Other CRFB Papers
The Hill | September 6, 2013
The last real government shutdowns occurred in the winter of 1995. Two funding gaps that winter resulted in a total of 26 days of hiatus when President Clinton battled it out with Speaker Gingrich and Majority Leader Dole over spending and taxes. While threats of government shutdown raised their head in 2011, 18 years have passed since anyone has really experienced a shutdown.
Forbes | August 21, 2013
Congress has left for its summer recess vacation at home. The President took his at Martha’s Vineyard. Based on legislative achievement, neither can be said to have earned time off. Nevertheless, it’s a good idea for both to depart the wearying, unproductive Washington battleground and rest up for the fall budget challenge.
Both need some relief from the intense frustration and animosity that have become Washington’s hallmarks. Congress, in particular, needs to hear from its constituents at home. The President always looks cool on TV, but in the toughest job on earth, he, too, needs occasional rest and family time.
While they rest and ponder the challenges of the rest of 2013, they will find that none of the problems which they have failed to solve in the first half of the year have not become any easier. Kicking the can down the road, as they have doing, buys some time, but it also makes solutions ultimately more costly and painful.
Because there weren’t many, adding up the successes of the first half of 2013 is easy. After the McConnell-Biden tax compromise that got us past the 2012’s fiscal cliff, our policy makers have done very little. For them it was 7 months of name-calling and blaming their opposition.
Their best effort was a reasonable college loan compromise. A responsible start to tax reform was begun by the chairmen of the Ways and Means and Finance Committees. And, after a confirmation dust-up, the Senate managed a filibuster compromise. For the people, that was pretty thin gruel for 7 months of work.
Just like in the stables, when the job is not done, work begins to pile up. The debt ceiling which reached its limit in May, has been postponed by clever manipulations at Treasury, but it will bite us sometime in the 4th quarter. No progress has been made there. Indeed, other than public statements of no concessions, the matter has hardly been discussed.
September 30 is the deadline for financing the government for Fiscal Year 2014. In its budget, the Senate dismissed the sequester. The House budget etched it in stone. There have been no real efforts to negotiate the differences yet.
No appropriations bills have been enacted, so another set of continuing resolutions will have to suffice, but the same budget differences must be negotiated there. Perhaps the appropriators will be better negotiators than the budgeteers, but there is no evidence of that yet.
The sequester poses a similar, but slightly different, problem. Both parties, and nearly all the policy makers, believe it is a thoughtless way to cut expenses. There is general agreement that it must be modified, but no agreement as to how. The Senate insists on wishing it away. The House demands that the total spending reductions be maintained and that other cuts be substituted for the unwise “meat-axe” approach.
Tax reform activity, bravely started, has little chance of success this year, or even next year for that matter. It is highly desirable, but it probably can’t stand on its own feet. Democrats want revenue for “investments.” Republicans want lower tax rates, both corporate and individual.
Even if agreement can be reached on the thorny problems of what preferences to repeal, the question of investments versus rates can only be negotiated in a grand bargain of spending controls and tax reforms. Aware of the problem for many years, the policy makers have repeatedly proved they are unwilling to negotiate that “grand bargain.”
They prefer the “grand delusion” that their team will win the next election. Then they can do the budget their way. Observers with the best prediction records believe that divided government will continue after the 2014 elections. Nevertheless, the grand delusion continues to dominate both parties’ strategic thinking.
So, when the stalwarts at the Capitol and the White House return, fully rested, to face this fall’s version of the fiscal cliff, there is no indication that they are interested in negotiating a long term arrangement. They may be more relaxed after their vacation, but both sides remain adamant as they face a fiscal cliff as difficult as 2012.
The best possible outcome is almost certain be a “small deal” that solves none of the long-term problems. That will keep the can rattling down the road. Perhaps they all need a longer rest. We who must watch the exercise, need one too.
Financial Times | July 23, 2013
Sir, Edward Luce says that “Simpson and Bowles are wrong about the US debt” (July 15) but he gets it wrong describing their position. In reality, Alan Simpson and Erskine Bowles are not as far off from Mr Luce as he implies.
Mr Luce describes the debt as a “medium-term threat”, which is the position of Mr Simpson and Mr Bowles and Fix the Debt as well. Our contention is that the US should put in place now a plan addressing the debt that can be phased in over time. Such an approach would be preferable to the steep sequestration cuts that rightly concern Mr Luce. A long-term, comprehensive approach would also include tax reform and curbing healthcare and retirement costs as Mr Luce admits would be ideal.
The threat to Social Security’s solvency is not as hypothetical or as far off as Mr Luce argues. The trustees who oversee the vital programme have been warning for years that the retirement of the baby boomers will put a strain on the programme as more workers receive benefits and fewer contribute to it. As the saying goes, “demography is destiny”. The choices facing policy makers will become increasingly unpleasant the longer action is delayed. Waiting until a crisis is imminent will require harsh solutions such as across-the-board cuts for all beneficiaries, including the poorest seniors. In addition, Social Security’s Disability Insurance Program Trust Fund will be exhausted in just three years, underscoring the fact that this is not a distant concern.
Furthermore, Mr Luce’s implication that addressing the debt versus the economy is a zero-sum game is false. There’s no reason why we can’t do both. In the commission report and the plan they recently put forward, Mr Simpson and Mr Bowles stress the importance of phasing in deficit reduction gradually to avoid harming the economic recovery. Indeed, that is the reason to act now to replace the immediate austerity from sequestration with policies that will reduce the deficit over time. In fact, putting in place a smart, credible debt plan would likely boost the economy by showing markets we are serious about dealing with the long-term debt.
Ultimately, Mr Luce’s condemnation is more geared towards a US political system that is seemingly capable of dealing only with immediate crises as opposed to Mr Simpson and Mr Bowles, who are challenging the system.
Judd Gregg, Former US Senator and Co-Chair, Campaign to Fix the Debt
POLITICO | July 22, 2013
In the quarter century since Congress last reformed the Tax Code, back in 1986, it seems Washington has worked overtime to create the most inefficient and ineffective globally anti-competitive tax system humankind could dream up.
It’s time to start over — time to start with a blank slate.
The 1986 reforms accomplished a great deal to simplify the Tax Code and promote economic growth by eliminating tax preferences and using the resulting funds to lower the top rate to 28 percent. Unfortunately, those deductions, exclusions and other preferences have returned over the years in the form of approximately $1.3 trillion worth of annual backdoor spending that now litters the Tax Code.
This hidden spending complicates tax filing, distorts economic decision making and slows economic growth. It also means that despite a top individual rate of 39.6 percent, deficits are still far too high. The current Tax Code is badly broken.
The conventional wisdom holds that real reform — reform that reduces or eliminates tax preferences to cut tax rates, simplify the Tax Code, promote economic growth and help to control the national debt — is impossible as long as powerful interests continue to promote the status quo.
But conventional wisdom was turned on its head recently when the two leaders of the Senate tax-writing committee called for starting tax reform with a “blank slate.”
The bold proposal from Chairman Max Baucus and ranking member Orrin Hatch begins by eliminating each and every tax preference. Starting from scratch, as Sens. Baucus and Hatch propose, provides the single best chance to accomplish fundamental tax reform, which could be one of the best ways to get the economy moving.
On the Fiscal Commission (known colloquially as Simpson-Bowles), our decision to take a similar approach — we called it the “zero plan” — was a turning point that truly broke the partisan logjam. At the time, we found eliminating all tax preferences would allow the top individual rate to be reduced to 23 percent and the top corporate rate to 26 percent, while still dedicating some of the revenue to reducing the deficit.
This was a true game changer that made it possible for us to put forward tax reform that accomplished the Republican goal of substantially reducing rates and the Democratic goal of raising new revenue.
Importantly, starting from scratch doesn’t mean that all tax preferences will be eliminated. Instead, it puts the onus on advocates of tax preferences to justify their existence and it requires policymakers to pay for those add-backs with higher rates. We believe most will not pass the cost-benefit analysis and will either be eliminated or phased out. Those deemed to serve important public policy purposes can be added back more efficiently and cost-effectively — for example, by using credits instead of deductions.
On the Fiscal Commission, we put forward an illustrative tax plan that added back a number of tax expenditures in a scaled-back, better targeted form, and achieved a top rate of 28 percent. Former Congressional Budget Office and OMB Director Alice Rivlin and former Sen. Pete Domenici have their own tax plan that includes similar rate reduction. Both plans would increase the progressivity of the Tax Code and, importantly, both would help raise new revenue to help pay down the deficit.
With $1.3 trillion of annual tax preferences, there are plenty of funds available to lower rates, restore worthwhile tax preferences and contribute to deficit reduction. And if we design the reform right, it also can do wonders for economic growth.
Of course, tax reform can’t do all the work on its own. Any successful effort to truly unlock the U.S. economy’s potential must bring our rapidly expanding national debt under control, which means slowing the growth of our unsustainable entitlement programs to match revenues from tax reform, along with other cuts in spending.
Combining tax reform with a broader package, one that also replaces the mindless sequester cuts with larger and smarter spending cuts and entitlement reforms, would represent a tremendous accomplishment.
Agreeing on such a package will not be easy. But the efforts and leadership of Sens. Baucus and Hatch, along with the hard work Ways and Means Committee Chairman Dave Camp has done in the House laying the foundation for reform, make it seem more possible than it has in some time.
Starting with a blank slate doesn’t allow us to avoid the hard choices. But it does make them just a little bit easier. It lets us build the Tax Code we want, rather than chip away from the Tax Code we have. If members of Congress and the administration rise to the challenge, this country’s future will be a whole lot brighter.
CQ Researcher | July 18, 2013
Should we measure inflation as accurately as possible? Of course we should, particularly when the fiscal implications of measuring inaccurately are so large. The so-called chained Consumer Price Index (CPI), a far more accurate inflation index than the one used now, would better reflect retirees’ actual spending patterns and the cost increases they encounter. Economists from the left, right and center broadly agree on that, and their view is affirmed by the nonpartisan Congressional Budget Office (CBO) and the Bureau of Labor Statistics. Adopting this improved measure would also generate more tax revenue, slow government spending growth and strengthen the Social Security system.
So how can anyone oppose this change? Some special interest groups do so for their own financial benefit, while others argue that seniors face faster price growth or the most vulnerable would be hurt by this change.
Yet alternative measures that purport to show seniors spending more are highly flawed — including in the ways they measure housing and health care — to the point that the CBO has concluded, “It is unclear...whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Even if a better measure were produced for measuring cost increases affecting only retirees, adopting it would raise serious fairness concerns. Should the one-third of Social Security beneficiaries who are not retirees receive smaller cost-of-living adjustments so seniors can receive larger ones? Should New Yorkers, with their high cost of living, receive a higher percentage than Detroiters? Should each government program get its own index or only those backed by powerful interest groups?
As for the most vulnerable, it makes little sense to measure inflation incorrectly for everyone in order to retain a desired windfall for the neediest. Doing so would cut taxes for the top 1 percent by $1,000 each in order to keep an average $20 tax cut for the lowest fifth. Instead, desired tax relief and benefit enhancements for the most vulnerable should be achieved through targeted reforms designed specifically to strengthen those populations.
Ultimately, the best thing we can do for the most vulnerable in society — at least within Social Security — is to make the program sustainable and solvent and avoid the 23 percent across-the-board benefit cut currently scheduled for when the program’s funds dry up. If we can’t even measure inflation correctly, how can we hope to make the hard choices necessary to keep Social Security funded for future generations?
Brookings | July 8, 2013
Barring a miracle, budget bargains, either grand or petty, are not in the cards this year. The Congress would prefer to fight. It is happily at war with itself over immigration, student loan interest rates, the farm bill, energy policy and the like. The president has abandoned his charm offensive, and is chasing other butterflies.
With no other candidates in sight, it is not surprising that tax reform has re-emerged as the major economic issue in Washington.
In the Senate, Finance Chairman Baucus and his Republican counterpart, Sen. Hatch, announced that they would soon begin work on a tax bill. The Senators intend to start clean, with a bill stripped bare of all tax preferences. Senate Finance Committee members were warned that they would have to amend that bill with any preferences they wished to restore or add.
Ways & Means Chairman Camp is still working assiduously to build consensus in his Committee. The members are well prepared, and thoroughly briefed, but there is no bill yet. Camp’s start may well be quite like that of Baucus and Hatch.
The “fresh start” approach is a splendid idea, one that was suggested in the Simpson-Bowles report. Both Bowles and Simpson have come out strongly in support the Senate process. Other tax reform advocates have similarly blessed the announced process.
However, huge obstacles remain. No process, however inspired, can overcome the fact that tax reform is still an essential part of a budget bargain. Each party’s sharply conflicting budget visions are dependent on tax reform. The Democrats need tax reform to fund their “investments” and control their deficits. The Republicans need it for tax cuts to stimulate growth.
Those differences mean that a stand-alone tax reform bill is almost impossible. Tax reform is too big a part of the budget to move by itself. It must be a part of the budget bargain. A good start is welcome because, at best, tax reform is a difficult and time-consuming effort. But, it will remain inextricably linked to a budget agreement. If there is no budget agreement, there will be no tax reform.
Therefore, it is folly for tax reformers to get over-enthusiastic now. Sens. Baucus and Hatch, and Rep. Camp, ought to be commended for bravery, and encouraged. They have a couple of years of hard work ahead of them with a high risk of failure.
A budget bargain requires negotiation and compromise on macro-accounts. Thereafter, the details can be thrashed out by the various committees. Tax reform has the same negotiation requirements, but, in addition, each petty little micro-detail has to be worked out in advance of passage. The devil is said to lurk in the details, and tax reform is the epitome of detail.
Perhaps an even greater problem is timing. A budget agreement and tax reform need to march together. If a tax bill is perfected long before a budget agreement is made, it will be subjected to a furious attack from all the losers in the preference game. No bill, however cleverly constructed, can withstand the full fury of a strong lobby scorned.
Tax reform’s last lap around the track was in 1986. Then, legislative leaders of both parties were guilty of conspicuous cooperation in the quest for tax reform. They, and the president, perceived that the bill was good for the country and for both political parties. That attitude won’t appear again at either end of Pennsylvania Avenue until there is some budget agreement.
There is none now. Funding the government for FY ‘14 will be by Continuing Resolution(s). The debt ceiling, which has to be settled this fall, could be a major crisis and another train wreck for the economy. House Republicans, who lost that debate in 2011, still see value in the debt ceiling even though the President has declared it “non-negotiable.” Even budget “hawks” are beginning to despair that this is not the year for budget compromise.
So let the Finance and Ways and Means Committees begin the tax reform process with the good wishes of tax reform advocates. Just don’t expect the exercise to be crowned with success until Congress is ready to deal with the larger budget issue.
The Government We Deserve | July 3, 2013
No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.
But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.
The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.
Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.
As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.
Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.
Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”
Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.
In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.
But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.
This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.
But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows. Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.
If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.