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The Rough Common Ground

December 6th, 2010 . by economistmom

clearing-brush21

By now we’ve seen a number of proposals for fiscal sustainability from groups with very different perspectives–including groups that say that the deficit is not a problem and even talking about it as such is what’s really dangerous and even evil, and yet offer up their way to solve it anyway(!).  Some of these harshest critics of the bipartisan deficit-reduction panels are liberal-leaning groups that argue that the recommendations of the President’s commission, as well as those of the Bipartisan Policy Center and the MacGuineas-Galston plan, leaned too heavy toward the conservative side and proposed packages that were too heavy on spending cuts and too insistent on keeping taxes (too) low.  (I may agree that I would have preferred more revenue increases in the overall mix than the President’s commission proposed, but I don’t think that should lead me to declare the overall proposal “dead on arrival” or to reject the the individual policies contained within it.)

I’ve seen two sets of policy proposals coming from the liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced–one by the Institute for America’s Future’s “Citizens’ Commission” (whose members include Dean Baker, Robert Borosage, Robert Kuttner, and Robert Reich) and another by the “Our Fiscal Security” project, a partnership of Demos, the Economic Policy Institute, and the Century Foundation.  I actually like a lot of the policy substance in these more liberal-leaning packages when I muster up my “loving kindness”/yogi heart and am able to see past the deficit-hawk hatred and character assassination that these groups or the individuals in these groups–particularly those involved in the “Citizens’ Commission”–often shroud their proposals in.

Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see this critique from the Heritage Foundation or anything that Grover Norquist (or his organization, Americans for Tax Reform) has said.  Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions’ proposals) his own fiscal sustainability plan that keeps taxes as a share of the economy low enough–below 19 percent–to please these conservative groups and his party’s caucus.

With all the screaming coming from both extremes, you’d think the competing visions out there must be so vastly different that there couldn’t possibly be such a thing as a truly “bipartisan” way to reduce the deficit.  But when I look at the bipartisan plans accused of being too conservative and compare them with the plans that came from the two liberal-leaning groups levying this criticism, I actually see a decent amount of “rough” common ground.  I see it as “rough” in two ways:  (i) it’s a terrain full of tough choices, so maneuvering through it will be “rough,” and (ii) the similarities across plans are in their “rough” general principles and strategies rather than in the specific parameters of the policies.

Compare the liberal groups’ plans with the bipartisan plans (from the President’s commission, the Bipartisan Policy Center, and MacGuineas-Galston), and you’ll find they all include:

  1. cuts to discretionary spending, including (or especially) substantial cuts to defense spending;
  2. reforms to Social Security and Medicare which improve the balances in these programs in a progressive manner (whether through the taxes collected or the benefits given through these programs);
  3. tax reform which raises revenue/GDP relative to current policy by reducing tax expenditures in a progressive manner (through capping the deduction rate and/or converting exclusions and deductions into credits, and by taxing capital gains and dividend income at same rate as labor income);*
  4. additional deficit-financed, but more effective, stimulus over the next couple years (whether spending or tax cuts).*

In the case of #1, the liberal groups concentrate the spending reductions on defense spending, while the bipartisan groups have a more equal mix of domestic and security-related spending cuts.  (All proposals note they’re open to cutting farm subsidies.)  In the case of #2 and #4, the disagreement is mainly over the pieces involving Social Security:  respectively, whether Social Security benefits should be cut at all (even if only for the rich), and whether a payroll tax holiday funded out of general revenues (not harming trust fund balances) would still somehow undermine the program and is viewed as “just another tax cut” in a stimulus strategy that has already been too tax-cut-heavy.

It’s in #3, the strategy of raising revenue by broadening the income tax base, and reducing tax expenditures in a progressive way, where I see the greatest agreement–even when you look at the details of the competing proposals.  Yet the rhetorical fighting from both the conservative and liberal sides over tax policy in general, and over the tax policies included in these deficit reduction plans in particular, continues, with both sides arguing that the tax proposals are not “bipartisan enough.”  On the left, the liberal critics of these tax proposals oppose the fact that marginal tax rates would come down–which sounds too much like a Republican goal.  They forget that these proposals collect more tax revenue in a progressive (as well as more efficient) way–such that average tax rates (and tax burdens) would rise more for the rich than for the poor.  On the right, the conservative critics of these tax proposals oppose the fact that average tax rates, overall (”on average”), come up.  They forget that these proposals would reduce marginal tax rates and the distortions that the tax system places on economic decisions, a crucial feature of “pro-growth” tax policy.

As I see it, the “bright line” that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other from their respective sides, is the question of how high federal revenues as a share of our economy have to rise.  Republicans have become pretty entrenched into their party-line position that revenues/GDP should stay around where it’s been in decades past–at around 18-19 percent.  (No matter that we know that future spending, despite our best efforts, is sure to be substantially higher than it’s been in the past, which was already higher than 18-19 percent.)  Democrats think that number is too low and that the right number is somewhere in the 20s, but they’ve become so used to either being defensive about this opinion (”no, we’re not proposing the largest tax increase in American history”) and/or proposing that all additional revenue come from just rich people and evil corporations (which doesn’t exactly make the Republicans’ hearts patter).

That’s why I think the general tax reform strategy contained in the variety of deficit-reduction proposals we’ve seen–the strategy of broadening the base which raises the average tax rate without raising (or even allowing decreases in) the marginal tax rate–has such promise to get Republicans to cross that “bright line” of 18-19 percent of GDP in revenues, with the “lure” of the kind of tax reform they should love if they only stopped shouting “no” long enough to give it a good look.  It seems to me this holds the greatest promise for the kind of deficit reduction that both Republicans and Democrats could support.  It is a rare example of potential “bipartisan compromise” where both sides get something they want:  for conservatives, low marginal tax rates and a tax system more conducive to economic growth; and for liberals, higher tax burdens on the rich and an increase in the overall progressivity of the federal income tax–and yet the deficit would be reduced instead of increased.

It’s a “rough” common ground right now, but I think we’ve got to keep clearing away the partisan “brush” over the next year, well before the next installment of the then-Bush-soon-to-be-Obama tax cuts expires.

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*NOTE:  The MacGuineas-Galston plan is not as specific as the other plans about how they would reduce tax expenditures; they propose a 10% overall cut in tax expenditures (via a “tax expenditure budget”) but suggest, for example, that the employer-provided health exclusion could be converted into a credit (which has the effect of making the dollar benefit of the tax preference the same for everyone no matter their income level).  The M-G plan also does not suggest an immediate fiscal stimulus option, but emphasizes that any deficit reduction policies “should be back-loaded to synchronize with the economic recovery and allow people sufficient time to adjust.”

6 Responses to “The Rough Common Ground”

  1. comment number 1 by: SteveinCH

    Good post Diane.

    I rather suspect that the issue is how far into the 20s you want to go in terms of government share of GDP and how firmly you believe you are able to make that stick.

    Speaking as a more conservative type, I’d say 21 (B-S) is acceptable because in agreeing to 21, I’m expecting 22 to 23 to be the real number. Were I to agree to something like the MacGuinness 23 or 24, I’d really be agreeing to 25 or 26 which is something to which I would never agree.

    The fundamental problem, from a conservative perspective, is believing that government will ever live within its means regardless of how those means are defined. There are always more good deeds to do with someone else’s money. Until those on the left come up with a way to convince those on the right that there won’t be some other worthy cause just over the horizon that demands greater spending, I don’t see the right going very far into the 20s to attain compromise.

    FWIW, I don’t think the “you pay more but at a lower marginal rate” is really a deal that appeals to conservatives (with the possible exception of conservative economists and policy wonks).

  2. comment number 2 by: AMTbuff

    >As I see it, the “bright line” that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other from their respective sides, is the question of how high federal revenues as a share of our economy have to rise.

    Precisely correct, Diane. However Republicans are unlikely to be enthusiastic about tax reform, knowing (based both on history and fiscal projections) that low rates will rise at the first fiscal crunch. This time, tax reform really is base broadening without a (durable) rate decrease, and all the major players know it.

    That’s not to say base broadening tax reform shouldn’t happen or that it won’t happen. I am only suggesting that Congress ought to level with the American people this time rather than play yet another game of bait and switch.

  3. comment number 3 by: Gipper

    Economistmom wrote:

    “As I see it, the “bright line” that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other from their respective sides, is the question of how high federal revenues as a share of our economy have to rise. ”

    As I’ve said many, many times, the argument is ultimately about spending, not the deficit. The Republicans recognize that focusing solely on the deficit as “the problem” works to the favor of the Democrats. The reason is that it’s much harder to run for office and win elections advocating cuts in spending.

    The only hope of luring Republicans over to raising taxes above 19% of GDP is for Democrats to take political responsibility for offering cuts in entitlement programs. Unfortunately, the Democrats behavior enacting Obamacare in the midst of our greatest fiscal crisis in 80 years, and allocating over 500 billion of tax revenues to a new entitlement over the next 10 years instead of reducing the deficit only buttresses the Republicans worst fears.

    Even worse was the reticence of so-called left-leaning deficit hawks to make any negative comments about this behavior. I am especially referring to you, Economistmom. That leads right-leaning deficit hawks like me to suspect that the focus on deficits is simply a means to an end — that is the enlargement of a welfare state on a fiscally sound footing.

    Republicans have no interest in establishing a fiscally sound footing for your welfare state. We’ve found that it’s easier to win elections focusing on lower tax rates and emphasizing the importance of the federal government’s core responsibilities for defense, law enforcement, and the courts. Let the Democrats worry about how to pay for all the other stuff they want.

    Ultimately, the deficits threaten the Democrats more than the Republicans. How can we prove this is true? Well, when the vote comes to raise the debt ceiling it will be the Democrats’ projects that go wanting. The Democrats won’t stop funding the military, Dept. of Justice, air traffic controllers and food and safety inspectors. It’s all the stuff that most Republicans don’t care about that require deficit-financing that will suffer.

  4. comment number 4 by: rjs

    have you seen “Think 2040: a Blueprint for the Millennial America”, a college based plan, which was developed by young people…

    http://www.rooseveltcampusnetwork.org/chapter/1875/blueprint-millennial-america

  5. comment number 5 by: SpendingHawk

    Obama demonstrated zero commitment to controlling the deficit agreeing to this deal today. What a blow to the gut after the restrained euphoria of last week’s commission report.

    Spending is going up (extension of UI benefits 13 months) and tax rates are going down. It’s Keynesian economics at its finest.

    Politically, the Republicans just had their balls cut off. What the hell are they going to do in the next Congress now that Obama has pre-empted their signature issue?

    I dream about Boehner offering to implement Simpson-Bowles tax recommendations in exchange for large spending cuts from Obama and the Democrats. Then I wake up and get depressed.

  6. comment number 6 by: AMTbuff

    >Politically, the Republicans just had their balls cut off. What the hell are they going to do in the next Congress now that Obama has pre-empted their signature issue?

    If this is a 2-year extension, the battle will be waged during the 2012 campaign. I hope one party or the other will offer a non-fantasy plan.