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Bill Clinton: Not a “Blood Bath”–Just Good Math

September 6th, 2012 . by economistmom

There’s no one quite like Bill Clinton to talk about how to achieve fiscal responsibility. He’s the master in terms of both the politics and the substance–or “mathematics” as he calls it. From the transcript of his speech:

[D]emocracy does not…have to be a blood sport, it can be an honorable enterprise that advances the public interest…

Now, we all know that [Obama]…tried to work with congressional Republicans on health care, debt reduction and new jobs. And that didn’t work out so well. (Laughter.) But it could have been because, as the Senate Republican leader said in a remarkable moment of candor two full years before the election, their number one priority was not to put America back to work; it was to put the president out of work…

In Tampa, the Republican argument against the president’s re-election was actually pretty simple — pretty snappy. It went something like this: We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in. (Laughter, applause.)

Now — (cheers, applause) — but they did it well. They looked good; the sounded good. They convinced me that — (laughter) — they all love their families and their children and were grateful they’d been born in America and all that — (laughter, applause) — really, I’m not being — they did. (Laughter, applause.)

And this is important, they convinced me they were honorable people who believed what they said and they’re going to keep every commitment they’ve made. We just got to make sure the American people know what those commitments are — (cheers, applause) — because in order to look like an acceptable, reasonable, moderate alternative to President Obama, they just didn’t say very much about the ideas they’ve offered over the last two years.

They couldn’t because they want to the same old policies that got us in trouble in the first place. They want to cut taxes for high- income Americans, even more than President Bush did. They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts. They want to actually increase defense spending over a decade $2 trillion more than the Pentagon has requested without saying what they’ll spend it on. And they want to make enormous cuts in the rest of the budget, especially programs that help the middle class and poor children.

As another president once said, there they go again. (Laughter, cheers, applause.)…

Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them.

But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it.

Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.

Now, I think this plan is way better than Governor Romney’s plan. First, the Romney plan failed the first test of fiscal responsibility. The numbers just don’t add up. (Laughter, applause.)

I mean, consider this. What would you do if you had this problem? Somebody says, oh, we’ve got a big debt problem. We’ve got to reduce the debt. So what’s the first thing you say we’re going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.

Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code.

So then you ask, well, which loopholes, and how much?

You know what they say? See me about that after the election. (Laughter.)

I’m not making it up. That’s their position. See me about that after the election.

Now, people ask me all the time how we got four surplus budgets in a row. What new ideas did we bring to Washington? I always give a one-word answer: Arithmetic. (Sustained cheers, applause.)

If — arithmetic! If — (applause) — if they stay with their $5 trillion tax cut plan — in a debt reduction plan? — the arithmetic tells us, no matter what they say, one of three things is about to happen. One, assuming they try to do what they say they’ll do…cover it by…cutting those deductions, one, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000 while anybody who makes $3 million or more will see their tax bill go down $250,000. (Boos.)

Or, two, they’ll have to cut so much spending that they’ll obliterate the budget for the national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs, all the programs that help to empower middle-class families and help poor kids. Oh, they’ll cut back on investments in roads and bridges and science and technology and biomedical research.

That’s what they’ll do. They’ll hurt the middle class and the poor and put the future on hold to give tax cuts to upper-income people who’ve been getting it all along.

Or three, in spite of all the rhetoric, they’ll just do what they’ve been doing for more than 30 years. They’ll go in and cut the taxes way more than they cut spending, especially with that big defense increase, and they’ll just explode the debt and weaken the economy. And they’ll destroy the federal government’s ability to help you by letting interest gobble up all your tax payments.

Don’t you ever forget when you hear them talking about this that Republican economic policies quadrupled the national debt before I took office, in the 12 years before I took office — (applause) — and doubled the debt in the eight years after I left, because it defied arithmetic. (Laughter, applause.) It was a highly inconvenient thing for them in our debates that I was just a country boy from Arkansas, and I came from a place where people still thought two and two was four. (Laughter, applause.) It’s arithmetic.

We simply cannot afford to give the reins of government to someone who will double down on trickle down. (Cheers, applause.) Really. Think about this: President Obama — President Obama’s plan cuts the debt, honors our values, brightens the future of our children, our families and our nation. It’s a heck of a lot better.

It passes the arithmetic test, and far more important, it passes the values test. (Cheers, applause.)

Refutation by Redefinition: Feldstein’s Redo of TPC’s Analysis of the Romney Tax Plan

August 30th, 2012 . by economistmom

Earlier this week, Martin Feldstein, a Romney campaign economic adviser and Harvard professor, published this op-ed in the Wall Street Journal, critiquing the Tax Policy Center’s viral (thanks to President Obama) analysis of the implied distributional effects of Mitt Romney’s self-proclaimed-revenue-neutral tax reform plan.  If you recall, the Tax Policy Center’s analysis showed that it was mathematically impossible to cut marginal tax rates as much as Romney proposes, not increase capital income taxes, and broaden the tax base in a revenue neutral way, without the reform resulting in a shift of tax burdens away from the richest households and towards other households (the “non-rich” you might say)–in other words, a “regressive” distributional effect.

Feldstein decided to do the calculation for himself, looking into which tax expenditures he himself could find to reduce/broaden the tax base that would reverse the conclusion that the Romney plan would cut taxes for the rich and raise them on everyone else (…remember, this is relative to Obama’s tax proposals, not relative to current law).  He reports his discovery, which he characterizes as not just a critique of the TPC analysis, but an outright refutation (emphasis added):

The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals. It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn’t specified what he would do. But refuting the Tax Policy Center’s assertions doesn’t require that. It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%.

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

In other words, Feldstein refutes that the Romney plan would raise taxes on the non-rich by redefining the non-rich.  Obama, the TPC, and I’ll bet Romney himself, don’t consider households in the $100,000 to $200,000 range the “rich.”  We know President Obama has always made the dividing line between the “rich” and the “middle class” somewhere in the $200K to $250K range.  Households in the $100K to $200K range are squarely within Obama’s definition of the middle class households who would never be subjected to any increase in tax burdens under Obama tax policy.  (By the way, those households also happen to be the households that tax policymakers often talk about as unfairly bearing the bulk of the burden of the alternative minimum tax, in contrast to the truly “rich”–say, millionaires–who are typically not on the AMT because their marginal tax rate puts their ordinary income tax burden above their broader-based AMT burden.)

So as the Tax Policy Center counter-responded today:

Writing in Wednesday’s Wall Street Journal, Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more. (Feldstein uses a different income measure than we do – see technical note at end.)

Taxes would rise on families earning between $100,000 and $200,000 in Feldstein’s analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.

Gee, let’s repeat that Feldstein version/reinterpretation of the Romney plan (emphasis added):

a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan.

One has to wonder:  did the Romney campaign really want Feldstein to “refute” the TPC analysis of the Romney tax plan this way–in effect spelling out that it’s “just” the $100K to $200K households that might get socked with the burden of paying for the net tax cuts for the above $200K households?

I don’t get it.  But that’s probably why I’m not cut out to ever advise a political campaign. (I think I would have said “keep this quiet.”)

There are other, less-fundamental problems about Feldstein’s analysis including his use of 2009 tax year data (an unusually low-revenue year) which you can read more about in the same TPC blog post.

Key Questions to Ask the Candidates (About Fiscal Policy)

August 27th, 2012 . by economistmom

Just released by the Concord Coalition, this good reading material for the start of the back-to-back conventions.  The intro to the document explains:

With the federal budget running annual deficits in excess of one trillion dollars, and many official and unofficial sources warning that current fiscal policies are not sustainable, it is vital that voters in 2012 demand realistic solutions from the candidates.

The fiscal challenges ahead are not a simple matter of too much “pork” or too many tax “loopholes.”

Our nation is undergoing an unprecedented demographic transformation against the backdrop of rising health care costs and falling national savings. It is an ominous combination for our economic future.

The retirement of the baby boomers, which began  in 2008, is ushering in a permanent shift to an older population — and a permanent rise in the cost of programs such as Social Security, Medicare and Medicaid, which already comprise 42 percent of the federal budget.

There is no plan to pay for it all other than running up the national debt. Some say that our political system only responds to a crisis. If that turns out to be true, we’re in big trouble.

Current budget projections are dominated by two factors: demographics and health care costs.

The Trustees of the Social Security and Medicare trust funds project that the number of Americans aged 65 and older will increase by almost 80 percent by 2035. In contrast, the working age population will grow by only 12 percent. This alone will strain the economy and budgetary resources.

Demographic change, however, is only part of the problem. For the past 40 years health care spending has consistently grown faster than the economy. If the same growth rate continues over the next 40 years, Medicare and Medicaid will absorb nearly as much of our nation’s economy as the entire federal budget does today.

No one can say exactly when a crisis will hit, but by the time it does the economy would likely be burdened with a debilitating amount of debt — leaving painful benefit cuts and steep tax increases as the only options. Doing nothing now to avoid this would be an act of fiscal and generational irresponsibility.

Key Questions Voters Should Ask Candidates

The following questions provide a framework for ensuring that candidates address some of the toughest choices they will face concerning the federal budget if they are elected. Background information is given to provide context and to help with follow-up questions, which should be asked whenever a candidate’s answer appears incomplete.

Read on for the actual questions and background material, and be well prepared to decipher the candidates’ responses to implicit or explicit questions like these that may come up on the campaign trail and at the debates.  Who knows–maybe at least one of you out there will even have a chance to ask a candidate one of these questions directly!

Don’t Talk About Offsets on the Campaign Trail: Part 2

August 15th, 2012 . by economistmom
The Daily Show with Jon Stewart Mon - Thurs 11p / 10c
Paul Ryan’s Bipartisan Appeal
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

The Daily Show segment above and Ruth Marcus’ column in today’s Washington Post emphasize that, gee, the Romney-Ryan Medicare reform approach–no matter that the GOP team is still trying to define/refine it–is not that different from “Obamacare.”  As Ruth explains:

The Republican National Committee chairman says President Obama has “blood on [his] hands” for cutting Medicare. Mitt Romney blasts the president for having “robbed” the program of $700 billion.

Vice President Biden accuses Romney and running mate Paul Ryan of “gutting” Medicare. And, inevitably, President Obama warned that Romney-Ryan would “end Medicare as we know it.”

Aren’t you glad we’re having a sober policy discussion about how to rein in entitlement spending?

Such hyperbole was inevitable. The laws of political gravity drag every debate from the lofty realm of ideas to the grungy plain of invective. The more complex and weighty the issue, the more it is at risk of being distilled — distorted — into a 30-second caricature.

Let’s pause for a bit of fact-checking.

The cheeky response to the critique of Obama’s Medicare cuts is that Ryan assumes those very cuts in his budget — the one passed by the House and endorsed as “marvelous” by Romney. So there are robbers galore and blood to spread around.

The slightly less cheeky response is to say: Aren’t these the people who have been screaming about Medicare bankrupting the country? Shouldn’t they be praising cuts, not denouncing them?

The on-the-merits response is that the cuts — more accurately, reductions in the rate of growth — involve lower reimbursements to hospitals and nursing homes, reduced payments to insurers, higher premiums for better-off beneficiaries, and savings from reforms such as lower hospital readmissions.

In other words, Grandma might lose her free eyeglasses, but her basic benefits remain untouched.

So what are the candidates blaming each other about?  In essence, it’s the exact same part of their largely-the-same overall proposals: the part that saves money. The Democrats demonstrate this by showing Grandma being pushed off a cliff by the Republicans.  The Republicans characterize this as the Democrats throwing the $700 billion off the cliff–”robbing” it from the Medicare program (and the very same Grandma!) and “wasting” that money.

It’s part 2 of “don’t talk about saving money” lesson on the campaign trail–part 1 being the lesson I’m afraid Romney got on his tax reform approach once the implied details of a base-broadening offset were spelled out by the Tax Policy Center.  My point on that lesson (summarized best in my Concord version of the blog post) was that the lesson for Romney should have been for him to pare back his tax-cutting plans and make any offsets more progressive–rather than for him to rethink paying for the policy at all.

But any policy talk that honors the inevitable budget constraints–that there’s no such thing as a free tax cut or spending program–paints an easy target for a candidate.  The offset or “pay for” always involves a spending cut or a revenue (tax) increase, at least relative to a not-paid-for baseline, and instead of leading to a healthy debate about the different ways to reform our tax and spending programs in fiscally responsible ways, it leads to attacks on the other side for even suggesting their version of the “fiscally responsible” part–no matter how similar it actually is to one’s own fiscally responsible part!

This is how it’s going to go through the November election.  Expect the candidates to get looser and looser about the “fiscally responsible” pieces of their policy proposals.  Expect them to spell out only the goodies, not how they would pay for the goodies.  For voters to be able to see past the rhetoric and understand the real substance of the differences between the two presidential candidates’ policy positions, we’re going to need constant translations from people like Ruth and Jon Stewart, I guess.

Ryan as Romney’s VP

August 11th, 2012 . by economistmom

romney-and-ryan-podium-cnn

Wow!  It looks like the federal budget will be front and center in the presidential campaign after all, with this breaking news that Mitt Romney has picked the chairman of the House Budget Committee, Paul Ryan (R-WI), as his running mate.  (CNN’s live blog on the announcement is here.)

Ezra Klein summarizes the implications well here. I like Ezra’s points about what Romney’s choice of Ryan means for the stark choice that will face voters in Romney-Ryan vs. Obama-Biden:

5. It’s worth recalling how Ryan became a semi-household name. It wasn’t a Republican strategy to put him forward. As Ryan Lizza recounts in his New Yorker profile of Ryan, it was a Democratic strategy to put Ryan forward. Ryan, he writes, “was caught between the demands of the Republican leaders, who wanted nothing to do with his Roadmap, and his own belief that the Party had to offer a sweeping alternative vision to Obama’s. Ryan soon had an unlikely ally, in Obama himself.” While Republicans were trying to keep Ryan quiet, the Obama administration was trying to make him famous. They saw his plans as the clearest distillation of the GOP’s governing philosophy — and they thought it would drive voters towards the Democrats. We’ll know in November whether that was a genius strategy or an epic miscalculation…

7. Ryan upends Romney’s whole strategy. Until now, Romney’s play has been very simple: Don’t get specific. In picking Ryan, he has yoked himself to each and every one of Ryan’s specifics. And some of those specifics are quite…surprising. For instance: Ryan has told the Congressional Budget Office that his budget will bring all federal spending outside Medicare, Medicaid and Social Security to 3.75 percent of GDP by 2050. That means defense, infrastructure, education, food safety, basic research, and food stamps — to name just a few — will be less than four percent of GDP in 2050. To get a sense for how unrealistic that is, Congress has never permitted defense spending to fall below three percent of GDP, and Romney has pledged that he’ll never let defense spending fall beneath four percent of GDP. It will be interesting to hear him explain away the difference.

8. It’s not just that Romney now has to defend Ryan’s budget. To some degree, that was always going to be true. What he will now have to defend is everything else Ryan has proposed. Ryan was, for instance, the key House backer of Social Security privatization. His bill, The Social Security Personal Savings Guarantee and Prosperity Act of 2005, was so aggressive that it was rejected by the Bush administration. Now it’s Romney’s bill to defend. In Florida.

Like it or not, America, we’re going to be talking a lot about deficits, debt, the federal budget, and the fundamental role of government in this election.  While the Ryan pick might not be great for future bipartisanship in developing compromise deficit-reduction plans, it will sure get people talking about, and hopefully thinking more about, what they expect the government to do for them and how they are willing to pay for it.

What Would Really Happen to Tax Burdens Under President Obama vs. President Romney?

August 6th, 2012 . by economistmom

Last week the Tax Policy Center (TPC) released this distributional analysis of the Romney tax plan, exploring how the plan could be made revenue neutral as Romney has claimed it would be. The TPC analysis found that it is impossible to pay for Romney’s proposed additional tax cuts (which are skewed heavily toward the rich) with base-broadening revenue offsets (which according to the Romney plan cannot include increasing the taxation of capital income) without increasing tax burdens on net for most Americans. (I quickly summarized what I took as the main findings of the TPC analysis in my previous post.)

By later the same day the Obama campaign had seized the moment by building the TPC calculations into an Obama “tax calculator” where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney.

The Obama campaign’s tax calculator produces honest numbers based on TPC distributional tables, but its presentation is confusing. It makes Obama tax policy look like it gives tax cuts for everyone, even the rich (which is indeed true relative to current law) and to make Romney tax policy look like it raises tax burdens on the middle class (which is indeed true relative to Obama policy, a different baseline). It seems to purposefully switch the baseline–or march from one to another–to come up with the most politically effective punch line that Romney wants to raise taxes on most Americans. The truth is that both Romney and Obama want to cut taxes by a lot relative to current law; it’s just that on net, Romney will cut taxes relatively more for the rich and less for everyone else (and more on average). The Bush tax cuts that Obama’s calculator touts as the benefits of Obama’s first-term tax cuts are relative to the current-law (no Bush tax cuts) baseline. The Obama tax cuts that would happen in 2013 are also relative to the current-law (no Bush tax cuts) starting point. But the “Romney tax plan” numbers are relative to an Obama policy baseline, accurately labeled in the Obama tax calculator as “compared to President Obama’s plan.” For the vast majority of Americans (the 95 percent or so with incomes below $250,000), the number for “under Romney” will show a tax increase for them. Relative to current law, however, Romney’s tax proposal would cut taxes for the middle class–just not by as much as Obama would. And both Romney and Obama plan to cut taxes for the rich; it’s just that Obama would cut them less than Romney would.

This strikes me as like shopping for a new car and comparing two cars in the dealer’s lot. One car has a sign on it that says it gets 25 miles per gallon (mpg). The car next to it has a sign that says “10 mpg—relative to the first car. ” Maybe for some reason the dealer wants to get rid of the first car more than the second, and that’s why he chooses to emphasize the relative, plus “10 mpg” of the second rather than the absolute 35 mpg that the second car actually gets. Most buyers wouldn’t catch the “relative to” comparison—and would reasonably expect the measures to be based on the same absolute scale (no matter the fine print)—and would thus incorrectly conclude that the second car had (absolutely) poor fuel efficiency when in fact it has relatively better fuel efficiency.

I admit this is not a perfect analogy to the Obama tax calculator, however, because there’s no such thing as negative miles per gallon, and a middle-class family’s tax burden under Romney would be higher than under Obama (so higher relative to Obama policy), but would still go down compared with current law. Conversely, a rich household’s tax burden under Obama policy would be relatively higher than under Romney policy, but would still go down compared with current law. The Obama tax calculator (conveniently) emphasizes how Obama policy in 2013 would compare with current law, because that suggests tax cuts for everyone—even the rich. By switching to the Obama-policy baseline only in the last step of comparing Romney policy to Obama policy, the calculator emphasizes that Romney raises taxes on the middle class (relative to Obama policy), while avoiding calling attention to the fact that Obama raises taxes on the rich (relative to Romney and relative to current policy extended).

For example, the Obama tax calculator highlights these three figures about the tax burdens facing a married, two-child household with $100,000 in annual income—emphasis added:

“Your Tax Savings during President Obama’s First Term, 2009-2012”: $5,600
“Tax Savings Under Obama, 2013”: $3,999
“Tax Increase Under Romney, 2013…Compared to President Obama’s plan…”: $1,339

…but this really means that under Romney this family would still get a tax cut in 2013, compared to current law, of $3,999 - $1,339 = $2,660. In other words, an “apples to apples” comparison of tax cuts measured against the same yardstick (baseline) would compare a $3,999 tax cut under Obama with a $2,660 tax cut under Romney. The smaller tax cut under Romney is because reduced tax preferences (those “base broadeners” aside from those affecting capital income taxation) would be used to pay for further tax rate reductions at the top of the income distribution.

For a household with $500,000 in annual income, the Romney tax change is in the opposite direction, because Romney would cut high-income households’ taxes even further than under President Obama’s plan (which extends the Bush tax cuts except for the highest brackets). The Obama calculator returns these three figures (again, emphasis added):

“Your Tax Savings during President Obama’s First Term, 2009-2012”: $8,676
“Tax Savings Under Obama, 2013”: $8,295
“Tax Savings Under Romney, 2013…Compared to President Obama’s plan…”: $36,319

…and this means that the $500K family would get a $8,295 tax cut under Obama in 2013, compared with current law, but a much larger tax cut under Romney, of $8,295 + $36,319 = $44,614, also compared with current law. A different “apples to apples” comparison could have compared tax changes under both candidates to the policy-extended baseline, in which case there would not be any tax savings under Obama for this $500K household but instead a large tax increase. (This is why the choice of the baseline matters and was not likely random in this campaign material; even President Obama would prefer to avoid showing tax increases, and even on the rich.)

My bigger criticism about the Obama tax calculator is that it ignores the distribution of the burden of deficit financing—as Bill Gale and Peter Orszag emphasized way back during the Bush Administration about the Bush tax cuts. (The lesson from that analysis was that if deficits at least eventually have to be offset by future tax increases or spending cuts, then the distribution of the burden of those future fiscal policy changes should be considered, not ignored, in the policy choice to deficit-finance a current tax cut.) By ignoring the cost of deficit financing any tax cuts (even those “fiscally irresponsible” Bush tax cuts!), the Obama calculator implicitly suggests that there is no cost of tax cuts if you deficit finance them. Instead, the calculator scores a monetary cost if the tax cuts are paid for, but no monetary cost if they are not paid for. This is not the message that encourages politicians to say “ok then, I’ll propose fiscally-responsible tax cuts from now on.”

The Obama tax calculator calculates the benefits of the extended Bush tax cuts without the burden of deficit financing and claims those (ironically) as the good of Obama tax policy. They then use the net burdens of the Romney plan as estimated in the TPC analysis (which average to zero across all households but burden middle income families on net) to claim Romney’s supposedly-paid-for plan raises taxes while the Obama (Bush-extended, deficit-financed) plan reduces taxes.

This gets back to my even broader concern about the Obama campaign’s emphasis in their touting of the TPC analysis. (To be clear, I mean no criticism of the TPC analysis itself here.) The Obama campaign has jumped at the chance to highlight the burden of the implicit Romney revenue offset–which should be criticized because of its adverse distributional effect, but not because it is an offset, nor because it is a base-broadening offset. In my view, the most important and very objective, basic-math lessons of the TPC analysis are (i) we can’t afford the Romney tax cuts, and (ii) it’s not possible to offset the cost of those tax cuts while taking capital income tax expenditures off the table without creating a very regressive tax reform on net. In an ideal world this TPC analysis would lead policymakers on both sides of the aisle to scale back their tax cutting plans and/or restructure the offsets to make for a more progressive package. Unfortunately, the Obama campaign’s political capitalizing on the TPC analysis has probably resulted in the Romney campaign saying to themselves now: “gee, we shouldn’t have proposed a fiscally responsible version of our huge tax cuts for the rich; we should have just said we would deficit finance it.”

In this PBS Newshour segment where Judy Woodruff speaks with one of the authors of the TPC analysis, Bill Gale, and the Tax Foundation’s Scott Hodge, at one point Hodge actually suggests it may be wrong to assume Romney would pay for his proposed tax cuts at all (emphasis added):

SCOTT HODGE: …There are many ways in which Romney could fill out the details of his plan. They of course are not forthcoming with that, because they would like to keep to a big-picture approach. So we have to be very careful about reading too much into this, because it really is not the Romney plan.

(CROSSTALK)

JUDY WOODRUFF: All right, so filling in a lot of assumptions, what about that?

BILL GALE: Let me respond to that.
It’s correct that Governor Romney has not specified all the details of his tax reform plan. He has specified the goodies, the tax cuts, but he’s not specified how he will pay for them. If he would do so…

(CROSSTALK)

SCOTT HODGE: He may not even pay for them. He may decide that we are going to scrap revenue neutrality.

Indeed, why should any politician propose a fiscally-responsible, as opposed to deficit-financed, tax cut then? By offsetting the cost of one’s tax cuts, whether with specific policy or not, your opponent will attack you on the burden of the offset on whichever households would bear that burden. In contrast, if you don’t offset the cost, you can claim all households win.

It’s a shame that Romney’s particular version of base-broadening tax reform might be a bad-enough version such that the more general (and wise) strategy of tax base broadening for deficit reduction—the kind of tax reform recommended by all of the bipartisan deficit-reduction groups—has now been tainted. Both the President’s commission (Bowles-Simpson) and the Bipartisan Policy Center’s task force (Domenici-Rivlin) showed that we can broaden the tax base, lower tax rates, and raise revenue—and yet still maintain or improve the progressivity of the overall tax system. But the TPC analysis of the Romney plan makes clear that going further with tax rate cuts, even beyond extension of the Bush tax cuts, is not feasible in any practical sense if we are not willing to pay for it by giving up the major tax expenditures that currently benefit all taxpayers very broadly, and is not palatable from a distributional perspective if we’re not willing to increase, not decrease, the taxation of capital income.

The TPC analysis of the Romney tax plan should be taken as a good teaching moment to help policymakers on both sides start constructing better tax policy. But both campaigns have just used it to ramp up their political posturing and sharpen their blame games. Let’s hope that this blow to the idea of fiscally-responsible, progressive tax reform is purely superficial and temporary and does not prove deadly.

The Most Important Lesson from the TPC Analysis of the Romney Tax Plan Is Neither What Obama Nor Romney Suggests

August 1st, 2012 . by economistmom

tpc-on-romney-tax-plan-080112

Today the Tax Policy Center (TPC) released this analysis of the distributional effects of Mitt Romney’s proposed tax reform plan, and it got so much (deserved) attention that both President Obama and presidential candidate Romney talked about it.  Too bad both candidates were speaking entirely as candidates and not as policy analysts or even as the supreme policymaker that we will elect one of them to be.

President Obama decided that the report was sufficiently unfavorable to the Romney plan as to make it great campaign speech fodder.  As reported in Politico:

President Obama is set to attack Mitt Romney on Wednesday for pushing tax reforms that would cut taxes for the rich while raising the burden on other taxpayers.

It’s an argument that Obama often makes, but as he speaks in Mansfield, Ohio, it will come with the added weight of a new report from the nonpartisan Tax Policy Center — which is affiliated with the Urban Institute and the Brookings Institution — that backs up his claim.

“Just today, an independent, non-partisan organization ran all the numbers,” Obama is to say, according to excerpts of his speech released by the Obama campaign. “And they found that if Governor Romney wants to keep his word and pay for his plan, he’d have to cut tax breaks that middle-class families depend on to pay for your home, or your health care, or send your kids to college.  That means the average middle-class family with children would be hit with a tax increase of more than $2,000.”

“But here’s the thing – he’s not asking you to contribute more to pay down the deficit, or to invest in our kids’ education,” Obama adds. “He’s asking you to pay more so that people like him can get a tax cut.”

Romney’s response?  As reported by Lori Montgomery in the Washington Post:

The Romney campaign on Wednesday declined to address the specifics of the analysis, dismissing it as a “liberal study.” Campaign officials noted that one of the three authors, Adam Looney of Brookings, served as a senior economist on the Obama Council of Economic Advisers. The other two authors are Samuel Brown and William Gale, both of whom are affiliated with Brookings and the Tax Policy Center.

“President Obama continues to tout liberal studies calling for more tax hikes and more government spending. We’ve been down that road before – and it’s led us to 41 straight months of unemployment above 8 percent,” said Romney campaign spokesman Ryan Williams. “It’s clear that the only plan President Obama has is more of the same. Mitt Romney believes that lower tax rates and less government will jump-start the economy and create jobs.”

But what does the TPC analysis actually tell us–meaning us people who aren’t campaigning to be president–about the Romney tax plan?  It’s well summarized by Figure 2 from the paper, above, which decomposes the bottom line conclusion that a revenue-neutral Romney plan would give generous tax cuts to the rich paid for with net tax increases on everyone else, into two parts:  (i) how much the tax cuts from the tax rate reductions are skewed toward the rich; and (ii) how much the revenue offsets from (Romney-limited) base broadening are skewed toward lower- and middle-income households.  Combined, we would end up with a revenue-neutral (relative to a business-as-usual, policy-extended baseline) and highly “regressive” tax reform, with relative and absolute tax burdens falling for “the rich” (defined here as households with incomes above $200,000–about the top 5%) and increasing for everyone else.

This makes the Romney proposal, specifically, a bad idea, but this should not be taken as a blanket indictment of any kind of tax reform proposal that tries to pay for low (or even lower) marginal tax rates by broadening the tax base.   From a purely mechanical standpoint (leaving aside politics, I mean), both parts of the reform could be modified fairly easily to come up with a revenue-neutral but much more progressive (with average tax burdens rising more steeply with income) tax reform package.  On part (i)–the rate cuts–just don’t cut rates so much (or at all) at the top.  On part (ii)–the base broadeners–just make sure you reduce some of the tax expenditures that currently benefit capital income (which is highly skewed toward the rich) and ideally additionally limit other tax expenditures such that higher-bracket households don’t receive  higher percentage subsidies.  (The President’s proposal to limit itemized deductions to the 28 percent rate is an example of this latter strategy.)  Romney goes wrong on both parts because he chooses to cut tax rates the most for the rich and at the same time refuses to reduce current tax subsidies that produce very low effective tax rates on capital income (and hence the rich).  The TPC analysis explains that taking tax preferences on capital income completely off the base-broadening table (as Romney would do) means that the revenue-raising potential from base broadening is cut by about one third.  So from my perspective, this particular version of a base-broadening tax reform scores poorly on fiscal responsibility grounds and not just distributional grounds.

But it seems that President Obama’s emphasis on the TPC analysis was to underscore that the offsets would imply higher taxes for most of us, even more than to complain about the proposed rate cuts lowering tax burdens on the rich.  So I’d hate for the message heard from the President to be “we shouldn’t pay for tax cuts with base broadeners”–as the shorthand for a more accurate characterization of TPC’s conclusion that “we shouldn’t pay for large tax rate cuts on the rich with base broadeners that fall disproportionately on the non-rich.”

And by the way, the main lesson from the TPC analysis is also not what Romney suggests–that the Tax Policy Center is (suddenly) “liberal” and biased.  ;)

Simon and Matt: More Taxes All Around–or At Least On Our Kids (Along with Everything Else That Will Screw Them)

June 18th, 2012 . by economistmom

I found this very nice video of Simon Johnson explaining to CNN-Money’s Lex Haris why taxes will have to come up for everyone–not just the rich. (Simon’s video was embedded in an also-nice CNN-Money column by Joe Thorndike on the topic of “fairness” and taxing the rich.) Simon explains the basic math that I have emphasized over and over again here: (i) the fiscal gap is just too large to put just on the backs of (even) the rich; and (ii) yes, taxes will have to be part of the solution (no matter what you think about their role in creating the “problem”), because the spending paths are not something we could or would choose to flat-line, even as we try our best to damp them down. (BTW, I’m now reading Simon’s new book on the national debt, White House Burning (with James Kwak), which is excellent–particularly in putting the current problem in historical context and making common-sense recommendations that emphasize that “fiscal sustainability” depends on the paths of both the numerator of the debt and the denominator of the size of the economy.)

And what of the fact that the “Just Raise Taxes” solution is not yet gaining enough traction? Matt Miller explains the consequences in his Washington Post column:

Hear me, Americans under 35!

There’s plenty that divides the parties in this pivotal election — from taxes to drones, from public workers to private equity. But there’s one uber-policy that brings Democrats and Republicans together that doesn’t get the attention it deserves.

That policy involves you, younger Americans. You’re in big trouble. You don’t even know it. You’re busy trying to get a degree, land a job, start a family, save for a home. You don’t follow the news. But trust me — you’ve been taken for a ride by your elders.

The question isn’t whether such talk will stir up generational war. That’s already being waged — and you’re losing. The question is whether you’ll wake up and engage in a little generational self-defense. Let me see if I can motivate you.

How are you being swindled today? Let me count just some of the ways…

There’s no cash for such investments in the future because pension and health-care programs for seniors (plus a bloated Pentagon) take up so much of the budget. At the federal level, seven dollars go to programs supporting elderly consumption for every dollar invested in people under 18. Nationally (after taking account of the fact that most education is paid for at the state and local level), the ratio is still 2 1 / 2 to one.

And that’s just today’s elderly tilt. We have trillions in unfunded liabilities in these programs coming due as more and more boomers retire.

Yet amazingly, both parties would exempt every current senior from participating in the inevitable adjustments in these programs. Paul Ryan and Barack Obama lock arms in agreeing that everyone over 55 must be spared such changes, even though most of these Americans are getting back far more than they paid into the system. And millions are well-off…

The solution for the young people?  Matt (with the help of Alan Simpson) explains you gotta fight fire with fire (emphasis added):

There are answers to these challenges that are fair to young and old alike. But we won’t hear them until younger people wake up to what’s happening.

In 1995, when I was a (younger) generational equity worrywart, I asked then-Sen. Alan Simpson how to fix what was clearly coming. Simpson told me nothing would change until someone like me could walk into his office and say, “I’m from the American Association of Young People. We have 30 million members, and we’re watching you, Simpson. You [mess with] us and we’ll take you out.”

Simpson was right then. He’s still right now.

All this talk about what’s “fair” to burden the rich with, and so little mention of our kids.  That’s what’s really outrageous about the partisan bickering about deficit reduction, spending cuts, and tax increases:  the politicians like to claim they are all about doing what’s right for our kids and grandkids–but when you pay close attention, you see their specific actions don’t match up with their vague words.  I think the kids have to get more involved.  The so-called “grownups” aren’t getting it done.

A Breach in the No New Taxes Wall?

May 27th, 2012 . by economistmom

cracked-brick-wall-with-norquist-head

Rosalind Helderman of the Washington Post reports in Saturday’s paper that a “Faint rift opens in GOP over tax pledge”–referring to the pledge that Americans for Tax Reform’s Grover Norquist has compelled virtually all Republican policymakers to sign.  Helderman explains how the ground seems to be shifting:

In GOP activist circles it is known simply as “the pledge,” and over the past generation it has become the essential conservative credential for Republicans seeking elective office. Of the 242 Republicans in the House today, all but six have signed the pledge.

But now, an increasing number of GOP candidates for Congress are declining to sign the promise to oppose any tax increase, a small sign that could signal a big shift in Republican politics on taxes.

Of the 25 candidates this year promoted by the National Republican Congressional Committee as “Young Guns” and “Contenders” — the top rungs of a program that highlights promising candidates who are challenging Democrats or running in open seats — at least a third have indicated they do not plan to sign the pledge authored by anti-tax crusader Grover Norquist.

Why the change in heart?  For one reason, because the lopsided, no new revenues (not just no new higher tax rates) stance just doesn’t make policy sense to many of these Republicans, who can’t see how spending-side-only approaches are easier than approaches involving a mix of spending cuts and revenue increases:

Republican candidates declining to sign generally indicate that they nevertheless oppose tax hikes. But some chafe against the constraint on eliminating tax loopholes, believing those restrictions limit Republicans’ ability to negotiate seriously with Democrats on a deal to tackle the nation’s mounting debt.

In Pennsylvania, Republican state Rep. Scott Perry said he was disappointed to see his party’s presidential candidates — all but one of whom signed the pledge — uniformly indicate in a debate last year that they would reject a deficit reduction deal that paired $1 in revenue increases for every $10 in spending cuts.

“I just think it’s imprudent to hem yourself in where you can’t make a good agreement that overall supports the things you want to do,” said Perry, who said he generally opposes tax increases but recently won a Republican primary in a conservative district over candidates who had signed the pledge. “I just don’t see what the point of signing would be for me. .?.?. I’ve got a record, and everyone who wants to know where I’ve been and where I’m at can look to that.”…

“I don’t want to get tied up in knots,” said Richard Tisei, an NRCC Young Gun and former Republican state senator in Massachusetts who is running against Democratic Rep. John F. Tierney. “If there’s a loophole that can be closed that ends up generating additional revenue that can be used specifically to pay down the national debt, I’m not going to lose sleep. And I don’t want to be bound by the pledge not to close it.”

The refusals among some new candidates come as a handful of incumbent Republicans who signed the pledge when they first ran for office also are publicly rejecting it.

Freshman Rep. Scott Rigell (R-Va.), who signed the pledge in 2010, recently posted an open letter to constituents indicating that he would not renew the promise as he runs for reelection. He said he fears it could stand in the way of an everything-on-the-table approach to tackling the mounting debt.

“Averting bankruptcy requires us to grasp the severity of our fiscal condition and summon the courage to speak boldly about the difficult steps needed to increase revenues and sharply decrease spending,” he wrote.

For another reason, it seems that voters don’t find a candidate’s blind allegiance to one man’s idea of the best fiscal policy very attractive:

[A]fter months of Democratic attacks on ATR and Norquist as obstacles to a debt deal, some Republican candidates report that they are hearing from more voters who want them to reject the pledge than the opposite.

Gary DeLong, a member of the Long Beach City Council who is labeled a “contender” for a House seat by the NRCC, said he is routinely encouraged on doorsteps and at town halls and candidate coffees to avoid the pledge.

Voters “ want me to represent them and not special interests,” said DeLong, who will compete next month in California’s unusual mixed-party primary for one of two spots on the November ballot in a newly drawn district.

What is it that has kept so many Republican policymakers so enthralled with Norquist, despite all the evidence to the contrary that “no new taxes” just makes no sense–and (perhaps the most puzzling part) despite Norquist’s lack of charisma?  Senator Coburn has certainly been working to get his colleagues to snap out of the Norquist trance; the Post article concludes with this:

Sen. Tom Coburn (R-Okla.), a fiscal conservative who has tangled with Norquist, said he believes candidates are starting to understand that the ATR pledge’s power has been exaggerated by Norquist and the media and that Norquist is wrong when he asserts that it is nearly impossible to win a Republican primary without signing the pledge.

“That’s him patting himself on the back,” Coburn said. “And I think it’s bull crap.”

[UPDATE 3 pm Sunday:] And this just out from another Republican who’s even more fed up than Coburn about Norquist… Former Senator and co-chair of President Obama’s fiscal commission, Alan Simpson, had this to say today on CNN’s Fareed Zakaria GPS (as reported on Talking Points Memo):

“For heaven’s sake, you have Grover Norquist wandering the earth in his white robes saying that if you raise taxes one penny, he’ll defeat you,” [Simpson] added. “He can’t murder you. He can’t burn your house. The only thing he can do to you, as an elected official, is defeat you for reelection. And if that means more to you than your country when we need patriots to come out in a situation when we’re in extremity, you shouldn’t even be in Congress.”

Obama vs. Romney on the Economy: Substance vs. Spirit

May 22nd, 2012 . by economistmom

obama-vs-romney-on-economy-washpost-052212

Very interesting poll results reported in today’s Washington Post.  A snip of the graphic is posted above.  Note that President Obama continues to reign in the overall inspirational category:  if the question is how excited one gets about supporting the candidate and knowing that the candidate will support and understand you (and your economic problems and concerns), Obama wins hands down.  But if the question is how well the candidate has actually done or is expected to do on objective, measurable economic goals, Obama and Romney look virtually the same.  If the President actually wins reelection, this suggests that he could and probably should go bolder in his second term to put the money where the confidence in him is–to come up with and follow through on the policies that are consistent with all of his inspirational talk.  If Romney wins, or maybe rather, in order for him to win, the poll suggests he has a lot of PR and perhaps substantive policy work to do to convince Americans that his economic policies will be good not just for this abstract concept of “the economy” or other people’s “jobs,” but good for Americans very broadly as well.

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