Other CRFB Papers

Report: Analysis of the Tax Reform Act of 2014

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More resources and blog posts about the Tax Reform Act of 2014 are available on our tax reform resource page.

Op-Ed: Tax Reform: A Real Possibility and Necessary

Pioneer Press | July 8, 2013

July may be the most important month for tax reform since 1986 -- the last time the tax code was considerably altered.

A week ago, Senate Finance Committee Chairman Max Baucus (D-Montana) and ranking member Sen. Orrin Hatch (R-Utah) sent individualized Dear Colleague letters to all 98 senators requesting input on comprehensive tax reform legislation. The senators advocated for scrapping the entire tax code and rebuilding it one page at a time, defending inclusions on an individual basis.

This letter came a week after the Senate Finance Committee held a series of private meetings on tax reform, including a joint-chamber meeting led by U.S. Rep. and Ways and Means Committee Chairman Dave Camp (R-Michigan) to kick off their summer dialogue tour. The two chairmen will soon begin to traverse the country -- starting in St. Paul on July 8 -- to engage voters directly on tax reform.

"We're going to talk to people, families, consumers, business groups ... to get a better idea of what people are thinking," Baucus said at a June 17 breakfast sponsored by The Christian Science Monitor.

All told, the actions of these leaders signify that a comprehensive rewrite of the tax code is a real possibility and the top priority of some of our nation's most powerful legislators (Sen. Baucus and Rep. Camp will leave their leadership posts in 2015). Obviously, real challenges exist -- namely clear partisan differences and overwhelming hesitation among politicians to discuss eliminating or restricting popular tax breaks -- but the efforts by Rep. Camp and Sens. Baucus and Hatch are a clear step forward and may be the last chance for reforming our inefficient and outdated tax code.

As members of the aforementioned Simpson-Bowles led Campaign to Fix the Debt, we commend Chairman Baucus and Ranking Member Hatch for taking such a bold approach in putting forth the "Zero Plan" and providing valuable leadership in forcing a real discussion on tradeoffs that will advance the cause of serious tax reform and possibly broader fiscal reform. We believe that our nation's unsustainable debt is a very real problem and see tax reform -- along with replacing sequestration with larger, more gradual and sensible spending reductions -- as a necessary first step to tackling the debt.

We are equally excited that Americans can hear details first hand from Rep. Camp and Sen. Baucus.

Eliminating all tax preferences in the past allowed us to reduce the top two rates to 23 percent while setting aside a small portion of the savings for deficit reduction. Starting with a clean slate, and requiring those who wish to add back tax preferences to pay for them with rate increases, would lead politicians to subject tax expenditures to much greater scrutiny and, if desired, then to restore worthwhile tax expenditures in a more efficient and cost-effective manner.

The decision by Sens. Baucus and Hatch to use this approach makes us hopeful that Washington can enact tax reform to attain lower rates, level the playing field, improve simplicity, promote robust economic growth, and reduce the deficit.

We see this as an notable case of bipartisanship and hope that other leaders in the House and Senate will rise to the challenge and act responsibly in using the savings from eliminating the $1.3 trillion in annual "tax expenditures" to lower rates in a progressive manner, reduce the deficit, and restore those tax provisions they consider worthwhile in a more efficient, cost-effective manner.

Now is the time for D.C. to get their act together and make this type of action the new norm. Our nation's future and the lives of our children depend on it.

Former Congressman Tim Penny represented Minnesota's 1st Congressional District from 1983-1995. Former Congressman Mark Kennedy, currently the director of the George Washington University School of Political Management, represented Minnesota's 2nd Congressional District from 2001-2003 and Minnesota's 6th Congressional District from 2003-2007. Both are working with the Campaign to Fix the Debt, a bipartisan group urging enactment of a thoughtful and comprehensive plan that puts U.S. debt on a downward trajectory over the long term while protecting the most vulnerable and meeting the federal government's vital commitments.

Report: Analysis of CBO’s 2014 Budget and Economic Outlook

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Note: The paper's mention of the change in deficits from 2015 to 2024 has been corrected.

Op-Ed: Helping the Budget $150 Billion at a Time

The Hill | January 14, 2014

By all accounts, 2014 is unlikely to be the year of the grand bargain…or anything close. Neither the President nor any of the political leadership is actively trying to fix the nation’s fiscal problem; there is no immediate crisis; and the issues of major entitlement reforms and revenues are hard enough that most politicians are quite happy to just look the other way.

That said, Congress has returned to DC to find many outstanding issues including the expiration of extended unemployment benefits, an impending 25 percent cut in Medicare payments to physicians, and the expiration of various targeted tax cuts known as “tax extenders”, all of which will create a number of important fiscal litmus tests.

These policies all come with a cost, and the question is; will congress find ways to pay for them or will they resort to their old habit of charging them to the national credit card?

One of the important achievements of the Ryan-Murray budget deal passed at the end of last year was that while it lessened the constricting caps of the sequester, it not only fully paid for the changes, it banked a little extra savings.

Congress should, at the very least, hold itself to the same standard for all of the mini-fiscal moments of 2014. One way to do this would be to pursue three bite-sized $150 billion packages focused on each of these policies.

Already, discussions are underway about an extension of unemployment insurance. Given the still weak condition of the economy, it makes sense to extend unemployment benefits and to consider doing a larger package to create jobs and spur the economy. A package could extend and reform unemployment benefits, along with other measures such as infrastructure investments, job training, or targeted tax breaks aimed at promoting job growth or investment.

One option to pay for this, would be to switch to chained CPI—a more accurate way of measuring inflation—and use $150 billion of the non-Social Security portion of the savings to pay for the growth package and some deficit reduction. (The additional savings that would come from the Social Security program should be used to help shore up the program and provide enhancements to low income beneficiaries.) Such a deal would have the multiple benefits of helping the economy, the fiscal situation, and, separately, Social Security.

A second $150 billion package could pay for fixing the impending 25 percent cut in doctors’ payments, or the unsustainable “Sustainable Growth Rate” (SGR). The Congressional health committees have put forward packages which would replace the SGR with a formula that promotes quality over quantity of care and encourages participation in coordinated care models. What they have not done? Proposed how to pay for it.

Congress could pay for these reforms with a $150 billion package of structural health reforms that help slow its cost growth. Such a package could include expanding new forms of cost-controls like bundled payments and readmission penalties; restricting supplemental health plans which lead to the overconsumption of health care; reforming overly-complicated cost-sharing rules; increasing the use of generic drugs; and expanding the means testing of Medicare premiums.

Finally, a third $150 billion package could pay for a one-year extension of the “tax extenders” which expired at the end of 2013, along with a permanent extension of the low-income support from the child tax credit and earned income tax credit scheduled to expire in 2017. One payfor option would be a plan developed by myself, Dan Feenberg and Martin Feldstein of Harvard University, where the amount of tax breaks any one individual can claim are limited to a certain dollar amount, or share of one’s income. It’s not comprehensive tax reform which we need, but it’s a step in the right direction.

These packages won’t be nearly enough to solve our debt problem – much more would need to be done. Still, enacting this series of incremental $150 billion packages would be consistent with the simple principle our lawmakers need to re-learn—if something is worth doing, it’s worth paying for.

Each of these three packages would save more money than they cost, particularly over the long-term. But none would be about simply making numbers add up, they’d be about improving the way we tax and spend to better promote growth, offer certainty, improve the health system, and moving us toward more responsible budgeting.

Op-Ed: Five Facts You Should Know About Social Security

Huffington Post | January 9, 2014

The recent column by Jane White on Social Security reform mischaracterized the position of the Committee for a Responsible Federal Budget (CRFB) and ignored fiscal realities facing Social Security. CRFB is not calling for a 16.5 percent across-the-board cut in Social Security benefits as White suggests. We are, however, calling on policymakers to act sooner rather than later to address the very real financial challenges facing Social Security that White ignores.

The paper that White references compares the cost of fixing Social Security now as opposed to if we wait. It shows how much benefits would need to be reduced now, or revenues would need to be increased, to restore Social Security solvency, compared to the changes that would be required in ten or twenty years from now. The paper in no way advocates an across-the-board cut in benefits (or an across-the-board increase in the payroll tax) as the way to restore solvency, but simply provides estimates to illustrate how the magnitude of changes required will increase if we delay acting.

While CRFB has not endorsed a specific Social Security reform plan, we have commented favorably on a variety of plans which rely on a mix of reductions in promised benefits, increased revenues and targeted benefit enhancements. We have also developed an online tool, the Social Security Reformer, which allows individuals to view the options for changes in benefits and revenues and design their own plan to restore solvency.

Despite acknowledging that she is not knowledgeable on Social Security's finances and needs to research options for fixing Social Security, she pre-emptively rules out any reductions in promised benefits and speaks favorably about proposals to increase benefits. Taking any reduction in promised benefits off the table will jeopardize the ability of policymakers to take action to ensure Social Security is financially sound for future generations and the government is able to meet other priorities. If White were to begin her research into options for fixing Social Security with an open mind, she would learn several facts which might cause her to reconsider her knee-jerk reaction to any reductions in scheduled Social Security benefits:

1. Benefits will be cut by over 23% within the next twenty years if no changes are made. The Social Security system is already running cash shortfalls, which are projected to exhaust the trust fund by 2031 (according to the Congressional Budget Office) or 2033 (according to the Social Security Trustees). At that point, the benefits Social Security would be legally able to pay would be limited to the revenues coming into the program, which would only be sufficient to pay approximately 77 percent of promised benefits. The 23% cut in benefits would apply to all beneficiaries, including those already receiving benefits and low income seniors with benefits at or below the poverty level.

2. Social Security benefits will increase in real terms for future retirees even with changes in benefits to restore solvency Social Security benefits are indexed to wage growth, which increases faster than inflation. As a result, initial Social Security benefits for future retirees will be higher than they are for current beneficiaries even after adjusting for inflation. In addition, increasing life expectancy means future retirees will receive benefits for more years, resulting in much greater lifetime benefits. Under current law, the average lifetime benefit would double in real terms over the next 75 years. Social Security reform plans which include "cuts" in Social Security benefits to restore solvency simply scale back part of this increase and still result in future retirees receiving higher initial benefits and total lifetime benefits than current retirees.

3. The Social Security shortfall cannot be closed solely through increased taxes on upper income taxpayers. Contrary to the assertion being made by some progressives that the problems facing Social Security can be solved simply by eliminating the cap on taxable wages, the Social Security actuaries estimate that eliminating the cap would close about 70 percent of the program's 75-year shortfall and only about 33 percent of the gap in the 75th year. A proposal from Senator Tom Harkin that would also increase benefits across-the-board would solve even less: closing only half of the 75-year shortfall and 20 percent of the gap in the 75th year.

Under the current structure of the system, a portion of the increased revenues raised from wealthier taxpayers by eliminating the wage cap would go to finance higher benefits for these same wealthy individuals when they retire. The amount of the shortfall that would be closed would be somewhat greater - roughly 86% -- if the wages above the current cap were not credited toward benefits. However, breaking any link between higher contributions and higher benefits would represent a fundamental change in the social insurance nature of the program that causes concern among many supporters of social insurance who believe that the link between contributions and benefits is a key feature of the program.

Eliminating the taxable maximum entirely would also make it harder economically and politically to enact further tax increases on upper income taxpayers to meet other needs. Relying on elimination of the taxable maximum to restore Social Security solvency represents a judgment that preserving 100% of promised benefits under Social Security for everyone, including wealthy retirees, is a greater priority than other possible uses of the additional revenues from upper income taxpayers that would be generated by eliminating the taxable maximum.

4. Delaying action will make the options for restoring solvency more painful Not only does waiting to act mean any tax increases or benefit cuts will be steeper, it literally means they will need to be bigger. A shortfall which could be solved with a 16.5 percent across-the-board benefit cut or 2.7 percentage point increase in the payroll tax today would require a 19 percent cut in benefits or 3.3 percentage point increase in payroll tax if we wait a decade to act. This is true for at least two reasons. First, waiting will mean that there are fewer total people to share in the tax increases or spending cuts - that means more increases/cuts per person. Secondly, the longer we wait, the less money is in the trust fund and the less interest it will generate. Ironically, the actions of those who resist efforts to reform Social Security by downplaying the magnitude of the problem and the need for action to address the shortfalls now will actually lead to deeper cuts in benefits for all beneficiaries and/or greater increases in payroll taxes for workers than would otherwise be the case.

5. The major Social Security plans that rely on a combination of benefit changes and increased revenues to restore solvency include targeted benefit enhancements for vulnerable populations at greatest risk of poverty. The Social Security reform proposals in the Simpson-Bowles and Domenici-Rivlin plans include an increase in the minimum benefit that would enhance benefits for low-income workers and a progressive benefit bump up in benefits for the very old and long-term disabled most at risk of outliving their retirement savings. These provisions would provide greater poverty protections than current law.

Earlier plans to restore Social Security solvency such as the plan proposed by CRFB President Maya MacGuineas along with Jeff Liebman and Andrew Samwick and the legislation introduced by CRFB board members Charlie Stenholm and Jim Kolbe had similar benefit enhancements for low-income populations. Providing benefit enhancements targeted at those most at risk of poverty is a much better use of limited resources than an across-the-board increase in benefits for all retirees, including wealthy seniors, as the legislation introduced by Senator Tom Harkin would do.

The future of the Social Security program is a serious issue that deserves a serious debate that honestly acknowledges the challenges facing the program and trade-offs involved in addressing the problem. Absolutist positions ruling out options before even considering them does a disservice to the debate.

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