Getting Specific: How to Fix the Budget

 

On Thursday, September 30, 2010, the Committee for a Responsible Federal Budget convened a policy forum, “Getting Specific: How to Fix the Budget.” The event brought together policymakers and a wide array of the nation’s foremost fiscal experts to discuss how we can get specific in fixing the federal budget. Also at the event, CRFB released two policy papers for a new series entitled Let’s Get Specific, offering a plan to reform Social Security and another to help further control rising health care costs.

Policymakers and voters recognize that the growing debt is a major issue that must be addressed. Now our leaders must move beyond paying lip service and towards producing results. Only by offering and discussing explicit proposals can we move forward. The forum challenged policymakers to come up with specific solutions to deal with the country’s fiscal challenges and offered ideas in areas ranging from defense cuts, to Social Security, to health care, to tax policy.

CRFB co-chair and former Congressman Bill Frenzel opened the event by emphasizing that it is tough to close the fiscal gap without specific policy proposals; therefore it is important to “continue the debate in specific terms.” He also focused on the fact that “for the purposes of debate, there should not be any third rails.” 

 

 

Senator Ron Wyden (D-OR), focused on the importance of wide-reaching, bipartisan tax reform to long-term fiscal sustainability. He is the co-sponsor, with Senator Judd Gregg (R-NH), of a detailed proposal (The Bipartisan Tax Fairness and Simplification Act) to fundamentally reform the tax code. Ours is a “broken, discredited tax system,” he said, “where Americans spend millions of hours a year trying to coordinate with a 10,000-part tax code.” We need a simpler, pro-growth tax system, which would be “an engine for job creation.” The Wyden-Gregg tax plan, he argued, “creates opportunities for you to get ahead if you don’t have much, but if you’re successful, we won’t take away your incentives for more success.”

Wyden also stated that the debate over whether to extend the Bush era tax cuts “is the wrong debate to have right now.” We can’t turn around the deficit with a weak economy—we need tax reform that will have a neutral budget impact, but will create jobs. And also, he concluded on a cautionary note, “reformers ought to be thinking how to make it tougher to unravel reforms once they’re implemented.”
 

 

Congressman Paul Ryan (R-WI) followed and discussed his comprehensive “Roadmap for America’s Future,” which deals with all facets of the budget, including spending (both discretionary and mandatory) and taxes. He started off saying that “it’s important to get specific with ideas to fix this fiscal problem.” He said that he was not trying to suggest that he has all the answers, “but just trying to get the conversation going—by putting a substantive plan out there, so that other people will put their plans out there too.”

He emphasized that if something is agreed upon soon, “we can gradually phase in these policies” instead of having to do them suddenly at the crisis point, thus avoiding “Greek-like austerity” down the road.

Even though he discussed the fact that “entitlement reform is being made into a political weapon,” his closing words focused on his optimism about our ability to fix this crisis, saying that in the end, “Americans always do the right thing.”

A panel of experts then weighed in on government spending. 

 

Chuck Bowsher, CRFB board member and former Comptroller General of the U.S. General Accounting Office, focused on defense spending. Having served under Secretary Robert McNamara in the Defense Department, he discussed the fact that he knows all too well that “if you go to war, you lose control of the budget.” He proposed that if we are going to continue the war for more than two or three more years, we will have to seriously consider implementing a surtax to pay for it.

Larry Korb of the Center for American Progress supported the idea of a defense surtax, reminding the audience that our prolonged involvement in Iraq and Afghanistan are the first major conflicts that we haven’t raised taxes to pay for, even though we have “astronomical, and still skyrocketing, costs.” All defense spending cuts, he emphasized, should be endorsed by the Pentagon, and should not in any way undermine national security. Two that he particularly supported were:

  • changing the consumer price index (CPI) for calculating military benefits, which would save $50 billion by slowing the growth of benefits;
  • raising premiums on military retirees, saving another $50 billion.

Former Congressman Jim Kolbe discussed Social Security, saying that finally, “the American people are ready to talk about this,” adding that “it’s pretty clear that we’re in trouble.” Kolbe argued that in comparison to attempts to reform other aspects of the budget like healthcare, Social Security reform is “easy.” Even though it’s always been the so-called “third rail,” Americans are beginning to understand that something has to be done now. So what can be done? He proposed several options:

  • raise the retirement age;
  • start using superlative CPI (a more accurate measure of inflation that will slow the growth rate of benefits);
  • implement a progressive formula for Social Security (changing the benefit so it’s slightly different for high-income earners).

CRFB president Maya MacGuineas and Bill Galston of the Brookings Institution discussed the paper they released at the event, “The Future Is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth.” They propose a target for federal debt held by the public—to be 60% of GDP by the end of the decade (it’s now on track to hit roughly 90% by then).

They proposed 5 principles for reform:

  1. Shared sacrifice: we must address the entire budget, not just a piece of it, and we all have to participate in this.
  2. Encourage growth: without a steadily growing economy, we can’t do anything!
  3. Increase progressivity and protect those most in need.
  4. Transparency: every American must be able to see what we are changing and why.
  5. Addressing long-term demography/aging issues.

Galston-MacGuineas Plan Summary

Policy Description Savings in 2020 ($ Bil)
Defense
  • Reduce weapon systems, reform compensation, reform contracting, cover all war costs beyond 2015 with a war surtax
80
Domestic Discretionary*
  • Freeze domestic discretionary spending for 3 years and limit to inflation for rest of the decade 
60
Social Security
  • Speed up increase in normal retirement age and index early and normal retirement ages to longevity
  • Switch to the Chained CPI
  • Use progressive indexation for higher earners
  • Include state and local workers
  • Create a minimum benefit and an old-age bonus
  • Use some proceeds from a carbon tax to reduce the payroll tax and make payroll tax more progressive
  • Establish mandatory 2% add-on accounts with progressive matches for low and moderate-income workers
75
Health
  • Institute tort reform
  • Raise Medicare premiums
  • Index the eligibility age for Medicare
  • Expand the Medicare Commission
  • Reduce health subsidies 
110
Other Spending
  • Index federal government salaries to private sector wage growth
  • Phase out farm subsidies and replace them with insurance against catastrophic income loss
  • Additional savings from other entitlement programs
75
Tax Expenditures
  • Reduce tax expenditures by 10 percent and limit growth
  • Divide the proceeds between lower tax rates and deficit reduction
300
Revenues
  • Enact a broad-based carbon tax, with some proceeds going to reduce the payroll tax and the rest to deficit reduction
  • Enact revenue-neutral corporate tax reform to reduce rates while broadening the base
100
Policy Savings 800
Interest Savings 300
Total Savings 1,100

Note: President Obama’s FY2011 budget serves as the baseline.
* Savings would be higher compared to more realistic growth trends, but the President’s baseline already assumes relatively low levels of discretionary spending. 

The biggest lesson to learn here is that we just don’t have time—“we must put a plan in place now, and phase it in as the growing economy can handle it.” Comprehensive budget plans are crucial—“even if there are things we don’t like in them, we need to support all the different plans.” This should be the year to get specific on solutions.

 

 

Next in the line-up, Congressman Jim Himes (D-CT) focused on the need for framing the political conversation on fiscal reform around the notion of shared sacrifice, the facts, and the need for both sides to not demagogue the debate. He argued that constituencies will respect a frank discussion of the tough fiscal choices we will have to make, and that, ultimately, “we will get there on the budget.” Himes is a founding member of the House Spending Cuts and Deficit Reduction Working Group and has sponsored legislation to cut agricultural subsidies and commodity payments to wealthy farmers. 

In the final panel, on taxes, Bill Frenzel reiterated that he is “very worried about the consequences of our rising national debt, and that if we’re really serious about reducing government spending, we have to be serious about reducing tax expenditures.”

 

 

Martin Feldstein, an economist at Harvard University, discussed how tax expenditures are where federal spending truly lies, as he explained in a recent Wall Street Journal opinion piece. He argued for reform of tax expenditures, noting that capping them at 5% of adjusted gross income (AGI) could save $85 billion per year while capping them at 3% of AGI could save $160 billion per year.

Of course it will be difficult, the panel concurred, but it can be done--and it has been done in the past. Buck Chapoton, a strategic advisor at Brown Advisory, provided a brief history of what was involved in tax reform in the 1980s. Chapoton argued the case for fundamental tax reform, much like what happened in the mid 1980s. What Chapoton believed to be most important in beginning tax reform was deciding on what the tax base should be.

Robert Carroll of Ernst & Young discussed how tax expenditures reduce government transparency, interfere in discussions of what is the right size of government, and that most of the lost revenue is concentrated among the top few credits, deductions, and exemptions. Chapoton, Carroll, and Maya MacGuineas (along with Diane Lim Rogers of the Concord Coalition) worked together on a paper last year that offers several ideas for bipartisan tax reform.

Bill Gale, a senior fellow at the Brookings Institution, then commented on three ways to fix the budget:

  • fixing tax expenditures;
  • raising an energy tax;
  • considering a VAT.

“We should think of ourselves as holding an axe,” he said, “and if we have to cut down the tree to get to the fruit way up on it, we will have to.”

CRFB also launched its “Let’s Get Specific” paper series at the event. The series will offer specific ideas for reducing the federal deficit and providing an idea of the choices that will be required to close the fiscal gap. The first two papers cover health care and Social Security.

Through the event and papers CRFB is helping to create an environment conducive to offering and debating specific policy solutions.