure on the recovery. And down the road, the states' situation will worsen, as their growing pension obligations -- estimated to be short by $1 trillion -- will push some toward default.
 
Congress should make significant aid available to state and local governments. But instead of just doling out the money, lawmakers should attach an important condition: States that take the money would be required to reform their pension programs.
 
It's not a crazy idea. Some are already doing it. Under a plan in Utah, new public sector employees would get a reformed defined-contribution system, which would limit the state's future exposures. Throwing public sector health care reforms into the mix would improve things even further. State policymakers I have talked to would be grateful to be pushed into making these tough political changes they know have to be made.
 
Fix No. 2: Payroll tax break -- but fix Social Security
 
Another effective stimulus option is a payroll tax holiday. Employers and employees would be exempt from paying payroll taxes on say the first $50,000 of earnings for a full year, pumping hundreds of billions of dollars into the economy.
 
But given that Social Security's trustees keep telling us that changes must be made to the nation's retirement system to avert insolvency, making reforms should be part of the deal. An obvious change would be to phase in a future increase in the retirement age to reflect growing life expectancies.
 
We could speed up the currently slated increase to 67, raise the age further to 68, and then index the age to life expectancy. We just can't afford to pay for people to spend close to a third of their life in retirement. Adjustments to the retirement age are only fair -- especially when combined with an expansion of the disability program to protect people who, due to the nature of their work, can't work longer.
 
Fix No. 3: Temporary VAT -- but not right away
 
And if we want to think even bigger, here is another idea: a "temporary consumption tax deficit-surtax." I know, it's a mouthful, but hear me out.
Right now the challenge is to get people to spend more; in a few years the challenge will be to cut the government's deficit.
 
If we announced a temporary consumption tax, or a VAT, that wouldn't begin until 2013, it would induce people to spend more now. Better buy that new dishwasher before the VAT kicks in!
 
The temporary consumption tax would also raise money for the government down the road. It is stimulus without spending a dime.
A temporary VAT would also address the problem many of us have with a permanent new consumption tax on top of the existing tax system: that it would take pressure off Congress to cut spending by producing so much revenue. Yet many of the changes that need to be made to programs like Social Security and Medicare will have to be phased in over time. A temporary VAT could fill the hole and buy time until those changes produced enough savings.
 
One additional condition: The temporary VAT would go away as soon as the budget was balanced (or reached another agreed upon fiscal goal). That way there would be ongoing pressure to cut spending as soon as possible. The entire country would be rooting for policymakers to fix the budget and eliminate the VAT. Suddenly, there would be a built in constituency for fiscal responsibility.
 
Economic growth will not get us out of this deficit mess, but it will be nearly impossible to fix the budget without fixing the economy first. Stimulus-with-strings attached could be a big part of the fix. 

 

Op-Ed: The $2.5 trillion Slush Fund

CNN Money | August 9, 2010

 
The Social Security trustees released their updated projections last week detailing the financial health of the nation's retirement system.
 
Bottom line: The program is running a deficit this year, and is projected to run growing deficits after 2015. But it will have money in the trust funds to pay full benefits until 2037.
 
Some maintain that the findings reinforce the claims that Social Security is basically on sound footing -- no need to rush to make changes and nothing a few minor tweaks won't fix. Others say the need to make changes has grown even larger.
 
I'm in the latter camp: Changes to Social Security must be made -- and the sooner the better.
 
The difference, in many ways, boils down to how you think about Social Security's "trust funds."
The trust funds hold the assets that have accumulated within Social Security from the annual surpluses the program has built up over the years. Right now, the funds (there is one for retirement and one for disability) have a whopping $2.5 trillion.
 
That's pretty fabulous news when looking at Social Security in isolation. The program can make good on all of its promises for a quarter of a century, first by relying on the interest owed to the funds, and then by redeeming the assets in them.
 
The big problem is the other side of the ledger. When Social Security runs a surplus, the extra money is used to purchase U.S. Treasurys, and the dollars are used to help finance the rest of the government, which is almost always running a deficit.
 
So when those assets to Social Security -- and liabilities to taxpayers -- come due, we have to find a way to raise the money, which has already been spent.
 
You know what that means: Raising taxes, cutting spending or borrowing. And because the downturn has drained Social Security surpluses more quickly than expected, that strain on the rest of the budget will begin even sooner.
 
Not our problem, say defenders of the trust fund concept. The money is owed to Social Security; it must be paid to Social Security. Legally, that's true.
 
But the entire federal budget needs to be rethought as the nation stares at the mountain of debt accumulated from years of our not paying our bills.
 
And the question is how?
 
Let the young pay it back
The unfortunate reality is that the trust funds proved to be ineffective at saving the money meant for Social Security in any economically meaningful way. Having used those Social Security surpluses as a slush fund for the rest of government has indeed complicated things.
 
First, it allowed Congress to keep all other taxes lower than it otherwise would have been. By using Social Security money to fill the gap, current and soon-to-be retirees got an effective discount on their share of the cost of government. By contrast, the responsibility for repaying the trust funds that they used is going to fall fully on today's younger workers. Not the best deal imaginable -- at least for those on the other side of the deal.
 
We urgently need to shift our attention to what to do to strengthen Social Security. There are a number of sensible solutions:
  • gradually raise the retirement age since we are living longer;
  • slowing the growth of benefits for high earners to preserve them for those who depend on the program;
  • correct the inflation formula, which overestimates annual cost of living adjustments.
The rhetoric surrounding the issue is likely to heat up. Instead of trading accusations or competing over promises of what not to do to fix the program, policymakers from both parties agree that changes need to be made to strengthen Social Security and rebalance the budget. We should get started as quickly as possible.
 
After all, as the program trustees said: "The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers can be given time to plan for them. Implementing changes sooner will allow the needed revenue increases or benefit reductions to be spread over more generations."
 
That is a point everyone should be able to understand.

 

Copyright 2010, CNN

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