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Who’s the Most Fiscally Responsible Candidate?

November 1st, 2012 . by economistmom

Between Obama and Romney, who proposes a fiscal policy agenda that’s the “most fiscally responsible?”  That’s not that easy to answer, because “fiscal responsibility” is more than just deficit reduction, and “most” depends on the baseline–i.e., compared with what?

Neither is the “most fiscally responsible of them all” certainly, because as my Concord Coalition colleague Josh Gordon writes, neither candidate is embracing a specific “go big,” “grand bargain” approach–at least not yet.  (This is an election season, after all.)

On Romney, Josh explains:

While Romney has called for cuts of five percent to non-defense discretionary spending (without providing details about where the cuts would fall), he has also supported an increase in defense spending, and restoration of the Affordable Care Act’s (ACA) Medicare cuts. When pressed, the campaign has avoided going into further detail about where all this would come out. In fact, unlike recent past presidential candidates, Romney has not produced even a bare bones outline showing the relative impact of his proposals on the budget. He has certainly given insufficient detail to establish that he has a credible plan to balance the budget.

One only needs to look at Rep. Ryan’s budget to see that even with large cuts to non-defense discretionary spending and Medicaid, it is mathematically suspect to promise a balanced budget without higher revenues — as the Ryan budget doesn’t achieve balance until 2040. Assuming that the gap can be made up with consistently above-average economic growth is an unrealistic dodge to avoid hard policy choices.

Aside from the overall goal, major questions remain about individual components of Romney’s fiscal proposals. The most discussed of these is his three-part tax plan. In short, Romney has promised to: 1) reduce all federal income tax rates by 20 percent after extending the expiring “Bush tax cuts”; 2) reduce taxes on the middle class (defined as individuals earning less than $250,000) and; 3) not increase the deficit — achieving revenue neutrality by reducing the tax expenditures benefiting the wealthy (except for the tax breaks favoring capital income).

These three parts of Romney’s plan are mathematically incompatible. The non-partisan Tax Policy Center has amply demonstrated why this is so, and no credible studies have shown otherwise. When pressed for an explanation of their assumptions, of the tax expenditures they would target, or which of the three parts would be jettisoned if the numbers don’t ultimately work, the Romney-Ryan campaign has avoided an answer.

Finally, the Romney plan for controlling health care costs in the federal budget also leaves many unanswered questions. The immediate result of his proposal to repeal not just the new spending within the ACA, but also the ACA’s Medicare cost savings and tax increases, would be to actually increase the deficit. Moreover, repeal of the ACA’s cost control experiments and pilot projects would needlessly inhibit research into ways that the health care system might be reformed to provide better value for our health care dollars. Given that we know very little on how to control systemic health care costs, this would also severely limit the possibilities for success of Romney’s own proposals to remake Medicare and Medicaid.

And regarding President Obama’s fiscal policies, Josh emphasizes that just because the President has had to be more specific (in submitting budget proposals every year), doesn’t mean it all adds up to a big-enough, fiscally-responsible-enough plan:

To the President’s credit, he supports negotiating a long-term, bipartisan “grand bargain” on fiscal issues with both spending cuts and new revenues. Yet, such explicit support has come only after his initial tepid reaction to the Simpson-Bowles report when it was released. Nevertheless, if Obama is re-elected, the upcoming fiscal cliff will give the nation’s political parties a chance to negotiate a major budget deal. This will test whether the President will fulfill his promise to have flexibility and put all options on the table. Unfortunately, during the campaign season, he and Vice President Biden have taken some options to reform Social Security (raising the retirement age) and Medicare (premium support) off the table. This will make achieving a bargain more difficult.

On taxes, the President has been similarly contradictory. He has argued for the need for more revenue, yet has ruled out tax increases for anyone earning less than $250,000. He has also proposed some new tax breaks even while arguing that others should be scaled back. On the corporate side, he has been as vague as Gov. Romney in detailing how he would pay for his proposed rate reduction.

Obama’s proposal to limit itemized deductions in the top two income tax brackets is a start on reform that broadens the tax base, yet the proposal has been made in every budget submission of his presidency and has gone nowhere. He has not supported a broader fundamental reform like the forward-looking plans recommended by the Simpson-Bowles and Domenici-Rivlin panels — where major tax expenditures are eliminated or scaled back and better targeted.

Obama’s contradictions are likely to impede a grand bargain. Furthermore, Obama’s promise not to increase taxes on anyone within a very expansive definition of the “middle class,” makes it very difficult to make the tax code more efficient.

Finally, the President’s health care reform agenda is mainly focused on implementing the Affordable Care Act (ACA). Proper implementation is a worthy goal and will be necessary for the ACA to have any chance of remaining effectively deficit-neutral. Yet, for the nation to control health care costs over the long term, more legislation needs to be enacted. Medicare in particular needs further reform.

And then there’s the tricky part–that “fiscal responsibility” means more than just mechanically reducing the budget deficit.  It means getting to “fiscal sustainability,” which is just as much about strengthening and growing the economy as it is about holding down the public debt.  (Both the numerator and the denominator in the sustainability goal of stabilizing the ratio of debt-to-GDP matter.)  The economy part (the denominator) is a particular challenge these days, because we’re still in a period where we are still recovering from an unusually severe recession that has been unusually resistant to the usual stimulus treatments, which come (naturally) in the form of deficit-financed policies.  At the moment, our economy still needs counter-cyclical fiscal policy (hence, all the calls to not let ourselves go over the “fiscal cliff”), but over the longer term after we hopefully get back to higher (”full”) employment, our economy will need higher national saving, in both the public and private sector, to keep growing its supply side (productive capacity).  So we still need deficits now, but significantly lower deficits later, and we need to be mindful that not all forms of deficit spending (or tax cuts) are created equal in terms of economic effects on either the supply or the demand sides of our economy.

I think this tricky part of having to worry about the economic (and not just budgetary) effects of these fiscal policy choices is what Princeton economics professor Alan Blinder is getting at in his Wall Street Journal op ed, where he expresses his pro-Obama opinion:

For stimulus, we could do a lot worse than to enact President Obama’s American Jobs Act, which he proposed about a year ago. It consisted of about $250 billion in tax cuts and about $200 billion in spending, most of it well targeted on creating jobs. But Republicans rejected the act outright.

For deficit reduction, I believe the nation eventually will come around to something resembling the Simpson-Bowles plan, which was rejected by both parties (with Rep. Paul Ryan voting against it) when Alan Simpson and Erskine Bowles proposed it in 2010. Although President Obama didn’t embrace Simpson-Bowles in 2010, his current 10-year deficit-reduction plan is a first cousin. Any such plan would “pay for” the American Jobs Act many times over.

For his part, Mitt Romney rejects any short-term fiscal stimulus, attacks the Fed for trying to speed up the recovery, and proposes large, new, permanent tax-rate reductions—beyond even the Bush tax cuts—which would almost certainly bust the budget again. He claims the rate cuts can be paid for by closing loopholes. But several neutral third parties have demonstrated that his numbers don’t add up.

So the Romney plan would provide neither the short-run stimulus nor the long-run deficit reduction we need, while the Obama plan would provide both. Which plan is better? I guess the answer to that is an opinion, not a fact.

To counter Blinder’s opinion, a pro-Romney economist would surely claim that Romney will cut spending by much more than Obama would, which means the Romney-proposed tax cuts will be more affordable, plus such an economist would likely also throw in a supply-side growth story that claims that revenues would actually rise when tax rates are cut (even before any base broadening).  (I welcome readers’ suggestions as to which actual conservative economist’s commentary is the best counter to Blinder’s.)

This election does offer a stark choice in terms of fiscal policy paths.  Obama is clearly for a larger, more active role of government in our economy and society.  Romney clearly wants to reduce the influence of government, especially regarding tax burdens.  Unfortunately, with neither of them is it clear that they have the political will and talent to raise the taxes or cut the spending needed to make their plans consistent with deficit reduction.  So we’ll have to just wait and see how the election turns out, and then hope that whoever wins will do better on “fiscal responsibility” than their campaign talk suggests, once the campaign is finally over.

8 Responses to “Who’s the Most Fiscally Responsible Candidate?”

  1. comment number 1 by: SteveinCH

    Well, I’ll happily offer a rebuttal to Blinder.

    For deficit reduction, I believe the nation eventually will come around to something resembling the Simpson-Bowles plan, which was rejected by both parties (with Rep. Paul Ryan voting against it) when Alan Simpson and Erskine Bowles proposed it in 2010. Although President Obama didn’t embrace Simpson-Bowles in 2010, his current 10-year deficit-reduction plan is a first cousin. Any such plan would “pay for” the American Jobs Act many times over.

    It’s nice that Dr Blinder notes that Ryan voted against S-B but fails to mention that the President pretty much didn’t mention it for more than a year after it was completed. That’s the type of non-partisan commentary we need. It’s probably also worth pointing out that Ryan’s stated reason for a no vote was that it did nothing about Medicare (which it didn’t).

    But the second argument is even more amusing. To argue the President’s current deficit reduction plan is a kissing cousin of Simpson-Bowles requires you to ignore

    1. Its lack of any spending cap at all.
    2. Its lack of tax increases outside the top 2% of wage earners.
    3. Its failure to say anything about SS.

    But other than that, it’s pretty similar. Well, except for the fact that long term projections say it explodes the deficit and never balances or even holds primary balance.

    The critique of the Romney tax plan is ground we’ve covered here forever. My point is that Blinder chooses to believe that rate reductions rather than revenue neutrality will win if a tradeoff is required. He has no basis other than partisanship to do this.

    Lastly, the notion that more stimulus (above the $1 trillion already in play) is needed is assumed at best. By what logic does this proceed for Blinder? It appears that as long as the economy isn’t doing as well as Blinder would like, the answer is “even more stimulus, regardless of its efficacy or ROI.”

    I think Romney believes that government needs to have some upper bound on its use of public resources. Funny that I remember S-B saying the same thing. Yes, they differ by 1% on the cap but they both endorse the notion of a cap. Second, they both endorse the notion of tax reform, which the President largely does not. Yes, they disagree on the revenue to be raised by about 3% but they agree on the principle.

    Blinder’s post, to my read, is more partisan than economist. He’s no Dr. K though.

  2. comment number 2 by: Vivian Darkbloom

    “For stimulus, we could do a lot worse than to enact President Obama’s American Jobs Act, which he proposed about a year ago. It consisted of about $250 billion in tax cuts and about $200 billion in spending, most of it well targeted on creating jobs. But Republicans rejected the act outright.”

    Well, that must be S 1549 submitted to Congress in September, 2011. That bill also suggested raising taxes by the same amount of those “tax cuts” and “spending increases” in order to make the bill “revenue neutral”.

    The bill basically punted the responsibility to come up with tax increases to pay for it to the Super Committee.

    The idea, it seems, is that re-arranging the deck chairs on the Titanic constitutes “effective stimulus” (and, as simultaneously argued here, that it is “fiscally responsible”).

  3. comment number 3 by: AMTbuff

    Blinder was simply dishonest: “I believe the nation eventually will come around to something resembling the Simpson-Bowles plan, which was rejected by both parties (with Rep. Paul Ryan voting against it)”

    Ryan did not reject Simpson-Bowles as a TAX plan, he rejected it as a DEFICIT REDUCTION plan. The Simpson-Bowles plan lacked major spending reform. Tax reform without spending reform is worse than doing nothing. That’s the ONLY reason Ryan voted no, and Blinder knows that very well. As I said, Blinder was dishonest here.

  4. comment number 4 by: Brooks / Gordon

    a pro-Romney economist … would likely also throw in a supply-side growth story that claims that revenues would actually rise when tax rates are cut (even before any base broadening)

    I don’t think it’s correct that a (typical) pro-Romney economist would likely make that claim. Generally speaking, even conservative economists have rejected the claim (by Republican politicians, conservative talk show hosts, etc.) that tax rate cuts generally have a positive net effect on revenues. A few years ago I looked for some prominent conservative economists supporting that claim, and found instead only rejection of it, which I compiled at http://swordscrossed.org/node/1671

    It would be accurate to say that a pro-Romney economist would be likely to claim a greater degree of revenue feedback effects and thus less forgone revenue due to the tax rate cuts.

  5. comment number 5 by: B Davis

    Josh Gordon writes:

    Aside from the overall goal, major questions remain about individual components of Romney’s fiscal proposals. The most discussed of these is his three-part tax plan. In short, Romney has promised to: 1) reduce all federal income tax rates by 20 percent after extending the expiring “Bush tax cuts”; 2) reduce taxes on the middle class (defined as individuals earning less than $250,000) and; 3) not increase the deficit — achieving revenue neutrality by reducing the tax expenditures benefiting the wealthy (except for the tax breaks favoring capital income).

    These three parts of Romney’s plan are mathematically incompatible. The non-partisan Tax Policy Center has amply demonstrated why this is so, and no credible studies have shown otherwise. When pressed for an explanation of their assumptions, of the tax expenditures they would target, or which of the three parts would be jettisoned if the numbers don’t ultimately work, the Romney-Ryan campaign has avoided an answer.

    I agree that no credible study has shown that the Romney tax plan adds up. I looked at the Feldstein study and posted the result on my blog. There’s also an ongoing discussion of it at this link. As the title of a TPC response states, “Feldstein’s Analysis Doesn’t Refute TPC Findings, It Confirms Them”. I’ve posted links to all six of the so-called “independent studies” that Romney claims support his plan at this link. None of them provide any credible data that counters the TPC study.

    I think that there is little doubt that Romney’s tax plan would increase the deficit. If Romney is elected, he will have to push for the specific goodies that he has promised. However, the act of “broadening the tax base” will likely become an argument between those who think we should limit deductions on the rich and those who think we should limit credits so as to tax more of those 47 percent who reportedly pay no federal income taxes. As a result - the goodies get passed, little or nothing get done on base-broadening, and the deficit goes up.

  6. comment number 6 by: B Davis

    Following is a link to the TPC response that I mentioned:

    “Feldstein’s Analysis Doesn’t Refute TPC Findings, It Confirms Them”

  7. comment number 7 by: ST Dog

    Davis, you implied in your blog that reduced/eliminated those deductions like mortgage interest on the 100k-200k group would be raising their taxes.

    Do you have numbers to back that up?
    As I understand it the current rate for couples $140k-$217k is 28% and the 20% reduction would make that 22.4%
    And the first $140K would be taxed $5547 less

    So, what’s the average MI deduction?
    This http://www.americanprogress.org/issues/open-government/news/2011/01/26/8866/tax-expenditure-of-the-week-the-mortgage-interest-deduction/
    Say the 124-250lk group on average saves $2700 in taxes, so for the 28% that’s ~ 10k less taxable income.
    So, tax that income at the new rate, gives $2240 in taxes owed.

    That leaves $3307 less tax owed just on the first 3 brackets. Never mind the 20% reduction on the other income in the top bracket.

    Would not most people give up a $2700 tax break in return for a tax reduction of $5500?

    I know I would.

    And that would still leave $3300 for further deduction elimination ($14,700 of income deductions) while remaining neutral.

  8. comment number 8 by: B Davis

    ST Dog wrote:

    Davis, you implied in your blog that reduced/eliminated those deductions like mortgage interest on the 100k-200k group would be raising their taxes.

    Do you have numbers to back that up?

    I assume that you are talking about the following statement on my blog:

    Next, Feldstein’s figures are based on the idea of eliminating all deductions for taxpayers whose adjusted gross income (AGI) is $100,000 or more. But when asked about the $100,000 limit in a September 14th interview with George Stephanopoulos, Romney said the following:

    No, middle income is $200,000 to $250,000 and less. So number one, don’t reduce– or excuse me, don’t raise taxes on middle-income people, lower them.

    Hence, it’s unlikely that Romney would agree to eliminate all deductions for someone making between $100,000 and $200,000 per year.

    It’s not entirely clear exactly what Romney meant by “don’t raise taxes on middle-income people”. I think that it’s reasonable to assume that he was talking about every single middle-class person, not just the average middle-class person. Also, it’s not unreasonable to assume that he was taking about not imposing a “net raise” in taxes on any middle-class individual. However, it still would likely have been difficult for him to explain the “net raise” concept to many middle-class individuals who lost all of their deductions. In any case, you are correct that this complicates the math. To avoid raising taxes on every middle-class individual, you need to look at the maximum deduction that would be cut. From Feldstein’s figures, it would appear that this would likely include home mortgage, local and state taxes, real estate taxes, and charitable contributions.

    However, recall the following statement I quoted from the Tax Policy Center conclusion:

    We show that given the proposed tax rates and proscription against reducing tax expenditures aimed at saving and investment, cutting tax expenditures will result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers—even if individual income tax expenditures could be eliminated in a way designed to make the resulting tax system as progressive as possible.

    They were simply saying that, even if the cut in deductions were top-loaded to high-income taxpayers, those taxpayers would enjoy a net tax cut. That would necessitate that lower- and/or middle-income taxpayers would have to have a net tax increase (even when figuring for a reasonable growth effect). Feldstein calculated something a little different. He said that the revenue lost by ALL of the rate cuts could be made up by cutting all deductions for those making over $100K. As I mentioned, that appears not to be true. In addition, he did not show how many of those between $100K and $200K would receive a net tax cut. He only attempted to show that everyone under $100K could receive a tax cut in a revenue-neutral tax cut. He failed to even show that. In any event, he did nothing to contradict the TPC study.

    Anyhow, this is all moot now. That is until the next election when the Republican candidate will likely roll out another implausible tax cut proposal.