…because I’m an economist and a mom–that’s why!

Don’t Ignore the Cliff, Make It a Better One

October 31st, 2012 . by economistmom


(Cartoon by John Darkow and Cagle Cartoons, obtained from

Last week former Senators Pete Domenici (R-NM) and Sam Nunn (D-GA), in the Washington Post, urged policymakers to “build” a “better” fiscal cliff.  As they explain:

Most pundits believe that, rather than go over the cliff, Congress will kick the can down the road during the lame-duck session after Election Day. We suggest that the lame-duck Congress should change the “can” before it is kicked.

Such a strategy has several advantages. First, it could avoid the worst effects of the fiscal cliff without ignoring our fundamental fiscal challenge, the unsustainable mismatch between spending commitments — largely for health-care programs — and current revenue projections. Absent more constructive action, simply postponing when we go over the cliff could hurt business confidence, worry investors and lead to another disruptive debate over raising the debt ceiling.

Second, it is politically achievable. While it is unlikely that a grand bargain to fix the debt could be reached during the lame-duck session, Congress could accomplish replacing the fiscal cliff with broad targets for deficit reduction along the lines of Simpson-Bowles and Domenici-Rivlin, to take effect if no other deal is reached.

Third, this strategy would increase the likelihood of reaching a comprehensive budget deal. If we learned one thing over our many years of service in the Senate, it is that elected officials require political cover on difficult votes.

Enacting such a deal means that Democrats have to be willing to consider reforming — over time — Medicare, a key driver of U.S. deficits. Republicans will have to consider raising revenue through reducing tax expenditures, if not through higher rates. Neither will be an easy vote to cast.

Changing the can before kicking it would allow lawmakers to explain to constituents that, while they don’t like everything in the deal, it is far better than going over the fiscal cliff. In this context, a vote to substitute a rational compromise would be a vote against recession, major tax increases, mindless spending cuts and diminished American influence abroad.

Now, we have set deficit-reduction targets before, but those have merely served as the big “kick me” targets on the fiscal cans that are kicked.  Why would a particular configuration of tough choices, such as Simpson-Bowles or Domenici-Rivlin be adopted when Congress has had trouble enough achieving less-ambitious plans?

If the goal is something as “grand” or “big” as the recommendations of the fiscal commissions, I think there has to be a credible default option that is procedurally easy to implement and enforce.  That’s where I think it’s time we hold our politicians to the laws they have passed in the past–i.e., literal current law with tax cuts that actually expire and spending cuts that actually take effect.  I think of this as the “benign neglect” or “go home” option, because Congress could go (or stay) home and not pass any new tax or spending legislation, and then current law would be forced to literally play out.

The Congressional Budget Office has “scored” this default option time and time again, because it’s called the “current law baseline.” And they’ve noted that although the first year of this current law baseline is known as the (dreaded) “fiscal cliff”–because the around $500 billion of deficit reduction between this year and next is too much for our still-fragile, still-demand-constrained economy to take–the latter half of the current law baseline in the later years of the ten-year budget window gets us to an economically sustainable level of deficits and hence a stronger supply-driven economy.  So CBO has warned (in their outlook report as well as an earlier one specifically dealing with the fiscal cliff) that the first year of current law needs to be avoided, but current law further down the line is a good thing.

The only way to shed the bad but keep the good is to “substitute the can” as Senator Nunn has characterized it during the “Strengthening of America” events that the Concord Coalition co-sponsored.  I’ve called it “recycling” the fiscal cans.  The point is that we can’t just throw the current-law baseline away just because we don’t like the first part of it.  And throwing away scheduled tough choices has become too habitual for our policymakers, because it’s just so easy and so seemingly free.  (Why have to propose future spending cuts or tax increases, when continued deficit financing is an option that finds bipartisan support?)  That’s why I think the public must not allow a mere kicking of the fiscal cans once again; they must pressure our policymakers to simultaneously (at the time of the can kicking) adopt a “tough choices or else” commitment (for policies in the ten-year window) to be set within the next six months to a year where the “or else” part is something even tougher but credible and “easy” to implement.  And what could be easier than current law?

Current law is not a bad “default option”–at all.  At a conference last week at Tulane University, I argued that current tax law (the bulk of what makes current law a huge deviation from “business as usual” current policy) would do pretty well by the three goals the conference dubbed a “fiscal trilemma”–economic growth, deficit reduction, and “progressivity” (the vertical equity of the tax system):

  1. Marginal tax rates certainly tolerable from supply-side perspective, and tax increases not contrary to short-term stimulus if delayed (and given distribution of expiring cuts);
  2. Achieves revenue levels consistent with economically-sustainable deficits over next 10-20 years; and
  3. Increases progressivity of federal tax system (is a pretty good execution of the “Buffett Rule” principle–that millionaires should have average tax burdens exceeding those of middle-income households).

And on a sidenote… I have to confess my huge (and I guess cynical) fear about the currently growing bandwagon of support for “fiscally responsible” policies which I hope does not come true:  that many of the CEOs and politicians clamoring for better leadership to “fix” the “fiscal cliff” issue (or even to “Fix the Debt”) are motivated mostly by their desires to avoid the tax increases and spending cuts comprising the (one-year) fiscal cliff.  “Fiscal responsibility” currently means not allowing our country to go off the cliff, because it could put us back into recession.  But once the immediate can has been kicked to avoid the first-year part of the cliff, and once our economy gets back to full employment, will the enthusiasm to (really) “fix” the debt problem continue, when the time has come when there are no longer the economic excuses to avoid tax increases and spending cuts, but only the obvious, glaring economic reasons to start accepting them?  I do hope so, but I worry, too.

All the more reason for the public to demand not just that we “fix the debt” right now (which could just mean “kick the can”), but that we “fix the debt” even after the election and even after the economy gets back to needing the policy actions formerly known as “fiscally responsible” deficit reduction.

Technical Difficulties

October 27th, 2012 . by economistmom

Sorry about the site being off line the past couple days.  Why is still a mystery to me (my version of “tech support” unfortunately tends toward my own mere “wishful thinking”), but it appears we’re back!  I am traveling this weekend but will be catching up early next week with my latest pre-election thoughts on the fiscal cliff.  Thanks for hanging in there with me and staying tuned!  :)

On Bayonets vs. Big Bird

October 25th, 2012 . by economistmom


(google image citation:  Horse And Bayonet Meme. Tumbler/horseandbayonet and

Debate coach Todd Graham, commenting on about President Obama’s “horses and bayonets” zinger of a line, calls it “the most memorable line of the night.”  But Professor Graham also makes the good budget-hawk observation that it wasn’t just cute; Obama actually has a (substantive) point (emphasis added):

The question was posed to Romney on how he would pay for his proposed $2 trillion increase in military spending, and he flat out didn’t answer it. He was busy finishing his previous answer. So by the time it was the president’s turn, Obama actually said, “You should have answered the question.”

Obama then asserted that the United States spends more on its military than the next 10 countries combined. That’s a great attention grabber. By the time Romney finally answered, he simply said we needed a stronger military, and the Navy needs more ships because it has fewer ships than it did in 1916.

But Obama countered with the most memorable line of the night. “We also have fewer horses and bayonets.” Obama’s debating point was that the nature of our military has changed. He continued by saying that the U.S. has things like submarines and aircraft carriers that should suffice, and reminded viewers that the nation needed to study what its threats are and put money into things like cybersecurity and space. Obama said that the military neither wants nor has asked for this extra $2 trillion.

This was terrible for Romney for three reasons. First, it was the original area of real disagreement, and Romney couldn’t afford to be bested. Second, no matter what he may actually know, Romney looked like a neophyte when it comes to military spending, as though he were repeating old Republican talking points. Viewers could be left unsure whether he knew what century this is.

And finally, it’s two freaking trillion dollars! They both talked about the budget deficit and the need to balance the budget, and over three debates, this — $2 trillion on military spending — was the biggest difference on offer. Axing Big Bird would net a President Romney next to nothing in savings, but adding $2 trillion to defense sounded excessive, especially if it’s true that the U.S. already spends more than the next 10 countries combined. Point Obama.

Whether the $2 trillion difference in defense spending is really the biggest difference in the candidates’ budget plans depends on how you combine the various pieces of their tax policy approaches (do you look at Romney’s proposal to cut tax rates separately from his base-broadening, revenue-raising “proposal”–or on net?), but the point that Big Bird is chump change compared with the defense spending issue is an important one.  If it takes a cute line (”horses and bayonets”) to get people engaged and understanding that reducing the deficit is more than cutting “waste, fraud, and abuse”–or even foreign aid or “Big Bird” (public TV)–then it’s a good thing.

On Anxiously Seeking Women in Binders

October 17th, 2012 . by economistmom

So of course, the world is all “atwitter” about the “binders full of women” comment (in the CNN video embedded above; here’s the transcript for reference–just search “binders”).

Yes, the visual was ridiculous, and the comedians are going to have a field day with this (beyond the field days ordinary bloggers and tweeters have already had).  But the whole exchange bugged me more than amused me.  I was bothered by the suggestion that this is how women get hired to high positions: employers have it pointed out to them (even via talking to themselves) that the first-round “qualified” applicants are all men. So they are told to go look for more women–to collect the resumes in “binders”–because they don’t already know these women to be qualified the first time around; they only think those women “could be qualified” in their looking again.  And they have to become “anxious” enough to hire so many more people such that the women can finally rise over the bar.  Well, yukk to all that.  I don’t find it so funny, and I hope I am never hired by someone who found me only in a “binder.”

Still, I look forward to the SNL version.  :)

Notes from “the Land of Persuadable Voters” (a.k.a., Wisconsin)

October 16th, 2012 . by economistmom


Today’s Washington Post has a front-page story about Wisconsin, a “state up for grabs” as the print edition says, and “the land of persuadable voters” as the online version puts it.  I happen to have spent two days in Wisconsin last week, speaking to a variety of groups ranging from students to financial planners to newspaper editors.  Here’s a 6-minute (easy-watch) TV interview I did for Wisconsin ABC affiliate WISN’s Sunday morning talk show, “Up Front with Mike Gousha,” on the tough fiscal policy choices ahead–the election, the fiscal cliff, and beyond.  (The segment aired this past Sunday.)  If you want the background behind that quick summary, here’s a video of the one-hour conversation I had with Mike and a large, engaged audience at Marquette University Law School, before we taped the TV segment.  And here’s a video of a University of Wisconsin event I did (recorded by Wisconsin Eye) with some faculty from their public policy school, focused also on the fiscal cliff and beyond, with heavy emphasis on what tax reform’s role in deficit reduction should be.  The tax policy emphasis was natural given the expertise of the participants, but that shouldn’t discount the main point that tax reform is the only kind of fundamental reform that has any chance of significantly affecting the fiscal outlook in the next few years.

Based on my small sample of time with a decent cross-section of them, I find the hypothesis that Wisconsinites are “persuadable” and “up for grabs” a reasonable one, but I don’t think one should take that characterization as suggesting they are easily swayed by superficial things–like the candidates’ body language during debates or the political attack ads.  The fact that many Wisconsin voters do not vote consistently for one party over the other is testament to their looking more deeply beneath the candidates’ party labels, into the candidates’ true positions on issues of real substance.  Many seem puzzled that the candidates all like to talk the good talk about “fiscal responsibility” yet seem to expend most of their energy attacking the ideas of their “opponent” that they do not agree with, rather than acknowledging and working on the bipartisan solutions that are possible given their common ground.  They want to know if the candidates’ talk will really work:  would a President Romney really be able to cut government spending enough to support lower tax rates (his prescription for longer-term economic growth), without on net hurting the middle class? Would President Obama in his second term really be able to find enough revenue to pay for the new public investments he says the economy needs to grow, without admitting that tax burdens would likely have to go up for everyone, not just the rich?  Would either president be able to change the partisan, gridlocked environment in DC, in order to be able to affect the changes needed to get our economy back on a better path?

So, I think the typical “persuadable” Wisconsin voter will be listening to tonight’s presidential debates closely, for the substance of what the candidates say far more than their style.

The Post story sums up Wisconsinites this way, with a quote from Charles Franklin who directs the Marquette University Law School Poll of Wisconsin citizens:

Although they may not follow politics closely, they do vote.

“Clearly those folks are not driven by ideology, clearly they’re not driven by party,” said Marquette University’s [Charles] Franklin.

“They do their civic duty,” he said. “And the last bit is: ‘Wisconsin nice.’ They’re just nice people.”

I can vouch for that!  :)

(PS:  I’ll provide some free advertising for the “Justice” clothing store–that t shirt shown above can be purchased here!)

Is Romney Speeding–or Just Heading Somewhere Else?

October 9th, 2012 . by economistmom


Bill Gale clarifies the debate over the Romney tax plan with an analogy even those who aren’t tax policy geeks can understand:

[L]et’s get out of the hyper-charged world of tax policy for a second.

Suppose Governor Romney said that he wants to drive a car from Boston to Los Angeles in 15 hours. And suppose some analysts employed tools of arithmetic to conclude that “If Governor Romney wants to drive from Boston to LA in 15 hours, it is mathematically impossible to avoid speeding.” After all, the drive from LA to Boston is about 3,000 miles, so to take only 15 hours would require an average of 200 miles per hour. Certainly other road trips are possible — but the particular one proposed here is not.

(Note: this is just an example that uses the logic to be employed; I am not suggesting that Romney has in any way broken a law.)

Especially in this inflamed campaign environment, one can imagine the frenzied responses. The Obama campaign might put ads out that say Romney wants to speed or is going to speed. Romney’s campaign might respond by saying the study is a “joke” and “partisan,” that he supports speeding laws and would never, ever speed, and it is ridiculous to suggest that he would. The Romney campaign and its surrogates might say that the analysts must be wrong because they don’t even know what his road plan is or which car he would drive. Besides, Romney never really said he wanted to go LA, he might want to go somewhere closer; he could get to LA without speeding if he took more than 15 hours; he could get somewhere else in 15 hours without speeding. And so on.

With a few substitutions, this is almost exactly how the tax debate has evolved. Substitute “the various tax cuts Romney has proposed” for “driving from Boston to LA;” substitute revenue-neutrality for “in 30 hours; substitute “tax increases on households with income below 200k and tax cuts for higher income households” for “speeding” and you have the basic story: Romney can’t do all of the tax cut proposals he has advocated, remain revenue neutral, and avoid taxing households with income below $200,000 or cutting taxes for higher income households.

My bet is that he’s not really going to speed, because he’s not really going to get anywhere close to LA.  (Were he to become president, there would be detours and roadblocks along the way, labeled “Congress.”  And with both “D” and “R” stickers on the signs, by the way.)  But for now he wants to keep up the illusion that he has this super-fast, flying race car that can magically and legally get the job done.  Maybe Romney’s tax plan is like the Batmobile.

Turning the Cliff Into a Good Thing by Recycling the Fiscal Cans

October 7th, 2012 . by economistmom


Last week the Tax Policy Center (TPC) released an analysis and held an event (which I participated in) on the tax changes that comprise the so-called “fiscal cliff”–the combination of policies scheduled under current law that according to the Congressional Budget Office (CBO) in their latest budget outlook would reduce the federal budget deficit by around half a trillion dollars between fiscal years 2012 and 2013.  (CBO had also done this earlier analysis in May (based on their previous baseline forecasts) focused specifically on the economic effects of avoiding or reducing the 2013 fiscal cliff.)

I’ve made the point before (here and here) that the scary part of the “cliff” that everyone is talking about and wants to avoid is just the first year of the current-law baseline; the drop from deficits in fiscal year 2012 to the baseline deficits in fiscal year 2013 that are represented by just the first two bars in the chart above (from the CBO outlook report).  CBO themselves referred to this one-year fiscal contraction as enough to send us back into recession:

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

While it is thus understandable that everyone says we can’t “go over” (or “run into”) the cliff, that doesn’t tell us what we should do on the other side of the one-year cliff–the remainder of the chart above.  Are we going to reject the entire current-law baseline in favor of “business as usual” that continues to extend and deficit finance the type of spending and tax cuts we’ve enjoyed over the past dozen or so years?  Or are we going to try to get back on the current-law baseline path eventually, given that CBO says that not doing so–continuing to avoid the cliffs and kick the cans along the way–would be harmful to the economy later on? (emphasis added):

Under the alternative fiscal scenario, deficits over the 2014–2022 period would be much higher than those projected in CBO’s baseline, averaging about 5 percent of GDP rather than 1 percent. Revenues would remain below 19 percent of GDP throughout that period, and outlays would rise to more than 24 percent. Debt held by the public would climb to 90 percent of GDP by 2022—higher than at any time since shortly after World War II.

Real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, and the unemployment rate would be lower. However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. In the later part of the projection period, the economy would grow more slowly than in CBO’s baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.

Note that most of the difference between “take the cliff” or current law and “avoid the cliff” or “alternative fiscal scenario” is tax policy; CBO’s figures for the one-year decline in the deficit under current law show that higher revenues alone account for $478 billion, or 98 percent, of the $487 billion “cliff.”  Alternatively, if defined as the difference between current-law and policy-extended (business as usual, alternative fiscal) deficits in fiscal year 2013, higher revenues account for 83 percent of the difference ($330 billion of $396 billion).

Thus, it’s pretty important that we take a closer look at the tax policies that comprise the “fiscal cliff,” in order to address it in the best way not just over the next year (when we want to avoid it because of the recession factor) but in the future (when we want to come closer to embracing it for long-term economic growth reasons).  The Tax Policy Center’s analysis is very helpful in this regard, effectively pulling apart the pile of fiscal cans that have all been kicked to this particular point in time (the end of 2012) and studying the tax-policy labels on each one of the tax-policy cans (that are most of the cans).  See, I believe the approach we need to take is not to simply avoid the fiscal cliff and kick the whole pile of current-law policy cans away (either into the trash or yet again “down the road”), but to commit to honoring the mix of spending cuts and (mostly) revenue increases imbedded in those fiscal cans and the current-law baseline, without feeling stuck with the particular timing and shape of the revenue- and spending-side policies.  What I mean is that we should strive to achieve (and commit to achieving) the same amount of deficit reduction over the 10-year budget window as is implied by the current-law baseline, and even the same amount achieved via the spending side vs. the revenue side of the budget–except with economically smarter, better-timed spending cuts and revenue increases.  I think of this as “recycling the cans” instead of continuing to kick them.  If we can’t use them usefully now, in their current spending-cut or revenue-increase form, let’s carry them along with us as we go along and figure out how to use them better later.  But the rule is that we have to use them; we aren’t allowed to trash them.

The Tax Policy Center analysis takes apart the pile of fiscal cans and sorts the current-law tax increase cans according to their “likelihood of occurring”–basing this admittedly very subjective ranking on “public discussion, proposals advanced by the two presidential candidates and members of Congress, and past congressional actions.”  This ranking is because TPC is trying to show the effects of what is most likely to happen–basically, what to expect when expecting our dysfunctional political and policymaking processes to continue. Here’s that list, from the tax increases they judge as most likely to occur (tax cuts most likely to expire) to those they judge as least likely to occur (tax cuts most likely to be extended)–see the TPC report for description of the policies in each category:

  1. Payroll Tax
  2. Health Care Law Provisions
  3. High-Income Capital Gains and Dividends
  4. High-Income Rates, Pease, and PEP
  5. Stimulus Legislation EITC, CTC, and AOTC
  6. Extenders
  7. Estate Tax
  8. 2001/2003 Tax Provisions Primarily Affecting Low- and Middle-Income Households
  9. Alternative Minimum Tax Patch

The TPC analysis demonstrates that we’re facing significant tax increases over the next year under current law, and that even if policymakers opt to avoid significant portions of the impending fiscal cliff, any parts of the cliff that do occur are likely to involve higher tax burdens on almost all of us (at least 90 percent of us), because the most likely tax increases to occur are some tax increases on mostly lower-and-middle-income households (such as items 1 and 5) and only some on just higher-income households (such as items 2, 3, and 4).

But TPC’s ranking of the “likelihood” of the tax increases above shouldn’t be taken as their endorsement of that policy ranking.  What if TPC had chosen to rank the policies according to economic intelligence instead–or how they would do it if their economists (or other smart economists) had their say?  That is, what if TPC had adopted my “recycle the cans” approach and tried to put out a ranking to guide policymakers on how to best deal with the tax-increase cans–from an economic perspective?  This kind of ranking would have to change over time, based on economic conditions at the time.  Right now, the entire fiscal cliff is a scary proposition because in an economy still in recovery, still facing a shortage of demand, any form of fiscal contraction can worsen conditions (as the CBO warning of “recession” underscores).  But ranking the tax increases from least harmful to most harmful, we economists would prioritize and use the tax-increase cans this year differently.  We would either avoid using any cans this year, or we would use the tax-increase cans that increase burdens on just the richest of households first–so we would probably rank tax increases 2, 3, 4, and 7 in the TPC list as the least harmful to the economy and the hence the most acceptable to exercise first.  We would push tax increases 1, 5, and 8 (the more regressive or proportional tax increases) further down this year’s list, because those are tax increases more likely to adversely reduce demand and suppress job creation.  Or we would simply replace this year’s scheduled regressive tax increases with other more progressive, less harmful to demand, tax increases–”recycling” the tax-increase cans (by changing their timing or shape) while keeping their essential revenue-raising element.

But on the other hand, an economist-determined ranking of these tax policies would change once the economy got back to full employment, a couple years out (hopefully).  In a full-employment economy, economic growth becomes once again constrained by the limits of our productive capacity, or the “supply side” of our economy–how large our human and physical capital stock is, and how intensely and efficiently we are choosing to use it.  Under those full-employment conditions the adverse influence of higher marginal tax rates on labor supply and saving, and uneven effective tax rates across different sources and uses of income, will matter relatively more than they do now in our currently-still-demand-constrained economy.  So in a couple years when we reexamine the tax-increase cans we have yet to use or re-purpose, we economists may rank tax increases that are skewed heavily to the rich and in the form of higher marginal tax rates much lower than we might this year.  At that time we economists will also likely press harder for “base broadening” revenue increases that would raise effective burdens on all taxpayers, not just on the rich, because in a full-employment economy we will be more concerned with minimizing tax policy’s distortions on economic decisions than on steering more cash to the most cash-constrained households or businesses (who won’t be as cash-constrained at that time).

So my idea is to stop “kicking the can(s)” and instead follow a “recycle the cans” approach.  Stop rejecting the current-law baseline levels of revenues and instead more strongly embrace them, because: (i) those revenues lead to economically-sustainable deficits over the next 10-20 years and represent a “grand bargain,” “go big” level of deficit reduction; (ii) those are policies our policymakers actually agreed to (to let tax cuts expire); and (iii) contrary to the spending-side portions of the current-law baseline, which we haven’t really experienced before, we have lived through the revenue-side portions (as in Clinton-era tax policy).  Whatever parts of current-law revenues we can’t tolerate at the moment, save them for future, more thoughtful revenue increases–don’t just abandon them.  And get the budget committees and the budget process to enforce this commitment.  “Recycle As You GO” (or “RAYGO”) can be the new budget mantra.  It sounds easier and more resourceful than “PAYGO,” doesn’t it?

Romney’s Tax Plan: What We Learned (or Not) from the Debate

October 4th, 2012 . by economistmom

From last night’s debate (emphasis added to NPR transcript, video above from Wall Street Journal):

MR. ROMNEY: Well, sure. I’d like to clear up the record and go through it piece by piece. First of all, I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high- income people...

…look, I’m not looking to cut massive taxes and to reduce the — the revenues going to the government. My — my number one principle is there’ll be no tax cut that adds to the deficit.

I want to underline that — no tax cut that adds to the deficit. But I do want to reduce the burden being paid by middle-income Americans. And I — and to do that that also means that I cannot reduce the burden paid by high-income Americans. So any — any language to the contrary is simply not accurate.

First, Romney says he will have “no tax cut that adds to the deficit.” How to reconcile this with not raising burdens on “middle-income” Americans and not reducing burdens on “high-income” Americans–given the Tax Policy Center’s analysis of the kind of base broadening needed to support a 20% across the board reduction in marginal income tax rates (in addition to the proposed extension of the full complement of Bush tax cuts) and no increase in effective tax rates on capital income?

A few possibilities I see: (i) Romney is willing to back off the 20% figure for the marginal tax rate cuts; (ii) Romney is implicitly fiddling around with his definition of “middle income” vs. “high income” (consistent with Martin Feldstein’s point that you might be able to avoid raising burdens on middle-income households as long as “middle-income” ends at $100,000); and/or (iii) Romney is using “dynamic scoring” assumptions that assume growth effects offset any “static” revenue loss.  Some combination of those three tradeoffs is being exploited here.

Second, Romney says he is “not going to reduce the share of taxes paid by high- income people.” How to reconcile this with reducing marginal tax rates and keeping capital income tax expenditures out of the tax base?  Well, two cautions here, noting what Romney is literally saying:

  1. If the Romney plan is actually revenue losing, then maintaining the high-income households’ share of a smaller overall tax burden would still imply a reduction in the progressivity of the income tax system–”progressivity” referring to the existing pattern of rising average tax burdens (taxes paid/income) at higher income levels.  A constant share of a shrinking progressive policy means the rich person’s burden, relative to his or her income, goes down more than it does for someone with lower income.  The reference to “shares of taxes paid” was a favorite way of talking about the (claimed “increased”) progressivity of the Bush tax cuts by the Bush Administration.  Given that a lot of the Romney advisers are the same people who created, promoted, and managed the Bush tax cuts (way back in 2001), the use of this statistic to advertise the “fairness” of the Romney plan is not at all surprising.
  2. Exactly who are the “high-income people” in this category?  (Go back to point (ii) above, regarding the deficit-neutrality claim.)  As the Tax Policy Center pointed out in their response to the Feldstein critique, if we change the definition of “high income” to above $100,000 instead of above $200,000 or $250,000, it’s much easier to keep the burdens of this much broader category of households constant (or higher), by paying for net tax cuts on those above $200,000, with net tax increases on those between $100,000 and $200,000.  You can technically call that “not a reduction” in the tax burdens of (all) “high-income people” (meaning the aggregate category of people with income above $100,000), but most of us wouldn’t find that a sensible way to increase the “fairness” of the tax system.

So Romney was very effective in last night’s debate at making his tax plan sound, contrary to the President’s claims, both fiscally responsible and fair, but that’s because he was just able to declare it without explaining the details.  And the President coming back with the details of the TPC analysis didn’t work as well as it did when he first touted the analysis two months ago in his campaign speeches and TV ads.  (CNN’s real-time sentiment meter of their sample of Colorado undecided voters recorded that point in Obama’s remarks as his lowest point in last night’s debate, in fact.)  And the debate moderator certainly didn’t follow up with the questions I would have.  ;)

Feldstein and Summers on Tax Reform: A Lot of Common Ground–but Still Some Stumbling Blocks

October 1st, 2012 . by economistmom

Last week as part of the “Strengthening of America-Our Children’s Future” project that the Concord Coalition is a co-sponsor of, a forum was held in New York on the topic of “pro-growth tax reform.” Harvard economics professor and Romney adviser, Martin Feldstein, joined former Treasury secretary and Obama adviser, Lawrence Summers, to discuss what they consider “pro-growth” tax policy.  A preview of their discussion was provided by former Senator Sam Nunn’s co-anchoring of the CNBC “Squawk Box” show earlier that morning; in this segment Feldstein and Nunn discuss the potential for bipartisanship in tax reform, but Feldstein is also asked to react to comments that Summers had made on the show just before.  (This latter issue will be most appreciated by those who have been following the Tax Policy Center’s analysis of the Romney plan and Feldstein’s subsequent critique of the TPC analysis and defense of the Romney tax reform plan.)

At the event, Feldstein and Summers made it clear that when it comes to the notion of what is “pro-growth tax reform,” there is a lot of common ground between economists who favor the Rs and economists who favor the Ds.  Here are what I heard as some of the main points of agreement between Feldstein and Summers (what Summers referred to as the “structure that Marty and I have converged on”):

  1. “Pro-growth tax reform” means structuring the tax system to encourage longer-term expansion in the productive capacity (or “supply side”) of the economy.
  2. This suggests that a broader, more even tax base, which supports relatively low marginal tax rates, is the best way to raise necessary revenue with the least distortion to those supply-side economic decisions (how much to work, how much to save, how much to invest in human or physical capital).
  3. A first priority to follow the “broadening the tax base” strategy is to reduce existing “tax expenditures” that are considered inefficient and/or unfair.  Tax expenditures are economically equivalent to government spending programs and make government bigger than indicated by the levels of direct spending. (Cutting revenues by increasing tax expenditures grows, rather than shrinks, the size of government.)
  4. Tax expenditures could be reduced in a variety of ways that don’t have to target particular sectors of the economy (could be done in across-the-board, broad-brush ways–e.g., Feldstein likes the idea of capping the total amount to a percentage of gross income) and can be done in a progressive manner, where tax burdens are increased relatively more on higher-income households (e.g., the Obama budget proposal to limit itemized deductions and even other tax expenditures to the 28% rate).
  5. Tax reform does need to raise revenue (relative to the policy-extended, “business as usual” baseline, and even before any “dynamic scoring” type effects are accounted for) in order to contribute to deficit reduction and (therefore) be “pro-growth.”
  6. But “pro-growth tax policy” is a longer-term goal focused on mainly the supply side of the economy; we cannot immediately raise tax burdens in ways that would threaten putting our economy back in recession (by reducing demand for goods and services too severely).

But I also heard some remaining sources of disagreement between Feldstein and Summers, which are probably indicative of where “stumbling blocks” to bipartisan tax reform remain:

  1. Beyond decreasing tax expenditures/broadening the income tax base, what are some other features essential to “pro-growth” tax policy? (i) Feldstein seems to favor continued low or even lower effective tax rates on capital income (more consistent with a consumption base), while Summers seems to favor reducing or eliminating the current preferential rates on capital gains and dividends (consistent with reducing tax expenditures under an income base); (ii) Feldstein would favor keeping marginal tax rates low across the income spectrum, including at the very top, while Summers would favor a return to higher rates at the top as necessary to restore fairness (greater progressivity) to the system; (iii) Summers explicitly said that effective (average) corporate income tax rates are too low, not too high, while Feldstein argues for corporate tax reform that is revenue-neutral at best with lower marginal tax rates on profits earned abroad; (iv) Feldstein would probably argue for a lower upper bound on overall revenues/GDP than Summers would, as consistent with the “pro-growth” goal.
  2. Beyond deficit reduction, what is needed to grow the economy’s “supply side?” Feldstein would probably argue for working toward smaller government in scale and scope, while Summers clearly stated that pro-growth tax reform is (necessary but) “not sufficient” to address our nation’s growth needs, because we have “under-invested” in many things.  Beyond raising national saving by reducing the deficit, Summers believes government should more directly help the economy invest more in education, infrastructure, the environment, health care, etc.–the components of the productive capacity of the economy.  He stated that such public investments are a necessary complement to fiscal sustainability in a “pro-growth” fiscal agenda.  (And immediately, Summers emphasized that continued stimulus-type policies, to keep demand for goods and services up, are still necessary–although Feldstein did not disagree with this.)

The conversation between Feldstein and Summers is a good indicator of the potential for achieving bipartisan tax reform consistent with not just “growth” goals but fairness and fiscal responsibility goals as well.  The broad contours of the common ground are indeed well “grounded,” but some of the remaining points of disagreement might be significant-enough stumbling blocks to make meeting halfway still challenging.