Other CRFB Papers
zpolitics | December 9, 2013
As the Congressional budget conference committee nears its December 13 deadline for producing a budget agreement, it is very unlikely that the conferees will come up with the “grand bargain” needed to slow the unsustainable upward trajectory of our national debt.
It is likely they will put forward a small deal that replaces some of the damaging sequester cuts with smarter, long-term deficit reduction. As frustrating as this may be, in today’s divided Washington, even a small deal would reflect progress.
Beyond paving the way for larger compromises, the conference resolution should also satisfy some important criteria for credibly reducing the deficit. In a recent paper, we outlined several of these goals. Any budget deal should begin to account for the long-term fiscal outlook and set responsible spending limits even if it doesn’t fill in all the specifics. It should also put in place a process for the next step, to deal with the major budget challenges of health care, retirement and tax reform. It should also include a separate track to strengthen and reform Social Security. And the immediate deal should refrain from using any budget gimmicks.
What is a budget gimmick? Simply put, it’s an accounting trick that allows lawmakers to artificially create or inflate budgetary savings. Imagine if you make some tough choices one month and are able to put away $100. When planning your budget for the next month, you decide to use those savings to pay your $100 heating bill and buy a $100 cell phone. It doesn’t take an economist to realize that budget isn’t going to work.
Congress has considered doing the same thing, but on a much larger scale. Lawmakers have proposed using every trick in the book in order to justify more spending or congratulate themselves on phantom deficit reduction.
For instance, the Congressional Budget Office only scores legislation based on its budget impact over 10 years, so Congress will often make sure that provisions that will increase the deficit don’t take effect until the second decade after a bill is passed. Projected war and emergency spending, including Superstorm Sandy relief, grows with inflation. If lawmakers rein that spending in by applying budgetary caps, they can claim bogus savings for unspent money. Lawmakers have also considered willfully disregarding the inevitable, like counting savings from expiring provisions — the Child Tax Credit or Pell Grants — that will almost certainly be renewed. Talk about counting your chickens before they hatch.
The scary thing is that Congress could get away with these tricks because so few people will call them on it. So encourage your Members of Congress to oppose any resolution that includes budget gimmicks. Tell them that you expect them to work with their colleagues on a budget compromise to put the debt on a downward trajectory as a share of the economy over the long term.
Our elected officials are smart enough to know that this issue is too important for tricks. The conference committee has an opportunity to stop the games and get serious about the debt before it is too late. We are counting on them to do just that.
The Hill | December 5, 2013
Friday the 13th has additional significance this year. In addition to being an annual day of caution for superstitious people, it is a deadline date and day of opportunity for the recently appointed joint Senate and House Budget Conference Committee to report its recommendations for the fiscal 2014 budget. Hopefully this committee will not be a super failure like the joint "Super Committee" that was formed after the debt ceiling deal in August of 2011.
While the American people and many fiscal advocates would like to see the Committee address the 2014 budget and our greater structural budget challenges, such is not likely given the current state of dysfunction and disconnection in Washington, DC. The partisanship is too great, the ideological divide is too wide, and real presidential leadership is lacking.
It's clear that the Committee has been working to tap down expectations of what it is likely to achieve. The Committee is focusing its efforts on trying to achieve a deal to replace all or part of the sequester for a two-year period with alternative direct or indirect spending reductions. To do so they should focus on mandatory spending proposals in President Obama's budget submission and unallocated funds from prior budgets. While achieving agreement on discretionary spending levels for two years would be good, it's not enough and the Committee should aim higher.
While achieving agreement on a fiscal "grand bargain" is beyond reach, it would be desirable for the Committee to agree on a fiscal goal that the Congress and president would seek to achieve over time. One possible goal would be to set a target of getting public debt/GDP down to 60 percent of GDP by 2030 with a fiscal trajectory that will keep debt/GDP no higher than that level over time. This would be a meaningful accomplishment and would ultimately force the Congress and the president address the four key actions needed to effectively address our longer-term structural deficits. Namely, the need for social insurance reform, additional health care reform, comprehensive tax reform, and a more intelligent way to address discretionary spending allocations.
In addition to the above, the Committee could embrace some of all of the No Labels Problem Solvers’ legislative proposals from their Make Government Work! agenda. This agenda involves nine pieces of "good government" oriented legislation to help improve the economy, efficiency and effectiveness of government, and all of them have achieved bipartisan support. The list can be found at www.nolabels.org.
The American people are tired of the hyper-partisanship and ideological gridlock in Washington. They want their elected officials to start solving problems and generating some results. Hopefully this Friday the 13th won't involve another fiscal failure and lost opportunity. America and Americans deserve more from their elected officials.
Project Syndicate | December 2, 2013
Corporate tax reform is one of the few issues that garner bipartisan support in a deeply divided US Congress. The current system, all agree, is deeply flawed: the corporate tax rate is too high by global standards, and the corporate tax base is too narrow, owing to numerous credits, deductions, and special provisions that distort economic decisions.
But there is significant debate about how to fix the system. One major area of disagreement is how to tax the foreign earnings of US multinational companies (MNCs), a disagreement highlighted by the recent proposals issued by Senator Max Baucus, the chair of the Senate Finance Committee.
The current US system is based on a worldwide principle: the foreign earnings of US companies are subject to US corporate tax, with the amount owed offset by a tax credit for taxes paid in foreign jurisdictions. Most other developed countries, by contrast, have adopted “territorial” systems that largely exempt their MNCs’ foreign earnings from home-country taxation.
MNCs headquartered in countries that employ a worldwide tax system are at a disadvantage when they compete in third-country markets with MNCs headquartered in territorial systems. Whereas US MNCs must pay the high US corporate tax rate on profits earned by their affiliates in low-tax foreign locations, MNCs headquartered in territorial systems pay only the local tax rate on such profits.
For example, when a US firm and a firm headquartered in a territorial system compete in a country where the local tax rate is 17%, the foreign firm owes 17% of its profits in taxes to the local country, while the US firm owes 35% of its profits in taxes – 17% to the local country plus 18% to the US. That difference translates into a sizeable cost advantage that allows the foreign firm to charge lower prices and capture market share from its US counterpart.
Current US law attempts to offset this competitive disadvantage through deferral: US MNCs are allowed to defer – potentially indefinitely – payment of US corporate tax on their foreign earnings until the earnings are repatriated to their US parent firms. Not surprisingly, most US MNCs take advantage of the deferral option for at least some of their foreign earnings.
As a means of bringing back this estimated $1.7 trillion in foreign earnings, the Senate Finance Committee’s draft proposals suggest the elimination of deferral. However, faced with the threat to their competitiveness that this would pose, many US MNCs would shift their headquarters to countries with lower corporate tax rates and territorial systems.
The global competitiveness of US MNCs and where they are based matter to the health of the US economy. Despite the rapid growth of foreign markets, US MNCs still locate significant shares of their real economic activities – about 65% of their sales, 68% of their employment, 70% of their capital investment, and 84% of their R&D – at home. Much of their domestic activity – particularly R&D, which has significant local spillover benefits – is related to their headquarter functions. And foreign direct investment by US MNCs is not zero-sum: it encourages rather than reduces employment, investment, and R&D in the US.
Deferral is essential to maintaining US MNCs’ competitiveness as long as the US relies on a worldwide corporate-taxation system. But deferral is not without significant costs for US MNCs and the US economy alike. Deferred earnings held abroad are “locked out” of the US economy, in the sense that they are not directly available for domestic use by US MNCs and their shareholders.
Moreover, deferral distorts corporate balance sheets and capital-allocation decisions. For example, firms may use earnings held abroad as collateral to take on more debt and incur higher borrowing costs at home. Or they may use these earnings to make investments abroad that yield a lower return than investments at home. Overall, such efficiency costs are estimated to be 1-5% of deferred earnings, rising as deferrals accumulate.
As the Senate Finance Committee’s draft proposals suggest, the US should jettison its worldwide approach to corporate taxation and adopt a territorial system for taxing US MNCs’ foreign earnings. Such a system would provide a level playing field that supports US MNCs’ global competitiveness. It would also eliminate the efficiency costs of deferral and boost US MNCs’ repatriation of foreign earnings, with significant benefits for output and employment.
Based on recent research that incorporates conservative assumptions, we estimate that under a territorial system US MNCs would repatriate an additional $100 billion a year from future foreign earnings, adding about 150,000 US jobs a year on a sustained basis. We also estimate that under a transition plan for taxing the existing stock of foreign earnings held abroad, similar to one proposed by US Representative Dave Camp, US MNCs would repatriate about $1 trillion of these earnings, adding more than $200 billion to US GDP and about 1.5 million US jobs over the next few years. These are significant gains for an economy that is still operating far below potential, remaining about 1.5 million jobs short of its pre-recession employment level.
A territorial tax system does have one potential disadvantage: it could strengthen US MNCs’ existing incentives to shift their profits to lower-tax jurisdictions. Competitive cuts in corporate tax rates, the spread of tax havens, and the rising importance of easily movable intangible capital have already made these incentives more powerful. Recent studies find growing segregation between where MNCs locate their real economic activities and where their profits are reported for tax purposes.
Income shifting and the resulting erosion of domestic tax bases pose serious challenges, and countries with territorial systems have adopted tough countermeasures to combat them. If the US moves to a territorial system, it should follow suit. A modern territorial system with adequate safeguards against income-shifting and base erosion is the right approach to taxing the foreign earnings of US MNCs.
U.S. News and World Report | November 25, 2013
Conventional wisdom about the outcome of the Budget Conference Committee – co-chaired by House Budget Chairman Paul Ryan, a Republican, and Senate Budget Committee Chairwoman Patty Murray, a Democrat – is that nothing much will happen. At best, they will cut a small-bore deal to avoid another government shutdown or debt crisis before the congressional elections in November. They will fail to enhance near-term growth or tackle the tax and entitlement reforms needed to stabilize future debt increases. The excuses are: the challenges are too big, time is too short and conferees don’t have the legislative tools to do anything substantial.
Time for the conferees is short, but they have the option of buying more time for the big decisions. The challenges are huge, but the consequences of failure are even worse. Most important, the conferees have a legislative tool – reconciliation – at their disposal that enables them to find a lasting solution, if they have the will to do so.
The conferees could agree on a short-term package to overturn the fiscal year 2014 sequestration caps that are punishing the recovery and making it hard to deliver the government services that both parties want. That would already be an important step in the right direction. But there is an opportunity to do more. At the same time, conferees could issue reconciliation instructions to the committees of the House and Senate to make fundamental, phased-in changes in taxes and entitlements. Such instructions could set a date in March 2014 as the day for committees to respond to the instructions with long-term, pro-growth changes in taxes and entitlements that would stabilize and begin to reduce the ratio of U.S. debt to the size of the economy.
Both sides fear reconciliation. Republicans fear it will lead to higher revenues. Democrats fear it will lead to future reductions in Medicare, Medicaid and Social Security benefits. In other words, both are afraid to even discuss the changes needed to grow the economy faster and start the nation’s debt accumulation on a downward path. Both are afraid to do more than kick the proverbial can down the road one more time.
But fear is not a strategy. All of the bipartisan budget strategy groups, including the Debt Reduction Task Force that we co-chaired at the Bipartisan Policy Center, have proposed reforming income taxes to enhance economic growth and raise more revenue without raising tax rates. They also recommended slowing the growth of health care entitlements by making care delivery more efficient and preserving Social Security for future retirees by making the program solvent. The budget conferees have an opportunity to change the dismal trajectory of:
- Defense sequesters that will make America more vulnerable in an increasingly armed world;
- Domestic sequesters that are "eating our seed corn," diminishing investments in health, education, science and infrastructure;
- A quick return to increasing debt that slows future growth and requires ever-increasing resources for debt service.
We do not underestimate the difficulty of finding common ground in our polarized political environment. It has been more than a quarter of a century since a divided Congress – one chamber Democratic and one Republican – has been able to reach a budget agreement. This fact alone shows that the challenges for bipartisan progress remain imposing. But the challenges can be met – time is sufficient, obstacles can be overcome and legislative tools exist.
However, only the active engagement on a sustained basis by the president and by congressional leadership can achieve a breakthrough. As Presidents Clinton and Reagan showed, if an executive is willing to use the bully pulpit, fiscal paths can be changed, fear notwithstanding.
In the last three years, the president and Congress have done three things: avoided a fiscal cliff of their own making; avoided a debt default danger of their own making; and continued the prospect of lurching from one budget crisis to the next without solving underlying problems. Now is the time to shift to the real issues. Negotiations should focus on existing entitlement promises that cannot be met with the current system and on a simplifying a tax code that is now anti-growth.
Are we naïve?
Maybe, although we combine about 90 years of work in the fiscal arena. Perhaps we are both nostalgic for negotiations when fear was pushed aside and leaders risked rejection. We have experienced agreements that came together even when time was short, the challenge huge and emotions high. We believe these conferees can do so as well if they have courage and party leaders have their backs.
The Hill | November 11, 2013
For the past three years, Congress has been stuck in a partisan stalemate that has threatened fiscal confidence and slowed our already sluggish economic recovery. It has proven easier for both political parties to stand firm in their ideological corners instead of presiding over a functioning budget process that promotes stability, government efficiency, and economic investment.
The Constitution granted Congress the authority to tax and spend, and they have certainly exercised it. But it wasn’t until 1974 that “The Budget Act” established the House and Senate Committees on the Budget and finally created what we now refer to as regular order in order to manage these resources in a manner worthy of a great nation. Under the law, each house of Congress would draft and pass their own budget resolutions and then a conference committee would meet to work out the differences. Reconciliation legislation could also be utilized to enforce the spending and revenue levels set out in the budget resolution.
Unfortunately, this established process hasn’t always yielded results in today’s divided Washington. That is one of the reasons we came together in 2009 to introduce legislation to establish a Bipartisan Task Force for Responsible Fiscal Action to put Congress back on a path to fiscal sustainability. That effort eventually led to the Simpson-Bowles Commission which we were both privileged to serve on. Since then, there have been sporadic attempts at dealing with the debt as Congress has engaged in habitual fiscal cliff-jumping.
Now nearly 40 years after the Budget Act, Congress has once again returned to regular order and convened a budget resolution conference committee to address our growing debt. We cannot let another year pass without at least taking some common sense steps to reduce our debt, beginning with a workable federal budget.
Despite some short-term improvements, the debt as a percentage of our economy is projected to rise much faster later this decade, as health care costs continue to grow and the baby boom generation retires in droves. The growth in entitlement programs alone will require increased federal borrowing and interest spending, crowding out other priorities. In addition to the entitlement tsunami, we remain burdened by a tax code that stifles innovation and economic growth.
As former chairmen of the Senate Budget Committee, we know more than most that one budget resolution conference report cannot solve the nation’s fiscal problems, or even strike the grandest of budget bargains.
Budget resolutions by design are not signed into law and therefore do not actually make changes to the law. Instead, they set topline levels for discretionary spending, mandatory spending, and revenue collection, leaving the allocation of funds to the appropriators and the ability to make changes to mandatory spending and revenue policies to the authorizing committees.
In addition to setting funding levels, the budget resolution can establish a process, known as budget reconciliation, to require those authorizing committees to comply with instructions to make changes to the tax code and mandatory spending programs. Reconciliation is a complicated process, but it provides one avenue for a budget conference to get at some of the largest drivers of our long-term debt.
As senators who were often on the opposite sides of recent budget resolution debates, we also know how partisan politics can complicate the path to common ground.
With the budget conference committee meeting again this week, we want to commend the bi-partisan and productive tone that Conference Committee Chairs Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.) have set. While we acknowledge the limitations that are inherent in the budget resolution process, we encourage the chairs and their fellow conferees to use the tools that the Budget Act provides to come up with a budget resolution that:
- Puts debt on downward path as share of economy, like the House Republican, Senate Democratic, and White House fiscal year 2014 budgets
- Replaces the across-the-board sequester cuts with targeted deficit reduction that offsets any changes
- Establishes a fast-track process for entitlement and tax reform to strengthen Social Security and Medicare and make our tax code simpler and more competitive
There is no doubt that we will need additional measures beyond a budget conference report to deal with the long-term drivers of our debt. A budget resolution is not an end itself, but merely one means of jumpstarting a functioning federal budget process and negotiations over national fiscal policy.
Many Americans, from North Dakota to New Hampshire and beyond, have lost faith in the federal government as they watch their leaders lurch from crisis to last-second stopgap and from to standoff to shutdown. Now is the time for our leaders to show they have the fortitude to make the tough choices needed to put us on a more prosperous path. Setting a budget, just like every American family and small business, is a good place to start.
The Hill | October 29, 2013
The recent budget showdown was both completely predictable and totally avoidable, as was the resulting damage to our economy and public confidence in our government. Not only did the shutdown and debt-ceiling standoff slow growth, waste money and inhibit basic governmental functions, but it distracted from the real issue: the long-term debt challenge facing our nation.
It is time for leaders to break the cycle of bouncing from crisis to crisis by taking three common-sense steps: Stop the madness, start talking and solve the problem.
Reopening the government and raising the debt ceiling was a good start in at least putting the madness on hold, and agreeing to establish a conference committee on the budget resolution will help facilitate a start of discussions. Our leaders must now find a way to make these discussions fruitful both in terms of slowing the growth of our debt and ending the practice of operating the world’s largest economy on a month-to-month basis.
We suggest deliberations should start by identifying areas of agreement. There seems to be broad-based support for reforming farm subsidies, modifying the federal worker retirement system and charging user fees that better reflect the actual costs of certain government programs. Savings in these areas could be used to soften the blow of the mindless sequestration over the next year or two and allow appropriators to fund defense and non-defense discretionary programs at more reasonable levels.
Trading across-the-board, temporary and anti-growth cuts for more targeted and permanent savings would represent an important step, but negotiators must resist the temptation to declare victory with such a “small ball” approach.
As Congressional Budget Office Director Doug Elmendorf recently warned, despite some improvements, “the fundamental federal budgetary challenge has hardly been addressed.” A budget conference that does not make progress in this area will not have lived up to its potential.
And progress could indeed be made if leaders start talking to each other instead of talking at each other. The two parties have been close to agreement in the past, and there is more potential for common ground than either side realizes.
Both sides have taken encouraging steps toward a principled compromise. The budget President Obama put forward earlier this year incorporated some tough choices and politically difficult compromises, including adopting a chained Consumer Price Index to measure inflation more accurately and achieving significant savings from Medicare. House Budget Committee Chairman Paul Ryan (R-Wis.) recently identified a number of areas of potential agreement in an op-ed, including means-testing Medicare premiums, modernizing Medicare cost-sharing rules and pursuing pro-growth tax reform.
Building from some of these policies and concepts, any responsible plan must have a few key elements. It should slow the rate of growth in federal healthcare spending by enacting structural reforms that improve incentives for all parties. It should eliminate unwarranted subsidies and low-priority spending while reducing fraud and improving the way we index the federal budget to inflation. It should protect and enhance important investments and support for low-income individuals. It should put in place a process that allows House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) to pursue comprehensive tax reform that cuts tax preferences to lower rates, promotes growth and reduces the deficit. Finally, it should find a way to reform Social Security on a separate track to make the program financially sound for future generations.
Savings from these policies should be used both to reduce the mindless cuts from sequestration and help to stabilize and reduce the debt as a share of the economy. A plan large enough to at least stabilize the debt could also be used to justify a permanent indexing of the debt limit, which would put an end to the repeated political brinksmanship by eliminating the need to pass debt-ceiling increases so long as the debt remains on a sustainable path.
Earlier this year, the two of us put forward a plan — built on the progress made in previous bipartisan negotiations — to achieve $2.5 trillion in savings, replacing the sequester with smarter, more gradual deficit reduction that would avoid disrupting a fragile economic recovery while putting the debt on a clear downward path relative to the economy over the next 10 years and beyond. Importantly, the plan would achieve this deficit reduction while respecting the principles and priorities of both parties. It called for significant savings from entitlement reforms, but with important protections for low-income and vulnerable populations. Likewise, it proposed additional revenues for deficit reduction, provided that those revenues be achieved through pro-growth tax reform and not higher marginal income rates.
The proposal we put forward is not our ideal plan, and it is certainly not the only plan. We also recognize that it may not be possible to reach a bipartisan agreement on a plan as aggressive as the one we put forward. But so far, we have done the easy stuff (raising taxes on the wealthy and calling for unspecified cuts in discretionary spending) and we’ve done the stupid stuff (across-the-board cuts under sequestration). Now it’s time to do the tough stuff and the smart stuff: reforming our entitlements and tax code.
Policymakers should seek to reach agreement on a framework that at a minimum stabilizes the debt as a share of GDP. Reaching such an agreement will require Democrats to accept some structural reforms of entitlements, and will require Republicans to use a portion of revenues that will result from simplifying the tax code for deficit reduction, instead of using all savings to reduce tax rates. But such an agreement is achievable.
It is going to take real political courage on both sides to come together to find common ground. The problem is real, the solutions are painful, and there is no easy way out. But there is room for a solution if both parties commit to stop the madness, start talking and solve the problem.