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Thoughts on the President’s Budget

February 16th, 2012 . by economistmom

Here is a sort of data dump (sorry) of various reactions I’ve had to the President’s FY2013 budget proposals in the past week.

My organization, the Concord Coalition, put out this statement on Monday, accompanied by the video summary above that my colleague Josh Gordon and I made.

(I also did this radio interview on Patt Morrison’s show on southern CA’s NPR station, KPCC, on Monday.)

I was most intrigued by what is new in the President’s proposals in terms of tax policy:  there’s actually a bolder move to combine the “Buffett Rule”–raising taxes on the rich so that their effective (average) tax burdens aren’t any lower than those of middle-class households–with a more fundamental tax reform strategy (which economists like) of broadening the tax base.  I’ve said before that there are lots of different ways to raise taxes on millionaires, but I’d prefer to see it done by reducing tax expenditures (which disproportionately benefit higher-income households and are also economically inefficient) rather than by (just) raising marginal tax rates on the currently rather narrow definition of taxable income.

Two tax proposals new to the President’s budget this year that score well in this regard are: (i) the expansion of the limit of itemized deductions policy to a broader set of tax preferences–including the exclusion of employer-provided health benefits (wow!); and (ii) letting the expiration of the Bush tax cuts for high-income households extend to the full expiration of preferential dividend tax rates, such that they would return to being taxed at full, ordinary income rates.

I wrote on Concord’s blog about the itemized deduction proposal here.

I write about this “Buffett Rule route to fundamental tax reform” among my other reactions to the tax policies in the President’s budget in my next Tax Notes column, which comes out next Monday.  I’ll give a Cliff’s Notes version of that column here then.

27 Responses to “Thoughts on the President’s Budget”

  1. comment number 1 by: Eric

    Does it follow from the capping of itemized deductions to a 28% tax rate that mortgage interest would effectively no longer be deductable under AMT, since the AMT rate is already 28%? This is one of the few things left when you are hit with AMT.

  2. comment number 2 by: SteveinCH

    I’m curious Diane. What definition of “the rich” and ” effective tax rates” would allow you to think that the rich pay a lower effective tax rate today than do the middle class?

    The fact that you even can write this with a straight face is truly shocking.

    In point of fact, what the President appears to have proposed (as usual his proposals are a bit vague) are the highest effective tax rates since 1970 (I can’t find any data going back further) on the top 1% of wage earners.

    Meanwhile, he has stuck by his pledge to keep effective tax rates on the bottom 50% of HHs at the lowest level at least since 1970 (again, I can’t find good data going back further).

    All of this in the name of having the rich “pay their fair share”

    And to have someone from the supposedly nonpartisan Concord Coalition egg him on and fail to mention the President’s budget proposes 4.4% per annum increases in spending. Well, I guess there’s not much more to say.

  3. comment number 3 by: AMTbuff

    Eric, the AMT treatment of mortgage interest would not change.

    Like Diane, I am dismayed by the proliferation of proposals that covertly increase marginal tax rates. (If Bush had proposed this package, Diane would have been explicitly dismayed, but since it’s Obama she is quietly dismayed.)

    It seems that every year there’s a new one of these sneaky ideas being floated. Phase out the benefits of individual deductions, cap the total benefit of all deductions, add another AMT (Buffett tax), add a tax on gross income, phase-out this benefit, phase-in that tax increase. Enough already. It’s time for honesty in taxation.

    The big dollars are in means-testing entitlements. That will be a huge marginal rate hike unless it is implemented on the basis of lifetime average income, which is barely affected by one’s earnings in the current year. Watch that one closely.

    The next most promising revenue source is unrealized capital gains. Requiring some degree of mark to market treatment for all taxpayers with assets exceeding $10M, including present value of defined benefit pensions, would shut Buffett up for good. That alone makes it attractive.

    We should end tax-exempt foundations as well, since that provision has been so thoroughly abused, especially by ideologues seeking to steer public opinion. Taxpayers should not subsidize propaganda directed against them. It’s unfortunate that this change would hurt Concord, but that’s the way it has to be.

  4. comment number 4 by: AMTbuff

    I just figured out how to persuade progressives to support means testing of benefits to the middle class: Just call it a tax increase!

    As I explained at
    http://taxprof.typepad.com/taxprof_blog/2012/02/the-definition.html
    the JCT counts tax cuts as spending and counts spending as a tax cut. So we just can do the same, counting tax increases as spending cuts and spending cuts as tax increases. Voila!

    The central ideological fight of our time is over inclusion or exclusion of the middle class from the cradle of government benefits covering ordinary and predictable expenses. Progressives have always wanted the government to care for everyone, not just the needy. They don’t yet realize that it’s impossible to have so many recipients of such large benefits.

    Conservatives have the upper hand on this fight because if and when the system crashes, all benefit payments will become worthless. The credibility of the government as a provider will be shattered. That will be a huge stimulus to the private economy.

    However the poor will suffer terribly. That’s very depressing, all the more so because it will have been avoidable. Eliminating benefits to the non-needy now could ensure the sustainability of benefits to the needy and prevent a fiscal collapse. That’s what the Tea Party sees and others do not see.

  5. comment number 5 by: Arne

    “The big dollars are in means-testing entitlements. ”

    I just don’t understand this thinking. SS is already significantly progressive in its benefits. Whether liberal supporters (such as me) like it or not, it does have a component of means testing.

    If Medicare pays for open-heart surgery for a person of median wealth, why would it not pay for open-heart surgery for someone of greater wealth who (almost certainly) paid more taxes during their working career?

    Both programs need to collect enough to pay benefits. For SS we need to answer the question of whether the safety net should continue to be strengthened as productivity increases; whether to increase taxes or decrease benefits comes directly from that answer. For Medicare we have to figure out how to keep expenses from growing (so much) faster than the rest of the economy.

  6. comment number 6 by: SteveinCH

    SS is not progressive in its benefits. It is regressive in its benefits. The wealthy receive higher benefits than the poor. What you are referring to is the relationship between the benefits and the taxes paid in over time. That presupposes a program where you are paying for your future retirement which, of course, you are not. You are paying for someone else’s retirement today.

    As to Medicare, why should it pay for the surgery of someone who has the means to pay for it him or herself. Said differently, why would anyone prefer a program where the government takes more money from him now in exchange for potentially giving it back later?

    As an alternative, you could simply deduct all Medicare expenditures from an estate before allowing it to pass between generations.

    Liberals really are funny. You have this orientation that program promises must be kept and that collections (taxes) must rise to meet the promise. It’s strange that many liberals find this to be a self-evident fact.

    Keeping Medicare expenses down is easy. Pay doctors less and ration care through availability or ration care directly. Those are the only options (or a mix of the two I suppose). Or you could go to the premium support model which is simply another form of rationing care.

  7. comment number 7 by: Vivian Darkbloom

    It appears to me that Arne and SteveinCH are talking past each other.

    First, I think Arne attempted (but failed) to articulate the proposition that, considering contributions *and* benefits, Social Security and Medicare would be progressive. It is uncontrovertible that on this basis social security is highly progressive (also considering taxation of benefits). Considering benefits only for Medicare it would not be progressive unless one thinks that affluent taxpayers consume less health care than less affluent Medicare participants. But, again, the affluent pay considerably more for that “insurance” than do the less affluent not only with respect to lifetime contributions but also with respect to premiums for Medicare B and D .

    Considering all these factors, I think it is true that Medicare is “progressive”, but what it really means is that more affluent Medicare recipients are, on average, contributing less to the deficit than less affluent recipients. Or, is SteveinCH arguing that the affluent are consuming more because they live longer? (Krugman has argued this).

    “As to Medicare, why should it pay for the surgery of someone who has the means to pay for it him or herself.”

    Well, by the same reasoning, why should a private insurance company make good on their promise to reimburse me if I can afford to pay for that surgery myself? I would not react very favorably to my insurance company if they refused to pay a claim on the basis that I have the ability to pay for the loss myself despite the fact that I had always been current on my premiums.

    And I do not even fashion myself a “liberal”.

  8. comment number 8 by: SteveinCH

    Vivian,

    You too are buying into the assumption that SS and Medicare are payments to yourself for future services. Both legally and tracking the flow of funds this is not true.

    So while you would have a claim on your private insurer in your hypothetical example, you have no claim on either Medicare or Social Security.

    SS is not progressive on benefits, it is progressive on the relationship between benefits and payouts. But, there is no real relationship between benefits and payouts, that is just a convenient fiction.

    However, if for the sake of argument, you wanted to make the argument that people were paying for their own SS and Medicare, one would be forced to conclude that FICA taxes should not count in our discussion on tax progressivity.

    Conceptually SS and Medicare are separate or they aren’t. One cannot have it both ways. In my view, they are no more separate than my checking account and my savings account.

    In the end, money from entitlements needs to be saved. The most fair solution in my view is to reduce/eliminate benefits to the wealthy. Anything less is just continuing the subsidization of intergenerational wealth transfer.

  9. comment number 9 by: Vivian Darkbloom

    Steve,

    To be frank, I don’t understand your argument. You wrote:

    “Said differently, why would anyone prefer a program where the government takes more money from him now in exchange for potentially giving it back later?”

    One way to interpret your comment is that the affluent (however you wish to define that) should not be forced to participate in the system at all. If this is not what you mean, I don’t get the difference between Medicare and insurance. It is axiomatic of all insurance schemes that you give money now with the chance of getting it back (or more) later. And, it is also true that, like Medicare, private insurance schemes can go bankrupt. It’s clear that for both Medicare and social security, the implied contract can be unilaterally adjusted; however, I think you put too much emphasis on that.

    I particulary do not understand this:

    “SS is not progressive on benefits, it is progressive on the relationship between benefits and payouts. But, there is no real relationship between benefits and payouts, that is just a convenient fiction.”

    What is the difference between a “benefit” and a “payout”?

  10. comment number 10 by: SteveinCH

    Vivian,

    Let’s take them one at a time. I argued for means testing. Arne argued for raising more money to pay for benefits. Taken from the point of view of the person from whom the money is raised, it’s the exact argument you quoted. Who would say, yes, take more of my money now in return for a higher probability that you’ll give me back some of it later?

    It’s not whether people should be forced to pay taxes (they should), it’s what claim they should have on benefits and how much tax liability they would like to assume in exchange.

    I’m not sure why you think I put too much emphasis on adjusting the contract. That is the very reason why it is not a contract. Except under very specific conditions, most contracts cannot be unilaterally altered. The fact that SS and Medicare can be and have been unilaterally altered demonstrates that they are not contracts.

    The last bit is a mistake. SS is progressive on the relationship between taxes and benefits (or payouts).

    Final thought, why is it that the benefit side of the SS and Medicare “contract” is considered sacrosanct but the payment side isn’t? Is it any less a violation of the “contract,” if the government unilaterally asserts that the same benefit will cost more than if is reduces the benefit in exchange for an unchanged payment?

  11. comment number 11 by: Vivian Darkbloom

    Steve,

    I’m not against means testing; in fact, I would be for it. However, let’s be clear: if the argument is that those with greater ability to pay are not exempted from the programs and that when it comes to benefit time those with the greatest means get fewer benefits, then you are arguing for a *more* progressive system. My point is that this is certainly not to say that the system we’ve now got is not progressive and that is what you earlier argued.

    As far as “contracts” are concerned, I agree that neither Social Security nor Medicare are “contracts” in the strict sense. On the other hand, I believe in long-term planning and in government making its promises in good faith. I want to know what I need to plan for. I use the term promises in a non-legal sense. Nevertheless, people rely on promises, and even in contract law, reasonable reliance on a promise can be enforceable—it’s called “promissory estoppel”.

    As to your last remark, I’m an agnostic as to whether the benefit side or the payment side should be enforceable; however, I tend to be a religious fanatic on the idea that the books should be reasonably balanced.

  12. comment number 12 by: SteveinCH

    Well you must be pretty outraged since SS is never going to be in balance again and Medicare pretty much never has been.

  13. comment number 13 by: Arne

    “Arne argued for raising more money to pay for benefits. ”
    While I have so argued in other places, I did not do so in this thread. I totally agree with Vivian that the books need to be balanced. I do think that means testing is one of the poorer methods of reducing benefits (with respect to “scheduled benefits”). The overall effect of most “price indexing” proposals is to increase progressivity, but I think they make more sense than means testing (if you must reduce benefits.)

    If I plan on SS replacing (about) 30 percent of my income and I invest to replace another chunk, it should not matter whether my chunk ends up at 20 percent or 60 percent.

  14. comment number 14 by: AMTbuff

    “I totally agree with Vivian that the books need to be balanced.”

    My contention is that the books cannot be balanced sustainably as long as the non-poor receive benefits for predictable and normal expenses.

    The central problem is third party payment, which breeds waste. Putting an increasing share of the economy into third party payment will bring on a fiscal crash, as it is doing now.

    No solution will be fair to everyone, or perhaps to anyone. It’s a default.

  15. comment number 15 by: Arne

    “My contention is that the books cannot be balanced sustainably as long as the non-poor receive benefits for predictable and normal expenses. ”

    I understand this with respect to healthcare, but not with respect to SS.

    Whether you call it a gimmick or consider it a feature, including the non-poor makes SS work more easily. SS does not make decisions about how to consume benefits and does not breed waste. Making SS books balance is simply a matter of adjusting for the change in ratio of years retired to years working as lifespans increase.

  16. comment number 16 by: SteveinCH

    But Arne, the fact that you think it makes more sense is of no matter.

    Imagine I offered a choice to all taxpayers making $200,000. In choice A, the government takes more of your money now and leaves your scheduled SS payments in place. In choice B, the government continues to take the amount of money it has always taken from you but decreases your future SS benefits.

    Why would a logical taxpayer making $200,000 pick choice A? They already know that their inflation adjusted rate of return on SS is well under $0.75 on the dollar. Why would anyone put more money in this “investment?”

    As to “price indexing” versus means testing, they are exactly the same thing. It’s just that one allows you to maintain the fiction of universality while delivering a rate of return that is completely unacceptable.

    As to your last paragraph, of course it matters. First off, SS doesn’t replace 30 percent of the income of people above the cap today, not even close. It will replace an even smaller percentage over time as program finances worsen.

    Lastly, to the point I made to Vivian, both of you keep looking at SS as a benefit only program. Try your sentence like this. If I plan on SS replacing 13 percent of my income in exchange for 6 percent of my income a year (roughly what someone making $200K pays in SS taxes and receives in benefits), my plan is bad. Either I can now plan on SS replacing 13 percent of my income in exchange for 12 percent of my income per year (the uncapped version) or I can plan on it replacing a smaller percentage of my income for 6 percent a year. I cannot any longer plan on it replacing 13 percent of my income for 6 percent per year.

    And, of course, back in the day, I could plan on it replacing 13 percent of my income for far less than 6 percent per year.

    That’s the point of looking at both sides of the ledger, the math changes pretty dramatically.

  17. comment number 17 by: SteveinCH

    Arne,
    mperry@cug.comAccording to the President budget, SS is running a current deficit of about 15% per annum for the entirety of the budgeted period. That is outflows exceed inflows by on average about 15%.

    As to your simple solution, why is raising the retirement age (which is what I assume you meant) a better solution than means testing. Making SS a worse deal for all is better than taking it away from those who don’t need it? That really doesn’t make any sense whatsoever to me. The first goal of any transfer payment in my view should be poverty prevention. Raising the age makes it a lot worse on that front than does means testing.

  18. comment number 18 by: SteveinCH

    Ok please ignore the weird website that is in the last post. Don’t know if that’s me or something else but I did not post it.

  19. comment number 19 by: Vivian Darkbloom

    “Lastly, to the point I made to Vivian, both of you keep looking at SS as a benefit only program. ”

    Steve, I wish you would explain this—how did I express the idea that SS (or Medicare) is a “benefit only program”? The precise point that I made was that in determining whether a program is “progressive” one needs to look at *both* contributions and benefits (as well as the taxation of the latter). How you could have misinterpreted this as saying that the programs are “benefit only” ?

  20. comment number 20 by: SteveinCH

    Vivian,

    My point is that the contributions aren’t contributions, they are taxes.

    But I take your point about you referring to it as a benefit only program. My apologies.

  21. comment number 21 by: Arne

    “the President budget, SS is running a current deficit of about 15% per annum”

    Table 13-1 shows a surplus of 91061 (million) for 2012, but since the Trust Fund is still much larger than one year’s expensies, you should expect it to run a deficit for most of the Boomer’s retirement timeframe.

  22. comment number 22 by: Arne

    “Making SS a worse deal for all is better than taking it away from those who don’t need it?”

    The reason SS is going to be running short is that people are living longer. They will be getting more back. It makes sense to put more in.

    “Why would a logical taxpayer making $200,000 pick choice A?”

    This question gives me a severe case of cognitive dissonance. How can you simultaneously implement means testing and do what someone making $200K would choose?

  23. comment number 23 by: SteveinCH

    Well, if your argument was that everyone should put more in, that might be a sensible response.

    I don’t know why it gives you cognitive dissonance.

    Let’s start by asserting that you’ve been arguing that the SS taxes I am paying are somehow for my future retirement. If this is not the case, the entire argument is rendered moot because there’s really no reason to compare taxes and payments for a particular individual (the progressivity argument that both you and Vivian have made).

    Now in the case where it’s my money that I am paying to myself in the future, why isn’t it fair to ask whether I’d prefer less money in the future or to pay more money today.

    My point is that the person making 200K has no choice. SS is going to become a worse deal for him or her regardless. The only question is HOW it will become a worse deal. Will it become a worse deal because taxes go up and payments stay the same (your preference) or because taxes stay the same and payments go down (my preference). I’m only arguing that few if any affected taxpayers would choose the option you prefer.

  24. comment number 24 by: AMTbuff

    I’m only arguing that few if any affected taxpayers would choose the option you prefer.

    Because they very reasonably worry that the deal will end up as taxes go up AND payments nevertheless go down.

  25. comment number 25 by: SteveinCH

    Exactly.

  26. comment number 26 by: Arne

    “isn’t it fair to ask whether I’d prefer less money in the future or to pay more money today”

    Of course, an excellent question.

    HOwever, the point I was trying to make was about means testing, which becomes whether you would prefer that those who save more outside of SS get less than those who save less outside of SS. I oppose means testing both because it adds to the overhead and because it creates perverse incentives.

  27. comment number 27 by: SteveinCH

    Now you’ve confused me. What is the meaning of save less outside of SS? Are you suggesting people won’t save as much because of the impact on SS?

    If that’s what you are suggesting, the fix is easy, sliding scale on means or set the level high enough that people won’t make the tradeoff or set it on an annual basis so that only current wealth balance matters.

    Any of those takes away the incentive not to save.