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Economic View: Budget Showdown Offers an Opportunity for Progress

November 12, 2012 by Leave a Comment

LOOMING CHANGES ARE BAD POLICY Though our long-run budget problems are enormous, a permanent dive over the cliff isn’t the answer.

Cold-turkey deficit reduction would cause a significant recession. A recent analysis by the Congressional Budget Office estimated that going headlong over the cliff would cause our gross domestic product, which has been growing at an annual rate of around 2 percent, to fall at a rate of 2.9 percent in the first half of 2013. I suspect that this estimate is, if anything, too optimistic. Many private-sector analysts predict a longer, deeper recession if we take the plunge. But even the C.B.O. number suggests that the resulting recession would be worse than those in 1990 and 2001.

Going over the cliff would also be a poor way to deal with our long-run deficit problem. Too much of the deficit reduction comes from tax increases — particularly on middle-class families whose incomes have stagnated for the past decade. And the spending cuts are haphazard and do nothing to deal with the fundamental driver of our long-run budget problems: rising government health care spending.

DON’T KICK THE CAN DOWN THE ROAD Just as going permanently over the cliff isn’t the answer, neither is wimping out. Pre-emptively extending all of the Bush tax cuts for another year and postponing the spending cuts would be a mistake. The cliff is a unique opportunity to forge a genuinely bipartisan solution to our budget problems. Republicans have strong views about how they want to reduce the deficit. The threat of automatic tax increases and military spending cuts gives Democrats a fair shot at negotiating for their priorities as well.

As bad as going over the cliff — and staying over it — would be, going over for a few weeks or even a few months wouldn’t be catastrophic. The Treasury has some discretion over how quickly the tax withholding tables are changed, so some of the tax increases might not be felt for a while. And since the result of a stalemate is budget consolidation, going over the cliff temporarily is unlikely to unnerve bond markets.

SOME TAXES NEED TO RISE A brief fall off the cliff would free lawmakers from the straitjacket of having signed Grover Norquist’s pledge never to raise taxes. Once taxes have returned to their Clinton-era levels, a partial reinstatement of the Bush tax cuts would count as a tax cut. And a brief plunge would also show that the president is serious about raising additional revenue.

And he should be. Every serious bipartisan budget plan — Bowles-Simpson, Rivlin-Domenici, the Gang of Six — includes additional revenue. That makes sense. With a long-run budget as out of balance as ours, the only way to solve the problem while spreading the pain widely is to work along every possible margin.

Democrats should be flexible, however, about the form of tax increases. If Republicans want to cut exemptions and loopholes more and raise marginal rates less, that should be on the table. What shouldn’t be contemplated is redistributing tax burdens away from the wealthy and toward the middle class. And the additional revenue needs to be substantial. The Bowles-Simpson proposal that revenue be about $200 billion a year higher should be a guidepost for the size of a sensible tax component.

EMBRACE ENTITLEMENT REFORM Republicans in Congress will likely insist that reforms to Medicare, Medicaid and Social Security be part of any budget deal. Democrats should meet them partway. It will be impossible to get our long-run deficit under control without slowing entitlement spending. Rather than fighting all changes to these programs, Democrats should work to preserve their core functions and protect the most vulnerable.

For example, in a previous column, I described how replacing Medicare’s fee-for-service model with accountable care organizations could help reduce costs while maintaining quality. And with the president’s health care law now likely to go into effect on schedule, it’s possible to consider gradually raising the eligibility age for Medicare. This would lower government health care spending and encourage people to continue working longer — and, thus, to continue paying taxes.

Another entitlement program needing attention is Social Security Disability Insurance. It provides essential support for people unable to work, and will be even more important if we raise the Medicare eligibility age. But the current system is expensive and inefficient. The rolls have surged in recent decades, and the system discourages part-time work and moves to less-demanding jobs. Economists have proposed innovations that could allow more workers to stay in the labor force — thus slowing spending growth and improving the security and well-being of disabled workers.

PRESERVE VALUABLE PUBLIC SPENDING To deal with the deficit, we’re going to have to trim other types of spending as well. My plea is to protect public investment. Infrastructure, job training and basic scientific research are the country’s seed corn — the spending that allows us to be more productive and prosperous in the future.

A related point involves near-term jobs measures. Because immediate severe austerity would be terrible for the economy and for unemployment, the president needs to gain support for including job-creation measures in an overall fiscal reform package.

One such measure that he probably shouldn’t embrace is an extension of the payroll tax cut legislated in late 2010. That cut, like its predecessor in the 2009 Recovery Act, was useful, but less effective than expected for stimulating consumer spending. And if we extend the cuts for a fifth year, I fear that they could become permanent.

Far better to focus on temporary infrastructure spending, which would create jobs today and leave us with something of lasting value. One way to achieve bipartisan support might be to give Republicans in Congress substantial control over the specifics of the spending. Our infrastructure needs are so large that we shouldn’t be fighting over which to address first.

IN the seven weeks before Jan. 1, not even the best-functioning political system could enact the kind of comprehensive fiscal plan I’ve outlined. What policy makers can do is agree in principle on the broad components of a plan and the top-line numbers for deficit reduction in each area. With that vote in hand, it would be reasonable to enact temporary measures to avoid the fiscal cliff while Congress negotiates the details of a comprehensive agreement.

A child care book I read as a new mother encouraged parents not to dread nighttime feedings, but to embrace them as another chance to nurture their babies. We should view the fiscal cliff the same way — not as a disaster to be avoided, but an opportunity to be embraced. It’s a chance for Congress and our re-elected president to nurture the economy and to protect the future of all Americans.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Article source: http://www.nytimes.com/2012/11/11/business/budget-showdown-offers-an-opportunity-for-progress.html?partner=rss&emc=rss

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Dynamics of G.O.P. Race Spur Romney to Hedge on Flat Tax

October 24, 2011 by Leave a Comment

Lately, though, his tone has been more positive. “I love a flat tax,” he said in August.    

Flat-tax plans have come and gone before, and analysts note that they have tended to lose support once they come under scrutiny. But Mr. Romney’s support of the concept of a flat tax underscores the tightrope he is walking as taxes become a larger focus of the Republican presidential race and he faces rivals’ accusations of inconsistency on the issues.  

That is because Mr. Romney also is always careful to emphasize — as he did in his comments two months ago — that he would never support any plan that hurts the middle class and helps the wealthy. But by replacing the graduated income tax with one single rate everyone pays, that is precisely what flat tax plans generally do, at least those that try to generate anywhere near the same tax revenue. 

Politically, Mr. Romney’s favorable comments about flat taxes speak to the deep frustration many Republican voters share about the current system. While Herman Cain’s “9-9-9” tax overhaul proposal has been criticized by his rivals because it includes a new national sales tax in addition to a flat income tax, the catchy plan has nonetheless helped vault the relatively unknown businessman to the fore of the party’s field.  Gov. Rick Perry of Texas is now trying to channel that same energy to rescue his campaign, and this week he is expected to unveil a flat-tax proposal resembling the one put forward 15 years ago by Mr. Forbes, who is advising him.

But flat taxes, despite Mr. Romney’s favorable comments, are not part of his campaign plan, which calls for extending Bush tax cuts and lowering corporate tax rates. Some conservative tax activists say his murky flat-tax stance highlights a broader complaint: his lack of consistency on conservatives’ core issues, like abortion.

“His problem is that people don’t have confidence that they know what he believes in, and I think there is a pretty good reason for that,” said Chris Chocola, a Republican former congressman from Indiana who is president of the Club for Growth.

Grover Norquist, head of Americans for Tax Reform, says he sees Mr. Romney’s shift as part of a broader consensus among the field to move toward a flatter tax structure. But with that movement gaining strength in the Republican Party, he said, Mr. Romney’s past critical comments about flat taxes are “awkward” and “a little tough to explain.”

Dick Armey, the Texas Republican and former House majority leader who was an early flat-tax proponent, said he believed Mr. Romney was doing “the conventional, orthodox, old traditional Republican thing: you’ve got to give it lip service but ‘I don’t want to do much heavy lifting.’ ”

Romney aides dispute the criticism and say his objection to the Forbes plan was specific: that it would raise taxes on the middle class. Gail Gitcho, a Romney spokeswoman, said there was “no inconsistency” in his position. She said he could support a flat tax that did not raise taxes.

But when asked about the many flat-tax plans that have been floated in the last two decades, Romney aides said they could not recall any that might pass muster with Mr. Romney’s requirements. Nor would they venture the outlines of a new plan that might meet his test. They also do not dispute the notion that a flat tax could never generate the same amount of tax revenue while also maintaining the same relative burdens on the wealthy and the middle class.

“You can have a flat-tax system that retains elements of progressivity, but I can’t say whether it would retain the same level of progressivity and same level of revenue,” one aide said.

Independent analysts say it is hard to imagine a flat-tax plan that would not be very regressive compared with the current system. Right now, the highest tax rate for many middle-income earners is 15 percent, while the richest Americans are subject to a 35 percent rate on much of their income.

“If you’re going to get the same amount of revenue, someone has to pay the price,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.  “The rich pay less, the poor pay nothing, and the middle class bears the burden.”

Mr. Norquist and Mr. Armey see more support now for a flat tax than ever before. But Mr. Romney’s hesitation may ultimately prove more popular with many voters if the arc of this election cycle’s flat-tax proposals follows the pattern of some past years.

“The people with big incomes are going to see big tax cuts, the low-income people are going to see big tax increases, and suddenly that doesn’t seem fair,” Mr. Williams said. “You start to see that kind of thing, and suddenly the bloom is off the rose. When people start to look at what it’s going to mean for them particularly, they say, ‘Wait a minute.’ ”

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Looking Closer at Taxes on the Rich

August 16, 2011 by Leave a Comment

With the budget deficit growing and tax rates at a 60-year low, one question will remain near the center of the political debate in the coming months: Should the federal government raise taxes on the rich?

Warren E. Buffett, the billionaire investor known as the Oracle of Omaha, pushed the issue to the forefront this week by urging members of the new Congressional supercommittee on deficit reduction to stop “coddling” him and other affluent Americans and raise their taxes.

In an opinion article in The New York Times on Monday, Mr. Buffett said he paid just under $7 million in federal payroll and income taxes last year, about 17 percent of his income, a lower percentage than anyone else in his office.

Echoing comments he has made in the past, he called on Congress to make the tax system more fair by rolling back the so-called Bush tax cuts on people who earn more than $1 million a year and on income from capital gains and dividends. He would also close the loophole allowing hedge fund managers to be taxed at a lower rate.

Whatever the political viability, his proposal would put a significant dent in the nation’s budget shortfall. Based on projections by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury, the tax increase on all three fronts would generate as much as $500 billion in new revenue over the next decade — about a third of what the Congressional committee is supposed to cut from the deficit.

“It’s not going to solve the long-term budget shortfall all by itself,” said Eric Toder, an economist at the nonpartisan Tax Policy Center. “The only way to do that is to have broader tax increases or reduce entitlements. But it could be an important piece of the puzzle.”

Because of Mr. Buffett’s high visibility and wealth — Forbes estimates his net worth at $50 billion, making him the world’s third-richest person — his comments brought a torrent of reaction. President Obama, who has fought unsuccessfully to increase taxes on the nation’s highest earners, cheered Mr. Buffett’s remarks during his Midwestern bus tour on Monday, saying that it was only fair that the spending cuts be balanced by tax increases on the wealthy.

Conservative bloggers and commentators brushed aside the proposals as grandstanding or as a gimmick to usher in a middle-class tax increase, and Pat Buchanan, a commentator on CNN, suggested that Mr. Buffett visit the section of the Internal Revenue Service Web site that accepts donations.

Republicans have been united in their opposition to tax increases, and gave Mr. Buffett’s proposals a chilly reception. All six Republican members on the committee have taken a no-tax pledge. Representative Kevin Brady, a member of the Ways and Means Committee and a Texas Republican, flatly rejected Mr. Buffett’s ideas.

“This is not a serious solution for deficit control or getting this dismal economy on its feet,” Mr. Brady said. “Economic growth does not follow a tax increase. So as much as I respect Mr. Buffett, his proposal fails on virtually every level.”

Despite the intense antitax sentiment that has helped the rise of the Tea Party movement since Mr. Obama took office, tax rates in the United States are at their lowest level since Harry Truman was president.

In 1950, the top income bracket had a 91 percent rate; today it is 35 percent. Mr. Buffett called for two new tax brackets for high earners — for income above $1 million a year and another above $10 million. While Mr. Buffett’s proposal did not suggest a rate, the Tax Policy Center has estimated that a 50 percent tax rate on income over $1 million would raise $48 billion over the next decade.

But one of the biggest factors reducing the comparatively low tax rates on investment income is the 15 percent for dividends, capital gains and “carried interest,” the money paid to hedge fund managers and private equity investors. Eliminating the carried interest provision alone would raise $21 billion over 10 years, according to the Congressional Budget Office.

And restoring capital gains and dividend rates to the levels before the Bush tax cuts — when capital gains were taxed at a top rate of 20 percent and dividends were treated as ordinary income — would bring the Treasury an additional $340 billion over the next decade.

Any of those measures would face intense lobbying and a battle in Congress. Indeed, Democrats were unable to roll back the carried interest tax break or the Bush tax cuts on the wealthy even when they controlled both houses of Congress. But with the prospect of severe spending cuts and another round of bitter deficit negotiations in Washington, proposals like Mr. Buffett’s call to raise taxes on the affluent are likely to become an increasingly urgent part of the discussion.

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Economix: Are the Bush Tax Cuts the Root of Our Fiscal Problem?

July 26, 2011 by Leave a Comment

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Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Whether revenue should play any role in deficit reduction is at the root of the fiscal impasse between Congressional Republicans and President Obama. One factor underlying the hard-line Republican position that taxes must not be increased by even $1 is their assertion that the Bush tax cuts played no role in creating our deficit problem.

Today’s Economist

Perspectives from expert contributors.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Few people remember that a major justification for the 2001 tax cut was to intentionally slash the budget surplus. President Bush said this repeatedly during the 2000 campaign, and it was reiterated in his February 2001 budget document.

In this regard, at least, the Bush-era tax cuts were highly successful. According to a recent C.B.O. report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.

Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.

Congressional Budget Office

These figures are conservative insofar as revenue is concerned, because the higher interest payments required by the deficits created by the Bush tax cuts are allocated to spending. If one allocates the interest cost proportionally, the Bush tax cuts were responsible for increasing the debt by $3.2 trillion — 27 percent of the fiscal deterioration since 2001.

These facts notwithstanding, it has become a Republican talking point that the Bush tax cuts did not, in fact, reduce revenue at all — something the Bush administration itself never asserted.

Last year, Mitch McConnell of Kentucky, the Senate minority leader, said: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.”

On June 10, former Minnesota Gov. Tim Pawlenty said, “Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts or other tax cuts, they always produce an increase in revenue.”

On July 10, Senator Jeff Sessions of Alabama said of the Bush tax cuts, “The revenue went up every single year after those tax cuts were put in.”

And on July 15, Representative Trent Franks of Arizona said, “Even the much-maligned Bush tax cuts brought in an additional $100 billion a year to government coffers.”

It is hard to know where these totally erroneous ideas come from. Federal revenue fell in 2001 from 2000, again in 2002 from 2001 and again in 2003 from 2002. Revenue did not get back to its 2000 level until 2005. More important, revenue as a share of G.D.P. was lower every year of the Bush presidency than it was in 2000.

Congressional Budget Office

What will happen at the end of next year when the Bush tax cuts expire is already a matter of intense budget negotiations. Perhaps the whole point of the apparent Republican disinformation effort to deny that the Bush tax cuts reduced federal revenue is to make the reverse argument next year — allowing them to expire will not raise revenue.

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