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Tax Base Broadening a Part of Everyone’s Deficit Reduction Plan–Even Paul Ryan’s

May 27th, 2011 . by economistmom

On Wednesday I attended the Peter G. Peterson Foundation’s “Fiscal Summit”–what felt like the fiscal policy world’s version of the Oscars, complete with stars like Bill Clinton, Paul Ryan, and two-thirds of the cast formerly known as the “Gang of Six” (now five), and even video presentations of the deficit-reduction proposals from six think tanks that felt amazingly similar to the clips from the Best Picture nominees.

President Clinton set the tone by encouraging an emphasis on the positive.  Instead of painting doomsday scenarios about what would happen if we don’t get our act together and reduce the deficit, he said we ought to emphasize what we have to gain from fiscal responsibility–you know, just little things (just kidding) like a strong economy and a more secure future for our kids and grandkids.

And in terms of the variety of proposals from the variety of participating think tanks, both the Wall Street Journal’s David Wessel, and the Tax Policy Center’s Howard Gleckman point out that while there are deep philosophical differences between the most liberal (Economic Policy Institute) and most conservative (Heritage Foundation) groups in terms of their views on the optimal size of government, they still all came up with mathematically consistent proposals that would actually reduce the deficit.  Heritage’s plan cuts spending the most in order to support a lower level of taxation (around the historical average of 18-19 percent of GDP), while EPI’s raises taxes the most in order to support a larger government.

Keeping on the positive, both David and Howard note the areas of agreement across the six proposals in terms of specific policy ideas, both awarding the “common ground” prize to… [drum roll please]… reducing tax expendituresDavid presents the award this way:

[H]ere’s the headline: All six would curb tax income-tax breaks, loopholes, deductions and credits, a.k.a. “tax expenditures” or “spending through the tax code” because Congress uses them as alternatives to explicit spending. “Until recently,” the Peterson Foundation observes, “tax expenditures drew little scrutiny outside budget circles, but the Bowles-Simpson commission put [them] at the center of the public policy debate.”

This unanimity points to the likelihood that any tax increases to which Republicans acquiesce in a deficit deal will curb tax expenditures rather than raise tax rates, perhaps even touching (while not eliminating) tax breaks for mortgages and employer-financed health insurance.

And Howard, this way:

How did they get there? They all would reduce or eliminate many tax expenditures, although most would preserve subsidies for charitable giving and mortgage interest in one form or another.

And while many commentators paint Paul Ryan’s (House Republican) plan as devoid of any tax-side solutions, that’s false.  Ryan’s deficit-reduction plan actually contains two tax plans which only when combined happen to add up to a zero-added-revenue plan: the first piece which broadens the tax base by reducing tax expenditures and hence raises revenue, and the second piece which reduces marginal tax rates and hence loses revenue.

So Paul Ryan proposes to reduce tax expenditures and raise revenue, too–just before he proposes to cut tax rates and lose the gained revenue.

Why does Ryan insist on keeping revenues in the 18-19 percent of GDP range?  Besides that nasty little (just kidding) “no new taxes” pledge the Republicans have taken, there’s Ryan’s genuine desire to promote economic growth and what I think is his sincere belief in the magic of “supply-side” (really, “Laffer Curvesque”) tax cuts.  But as he thought out loud about this at the summit, I made note that his logic goes this way (as quoted in a Politico story by Meredith Shiner, emphasis added):

Ryan reiterated his anti-tax hike stance, a point of contention with Democrats who say increases will be necessary.

“I think higher revenue is clearly helpful but we should get it through economic growth — job creation and economic growth,” Ryan said.

Ah… So I’d like to ask Paul Ryan to consider his stated economic goals and evaluate the tax pieces within his deficit-reduction plan, piece by piece.  If he recognizes that higher revenue “is clearly helpful” in reducing the deficit (by the basic mathematics that deficit = spending - revenues), then he should consider how each of his two tax policy components affect revenues, accounting for effects on economic efficiency and growth:

  • Paul Ryan Tax Piece #1: broadening the tax base by reducing tax expenditures.  This directly raises revenue, and indirectly, through improved allocation of resources from a more level “playing field” (more neutral tax treatment across different sources and uses of income) increases economic efficiency and economic growth–also raising revenue.  Score on Piece #1: unambiguously higher revenue = helpful!
  • Paul Ryan Tax Piece #2: lowering marginal tax rates, but holding the tax base constant. This directly reduces revenue, and indirectly, through increased incentives to work and to save, increases the tax base, which increases revenue.  Score on Piece #2: theoretically ambiguous; depends on which effect dominates, which depends on which side of the Laffer Curve we’re on.  But bad news: economists pretty much universally agree that in practice (i.e., reality) we are nowhere near the side of the Laffer Curve that folks like Grover Norquist would like people to believe we’re on.  So, likely lower revenue = NOT helpful!

So Chairman Ryan just needs to slow down when he self-analyzes his own tax proposals within his deficit-reduction plan.  If he would take a breather after recognizing the unambiguously positive economic effects from Paul Ryan Tax Piece #1 (reducing tax expenditures holding rates constant) and note that the costs are likely to exceed the benefits of Paul Ryan Tax Piece #2 (reducing marginal tax rates holding the tax base constant), he’s more likely to conclude that the other deficit reduction plans that also happen to involve raising revenue by reducing tax expenditures, but just don’t go so gung ho on the marginal tax rate cuts (as they shouldn’t given the cost-benefit test), aren’t really very different from his own optimal deficit-reduction plan.  That is, if he’s being honest with himself and true to his faith in economics–which he insisted at the fiscal summit motivates him more than his ideology.

Public Education Not Quite So Publicly Funded These Days

May 26th, 2011 . by economistmom

graduation-cap-with-pricetag

An article in Wednesday’s Wall Street Journal struck me as related to the overall financial woes facing the public sector more broadly–and not just the state and local level financing of public schools that is the focus of the story by the WSJ’s Stephanie Simon.  She explains:

Budget shortfalls have prompted Medina Senior High [in Medina, OH] to impose fees on students who enroll in many academic classes and extracurricular activities. The Dombis had to pay to register their children for basic courses such as Spanish I and Earth Sciences, to get them into graded electives such as band, and to allow them to run cross-country and track. The family’s total tab for a year of public education: $4,446.50.

“I’m wondering, am I going to be paying for my parking spot at the school? Because you’re making me pay for just about everything else,” says Ms. Dombi, a parent in this middle-class community in northern Ohio.

Public schools across the country, struggling with cuts in state funding, rising personnel costs and lower tax revenues, are shifting costs to students and their parents by imposing or boosting fees for everything from enrolling in honors English to riding the bus.

At high schools in several states, it can cost more than $200 just to walk in the door, thanks to registration fees, technology fees and unspecified “instructional fees.”

Well, I can vouch for that.  At my kids’ public high school in Fairfax County, VA (which I assume is one of the wealthiest public school districts in the nation), I’m paying for the second year in a row of graduating seniors’ fees.  If you want to see your kids donning honors cords atop their graduation gowns, you have to pay for them–just like you have to pay fees for them to join the honor societies in the first place.  And yes, at my kids’ school, we do pay for a parking spot in the school lot.  And I have other strange and seemingly random examples of things I’ve had to pay for this year, which I won’t get into because I don’t want it to come across as my griping about it.

I’m not griping, because it’s still undeniable that my kids’ public educations are still an exceptionally good deal for me.  And I’m willing to help the school district with my private contributions, however they are labeled or to whatever specific purposes they are “earmarked,” to keep my kids in that high quality educational experience.

As the WSJ article continues:

Public-school administrators say the fees—some of which are waived for low-income families—allow them to continue to offer specialty classes and activities that would otherwise fall to the budget ax. Some parents support that approach, saying they’d rather pay for honors physics or drama than see those opportunities eliminated altogether.

Some educators, too, argue that fees are good public policy. In a time of fiscal austerity, they say it’s not fair to ask taxpayers to fund an all-inclusive education that offers Advanced Placement Art History, junior varsity golf and fourth-year German with little regard for the cost…

The concern though is how to get private contributions from those who can afford them without limiting the educational opportunities for those who cannot:

Many states require schools to waive academic, but not extracurricular, fees for the poorest students, generally those with an annual income less than $29,000 a year for a family of four. Those above the cutoff, however, can be sanctioned if they don’t pay in full. Schools may withhold their diplomas or ban them from commencement, which itself often carries a $30 to $60 “graduation fee.”

Even when waivers are available, advocates for the low-income contend that it violates the spirit of a free public education when parents must, in effect, seek charity to pay for their child’s math workbook. In California, the American Civil Liberties Union is suing the state for allowing districts to charge a wide array of fees.

Administrators and parents also worry that fees might affect some students’ chances of getting into good colleges. Schools across the country now charge substantial “pay to play” fees not only for sports and arts programs, but also for more modest activities, including community service.

This is how this particular issue of public school funding having to become not quite so publicly funded is not really that distinct from the challenges facing the public sector as a whole.  The debate about what to do about the federal entitlement programs is pretty similar.  If the government cannot afford to continue to subsidize the programs for all households (regardless of income) as generously as they have in the past, then how can we reduce the government’s contribution (and get private contributions to fill in at least part of the gap) without adversely affecting the quality of services provided by these still inherently-publicly-provided programs to those who rely on these services the most?

The public schools are approaching this problem by reconsidering what’s “basic and essential” in a K-12 education–a lot like what federal policymakers will have to contemplate about the services Medicare or Medicaid will pay for in the future (and who will pay for them):

Though the right to free education is now enshrined as an American value, when written into state constitutions, it typically carries a qualifier: Students are entitled to a “suitable” or an “adequate” education on the public dime.

That has long been interpreted expansively. As far back as the 1920s, schools were offering a wide variety of courses designed to serve many aptitudes and interests, [New York University professor Jonathan] Zimmerman said.

Today, however, educators and lawmakers are wondering if that’s sustainable—or necessary. As the population ages and fewer voters have children in the public schools, some communities are questioning whether an “adequate” education really requires the public to fund a full menu of arts courses, or advanced science classes that may draw just a handful of kids, or a debate club or a gymnastics team.

Seeking to define the extent of taxpayers’ obligation, Kansas House Speaker Mike O’Neal suggests that “what should be required is more than the 3 Rs, but it is decidedly less than everything school districts choose to offer.”

Because ultimately, our budget constraints–at all levels of government (besides within our own households)–are binding tightly these days, forcing us to make tradeoffs that we hope are wise ones.  The WSJ article concludes with a local public school official sounding like a federal budget expert:

While it has pained him to put price tags on so much of the public-school experience, [Medina, OH public schools] Superintendent Randy Stepp said the new cost structure may not be all bad.

“Students have to realize, as our country is realizing, that you can’t have everything,” Mr. Stepp said. “We all have to make tough choices.”

Even Mitch McConnell Is Starting to Ponder the Spending That’s Done Through the Tax Code

May 25th, 2011 . by economistmom

(Video courtesy of Huffington Post.)
As David Callahan writes on Huffington Post (emphasis added):

Such steps [to broaden the tax base by reducing tax preferences, or "tax expenditures"] would command support from an unusual cast of characters. Many fiscal conservatives dislike offering a plethora of deductions in the tax code because it uses the tax system for “social engineering” and — in regard to corporate taxes — puts the government in the business of picking winners and losers. Meanwhile, progressives don’t care for key individual tax breaks because they mainly benefit high earners. Also, of course, progressives hate the billions in tax breaks given to oil companies and other corporations.

All in all, it is possible to imagine a bipartisan deficit reduction deal in which large new revenues are raised by closing loopholes. That is clearly where some members of the Gang of Six (now five) have been for weeks. Last month, Republican Senator Tom Coburn [the departing gang member] said on Meet the Press that he would favor a “net” increase in revenue if it didn’t raise tax rates.

It is even easier to imagine that scenario after a television appearance yesterday by Senate Minority Leader Mitch McConnell, who said that Republicans were dead set against higher tax rates. As reported by CNN.com: “Chris Wallace of Fox caught the distinction and asked McConnell if his language indicated he was open to collecting more tax revenue by ending some subsidies and loopholes. McConnell deflected the question, saying he wouldn’t negotiate a deal on the program.”

Maybe I’m naive, but that sounds like a clear signal that at least Senate Republicans would go along with a tax reform plan that raises revenue.

And incidentally, the Tax Policy Center’s Donald Marron has an excellent column on this very issue in this week’s print edition of the Christian Science Monitor–available online here–where he explains:

Here’s a shocker: America can cut government spending by eliminating tax breaks.

I know that sounds crazy. Everyone usually talks as if spending and tax breaks are distinct. Spending is what the government gives out or uses for purchases; tax breaks reduce how much revenue it collects.

Reality, however, is a lot blurrier. Hundreds of billions of dollars of spending are disguised as tax cuts.

It’s not hard to see why. Voters like tax cuts more than spending increases. Politicians understand that, so they convert spending into tax breaks.

I truly believe that, at least eventually, more policymakers from both sides of the aisle and both houses of Congress–and even the guy down on the other end of Pennsylvania Avenue–will discover that reducing tax expenditures are their favorite way, not just to reform the tax system, but to reduce the deficit.  In other words, they will have to come around to the idea of reforming the tax system, not just to make the system more efficient and/or fair in raising any old amount of revenue (usually “constant” is the preferred tax reform goal), but the most efficient and/or fair way to raise a higher amount of revenue and reduce the deficit.  Not that this will be a pleasant thing to do, especially when politics are involved, but I really doubt the politicians can find a surer, more efficient, and fairer way to (actually and substantially!) reduce the deficit with any other type of spending cuts.

Eventually almost everyone–or at least a majority–will come around to the fact that although we’d rather avoid tax (revenue) increases and keep believing in painless solutions (which don’t really exist), deficit reduction that’s achieved through base-broadening tax reform that reduces “tax entitlements” sure seems quick and easy compared with the alternative of cutting the other big entitlement programs–namely, Medicare/Medicaid and Social Security.  (In the video clip above, McConnell clearly distances himself from the Medicare/Medicaid cuts as spelled out, more than elsewhere at least, in Paul Ryan’s plan.) Don’t get me wrong:  At least some degree of those other tough choices over the other big entitlements will have to be made, too, but those are changes that will materialize only over the much longer term and with a much greater degree of uncertainty, and frankly, we don’t have a lot of time and money to spare.  It sure would be good to actually “get somewhere” with deficit reduction over the next five to ten years.

Making Tax Expenditures Sound More Like Other Spending

May 21st, 2011 . by economistmom

I’m on a mini vacation this weekend, looking out at the Pacific Ocean and appreciating the here and now but also contemplating my goals for the future, both personal and professional.  Sometimes these goals overlap, and most people would find it strange that I’m moved to blog on fiscal policy even while on vacation.  But you see, I’ve made myself a personal commitment to work harder on the issue of tax expenditures, tax reform, and bipartisan solutions to the deficit problem over the next few months (to few years, I anticipate).  I want to better explain the ways in which (most) tax expenditures are economically equivalent to spending-side subsidy programs.  I also want to look at the reform of the tax system and reductions in these tax expenditures from a fiscal policy, and not just tax policy, perspective.  This entails demonstrating the ways in which these tax-side spending programs are an even better target when it comes to deficit reduction than most spending-side programs–for reasons of economic efficiency, income distribution (fairness), and/or fiscal sustainability (the projected growth in their cost and hence their contribution toward the deterioration in the fiscal outlook over the next several decades).

To do this effectively, we have to start talking about tax expenditures more like we talk about direct spending, regardless of the asymmetry that still exists in the official federal budget process because tax cuts are not annually appropriated–even when they are enacted to expire after only a year or two.  (For this reason, most tax cuts are more akin to entitlement programs rather than annually-scrutinized discretionary spending.)  So I’m going to spend some time trying to change our vocabulary on tax expenditures in highlighting particular types of tax expenditures as examples of spending our society might rather cut than the direct spending programs the small-government types tend to limit their attention to.

While President Obama and his Administration have been good at making the general point that there’s a lot of federal spending that’s run through the federal tax code (around $1 trillion/year, as much as all of discretionary spending combined), they have not been very good at following up with an internally-consistent set of budget proposals.  The President still tends to emphasize “tax reform” (such as in his corporate tax reform suggestions) as a revenue-neutral proposition, seeming to buy into the Republican view that raising revenue as a share of GDP would grow government even if higher revenues come from broadening the tax base and reducing tax preferences (”tax expenditures“).  And whenever the President talks about the need for revenue-side solutions to the deficit problem, it’s not so much in the context of a more efficient and fair tax system via “tax reform” (that would reduce those tax expenditures fairly broadly), but rather in the framework of “it’s only fair” that we raise “taxes on the rich”–no matter how that’s done, via broadening the tax base or increasing tax rates.

So even when the President actually embraces the idea of reducing tax expenditures (such as limiting itemized deductions) to raise revenue and reduce the deficit, his limiting that policy to only households with incomes over $250,000 makes it sound less like a smart way to cut spending and much more like just another proposal to raise taxes on the rich.  And even though Administration officials like to point out that they don’t engage explicitly in “class warfare” in their rhetoric about those taxes on the rich (because they don’t blame the rich for being rich nor suggest they deserve to be punished for being rich), the fact that they want to limit revenue increases of any sort to those that would raise burdens only on those over $250,000 makes it sound a lot like class warfare to a lot of people, especially to those Republicans whom the Administration supposedly wants to bring on board for bipartisan solutions to the deficit problem.

So while the Republican pledge to not raise taxes in any way, shape, or form at any time is obviously the much bigger road block in achieving meaningful, smart, and bipartisan deficit reduction (which will require a mix of spending cuts and revenue increases), I actually think the secret “open sesame” code is more in the hands of the President and the Democratic leadership in Congress–and all of us who are not entrenched in the “no new taxes” view.  We need to do a better job framing our preferred approach of including revenue-side ways to reduce the deficit, to make it clearer that reducing tax expenditures means reducing spending and reducing the deficit in a fair and economically-efficient and even widely preferable way.

I’ll be working on this for awhile.  Hope you’ll stay tuned.

And Then There Were Five

May 17th, 2011 . by economistmom

coburn-ap-photo

This is not good news for bringing the Republicans around to the idea of reducing tax expenditures as part of a bipartisan agreement on deficit reduction.  As David Rogers reports on Politico:

The Gang of Six is now the Gang of Five, as Sen. Tom Coburn made a quick departure from Tuesday afternoon’s meeting of the bipartisan Senate budget group struggling for months to reach agreement on a long range deficit reduction plan.

“We’re still talking, still trying. This is not easy stuff,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) told POLITICO after the meeting concluded about 45 minutes later. Asked about Coburn, Conrad had no comment, but the Republican later confirmed to reporters that he is dropping out of the effort.

The talks are at an “impasse” [said?] Coburn, but allowed that the remaining senators “may continue to meet without me.”

Why drop out today?  He seems to have suddenly taken a turn toward the “glass half empty” view.  More from the Politico story (emphasis added):

“We’re at an impasse – there’s no reason to talk about the same things over and over and not getting any movement,” Coburn told reporters later. “It’s just a recognition that we can’t get there.”

“My hope is that we can bridge that but right now I don’t think we can,” he said, indicating that he remains frustrated that the emerging plan still does not go far enough to slowing spending on major government benefit and entitlement programs. “It’s got to be balanced.”

“I’m not planning on participating at this time, if things change I will.”

I am wondering if he was referring to the “tax entitlement” programs and not just the entitlements on the direct spending side.  No doubt each side will interpret his complaint about lack of “balance” the way they each want to.  And they will stay in their trenches.  It’s really too bad.

Don’t Tax You, Don’t Tax Me, Sell the Gold Behind the Tree?

May 16th, 2011 . by economistmom

fort-knox-behind-trees

I thought Sunday’s front page story by Lori Montgomery in the Washington Post–on the idea of reducing federal government retirement benefits–was just the latest (depressing) installment of politicians avoiding broad-based, fundamental reforms that are needed to get projected budget deficits down to economically-sustainable levels.  Government workers are to the conservatives what really rich people and evil corporations (be they oil and gas ones or financial/insurance ones) are to liberals:  not a middle-class, Main-Street, majority of voters, and hence a group those policymakers are willing to say ought to pay for deficit reduction.

But today’s (Monday’s) front page story highlights an idea that goes way beyond the “tax the guy behind the tree” attitude.  As Joel Achenbach explains:

With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion.

“It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”

Good idea?  Well, Treasury and other Administration officials don’t seem to think so (emphasis added):

[T]hat’s cockamamie, declares the Obama administration. Mary J. Miller, Treasury’s assistant secretary for financial markets, said the U.S. should sell assets in an orderly, “well-telegraphed” manner, not in a “fire sale” atmosphere with a debt limit deadline accelerating the process.

“It would be bad for the taxpayers. It would be bad for the markets,” Miller said.

Another senior administration official, not authorized to speak for attribution, described the situation more bluntly: “Selling off the gold is just one level of crazy away from selling Mount Rushmore.”

And this qualifies as an example of how real life is often stranger than fiction, when, as Achenbach points out, the Onion knew about this “use the gold” policy solution before the Post did:

Although the country does not use the gold for anything, Treasury officials believe that selling it could create the impression of desperation, and thereby rattle the markets. Inert though it may be, the mountain of hidden gold may serve an indefinable psychological function.

Selling it during a budget crunch would seem a sure bet to incite derision. The satirical newspaper The Onion recently ran a story in which President Obama vowed to balance the budget through spending cuts, tax increases and a daring midnight heist of Fort Knox. (“I’ve got the blueprints and I think I found a way out through a drainage pipe.”)

A sudden gold sale would also postpone only briefly — two or three months, perhaps — the deadline for raising the debt limit.

Ah, so much drama (and comedy) for so little help with our real debt problem.

Why We Need the (Gentlemanly) Gang of Six

May 12th, 2011 . by economistmom

gang-of-six

Some (bipartisan) members of the (nonpartisan) Concord Coalition’s Board of Directors recently issued this statement supporting the efforts and spirit of the Senate’s so-called “Gang of Six”–Senators Saxby Chambliss (R - Ga.), Tom Coburn (R - Okla.), Kent Conrad (D - N.D.),  Mark Crapo (R - Ida.), Richard Durbin (D - Ill) and Mark Warner (D - Va.), who have been working together on a bipartisan agreement modeled along the lines of the recommendations of the President’s (Bowles-Simpson) fiscal commission.  The Gang of Six seems to be laying low lately, perhaps not wanting to get in the way of the Biden talks, but as our board members stress, there are several reasons why this group of senators is the right way to work toward a bipartisan agreement on deficit reduction and why we need them to maintain an active role in this big drama:

The group’s work is important for several reasons:

It addresses a crucial need. There is no question that current fiscal policy is unsustainable and that legislative action is needed to avoid a crisis…

It recognizes that there must be a comprehensive solution. The natural tendency in Washington is to begin deficit-reduction negotiations by taking things off the table. This may please each party’s political base but it makes it all the more difficult to agree on a plan with credible numbers and political viability…

It is bipartisan. Neither party has a monopoly on good ideas, and even if one did, neither party has the votes nor the public trust to muscle through a one-sided solution…

It is unique. Bipartisan cooperation on deficit reduction is in short supply. The budget adopted by the House of Representatives has no support from Democrats and thus no chance of becoming law. Similarly, the President’s budget has no support from Republicans…

It could produce a plan for others to rally around. As of now, members of Congress and the public have a choice between partisan plans, which will get us nowhere, and the status quo, which is unsustainable. If the Senate group is able to agree on a plan, it will serve as a beacon for those who wish to support meaningful bipartisan solutions. It would spark a more realistic debate about the inevitable trade-offs that must be confronted and marginalize those who insist that their way is the only way…

To this list, we could add that the Gang of Six act like gentlemen to each other and don’t call each other names–quite the contrast to the behavior of the political leadership, whose trench-warfare style is something that the Washington Post’s David Fahrenthold points out only makes agreement (and let’s not say the seemingly-poisoned word “compromise”) even more unlikely:

Amateurs.

That’s the frustrated conclusion that America’s professional negotiators have reached, after watching Washington’s politicians begin their own negotiation over the national debt ceiling.

These professionals are ex-FBI agents, labor mediators, divorce counselors. They have learned the rules that help resolve unsolvable standoffs: Don’t lie to a man on a high ledge. Don’t box yourself in with sweeping threats. Don’t tell your adversary to “act like an adult.”

Now, they have watched the two parties bend or break those three rules. They worry that the politicians’ mistakes might only prolong their dispute — at a moment where every day of delay adds to Wall Street’s worries.

And it bugs them to see their art practiced this way. It’s one thing, negotiators say, to threaten the country with financial calamity if your demands aren’t met.

It’s another thing to do it incorrectly.

What Do John Boehner and Jon Stewart Have In Common?

May 10th, 2011 . by economistmom

Thanks to Len Burman’s latest insight on his brand-new, awesome blog on Forbes.com, what was otherwise going to be a pretty ordinary complaint about a pretty dull yet aggravating speech by House Speaker John Boehner (which has already gotten lots of spot-on criticism, including this column by Ruth Marcus), is now a post where I get to point out a much more entertaining Jon Stewart video!

Apparently, John Boehner and Jon Stewart have this in common:  they both don’t understand how special preferences in our tax code are just a different form of government spending, and hence how reducing such “tax expenditures” would reduce both the budget deficit and the size and scope of government.

As Len explains in his “Dear Jon” letter:

For 40 years, tax geeks like me have been trying to explain that there’s a boatload of spending programs masquerading as tax cuts, and they’re multiplying.  Their number increased by almost 60 percent between 1987 and 2007.

The fact that pols can claim credit for “tax cuts” (good) rather than “spending” (bad) has made them irresistible to legislators of both parties. Never mind that the IRS doesn’t have the budget or expertise to effectively administer a couple hundred spending programs (sorry, tax cuts) or that many of them make no sense.  The tax code’s cluttered with this junk.

Finally we get the president of the United States to acknowledge this and you drill him a new one.

You don’t believe there’s spending in the tax code???  Here’s a real life example:  the chicken-s**t tax credit.  Really, section 45 of the Internal Revenue Code.  You can look it up

It’s spending, Jon.  Often really dumb spending.  And when we’re talking about cutting food stamps, nutrition programs for mothers and infants, and environmental protections to save money, those spending programs in the tax code should be on the table too.

Tax subsidies add up to more than $1 trillion per year.  That’s not chump change, but, until recently, it’s been off limits in any bipartisan budget negotiations in Congress because Republicans have been unwilling to consider anything that might be labeled a tax increase.

I’ve said before that a tax reform that broadens the base by reducing some of these “dumb” tax expenditures would raise revenue and reduce the deficit in a progressive way while keeping marginal tax rates (and economic distortions) low–and this is a reason why politicians and policy wonks on both the left and the right should love this way of being fiscally responsible.

But instead, it seems both Jo(h)ns are in denial about it.

As Len concludes, this is “not helpful.”  Amazingly, before Len pointed out Jon Stewart’s take on the issue to me, I was going to blog only about the Boehner speech with the title “Not Helpful.”  Really!  No joke.

The Trouble with “Brute Force” Budget Processes

May 4th, 2011 . by economistmom

sledgehammer-flyswatter

As a Concord Coalition issue brief (written by my colleague, Cliff Isenberg) explains, they’re just not very “forceful”:

Process proposals such as caps, commissions, points of order and constitutional amendments are often appealing solutions for politicians because they frequently leave out the specifics of politically difficult decisions necessary to meet the targets. For elected officials, it is far easier to discuss a cap than it is to tell voters that their Social Security or Medicare benefits will be cut or a favorite tax deduction will be eliminated.

As a means of actually reducing deficits, the benefits of process proposals are less clear. In the past, similar proposals have had a mixed track record because they have frequently been poorly designed and weakened with exemptions. For a process proposal to have a meaningful effect on trillion-dollar deficits and our $14 trillion debt, these mistakes of the past must be avoided. An effective budget process proposal should limit exemptions, consider the entire federal budget to be on the table for deficit reduction, include realistic targets, and be accompanied by a bipartisan commitment both to enforce the targets and support the specific spending and revenue policies necessary to meet them.

It’s a lot like our real-world experience with “pay-as-you-go” budget rules, and how we’ve ended up (instead) with “paying-for-hardly-anything-as-we-went” policies.

The sledgehammers turn out to have fly-swatter heads, and the “caps” turn out to be more like cheesecloths.  (If you get what I mean.)

Unfortunately, there’s really no easy way to force the tough choices.

Tax Promises That Need to Be Broken

May 2nd, 2011 . by economistmom

promises__promises_cd_cover_front

In an opinion piece I wrote for Bloomberg Government published last Friday (subscription-only access here), I elaborated on those “magical, mystery tax pledges” of both political parties that are getting in the way of bipartisan approaches to deficit reduction.  Those tax promises:

  • Republicans: “Don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP.”
  • Democrats, including (and especially) President Barack Obama: “Don’t raise tax burdens on households making under $250,000 a year.”

What Republicans might not realize about how their political promise works against their own policy goals (from my Bloomberg column):

To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with “supply-side” economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy…

[Reducing tax expenditures would also] reduce [not increase] government’s role in the economy…

And the Democrats may be shooting themselves in the foot as well, if they really prefer revenue-raising approaches to reducing the deficit over deep cuts in spending:

To those on the left who are holding fast to the president’s promise not to raise taxes on households with incomes below $250,000 a year, here’s your paradox: Limiting the pool of households to tap for revenue increases means limiting the revenue-side strategy for deficit reduction.

It’s hard to reconcile wanting a significant portion of deficit reduction to come from higher revenues and wanting to avoid any increase in tax burdens for 98 percent of the population. Exempting that many people means that tax rates on those above the cutoff must be prohibitively high…

This doesn’t mean giving up on progressive policies that would ask the rich to bear a larger relative burden of deficit reduction. Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich.

Now, I do recognize that on the face of it, the Republican pledge of “no new taxes” (i.e., revenue increases)–of any shape or form, at any time–seems a much bigger obstacle to deficit reduction than the President’s campaign promise to shield (just) most of us from increased tax burdens, which is not a universally-held conviction of the Democrats and is less mathematically-impossible.

But factoring in that: (i) the one Democrat most wedded to that promise is the President of the United States (the one ultimately “in charge” of our nation’s economic policies and the most powerful man in the world), and (ii) both sides are probably just looking for excuses to outright reject the other side’s ideas so they don’t have to walk on the common ground, which is still a political landmine of hard choices, I think it is the President’s promise–even if the less ludicrous promise of the two–that’s probably the binding constraint on both sides’ doing the right thing in terms of bipartisan deficit reduction.

So both of these “magical, mystery” tax promises need to be broken.