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Can Tax and Social Security Heresy Lead to a Budget Deal?
Posted by: | CommentsIdeological heresy may not quite be breaking out all over Washington, but in the growing debate over the burgeoning debt, there are helpful hints of apostasy. And hope of a bipartisan consensus for responsible deficit reduction may lie atop those tiny waves of dissent.
The latest whiff of hopeful heterodoxy comes from three Republican senators– Saxby Chambliss of Georgia, Mike Crapo of Idaho, and Tom Coburn of Oklahoma. In quiet backroom negotiations and in a remarkable public exchange of letters with Grover Norquist of American for Tax Reform, the three lawmakers suggest that they might—might—support revenue-raising tax reform as part of a broader deficit reduction deal.
All of this is happening in code, and with classic Washington indirection. The three lawmakers—none of whom would ever be confused with a Rockefeller Republican—are the GOP half of a small bipartisan group of senators that is trying to develop a compromise deficit reduction plan. As members of President Obama’s deficit commission, Crapo and Coburn endorsed the proposal offered late last year by panel chairs Erskine Bowles and Alan Simpson. That plan included a call for a broad-based tax reform that would lower rates, eliminate most tax preferences, and raise about $800 billion in revenues from 2015 thr0ugh 2020.
When word spread that the three were working with Senate Democrats to design a bipartisan budget that would reduce spending, restructure Social Security, and reform and raise taxes, Norquist pounced. The three senators, he wrote, “were implicated as parties to a bipartisan budget deal containing a net tax increase.”
Norquist, the Tomás de Torquemada of tax policy, accepts no breach of his “Taxpayer Protection Pledge,” a vow to never raise taxes under any circumstances. According to the ATR website, the pledge has been signed by 237 House members and 41 senators, including Chambliss, Crapo and Coburn. Torquemada, you may recall, burned thousands of non-believers at the stake in the 15th century and was fondly known as “the hammer of heretics.”
Within hours, the three lawmakers responded with a very carefully written letter of their own. “Our pledge,” they wrote, “is to protect taxpayers, not special interests. To do so we must analyze every aspect of the federal budget, including the tax code.” On the other hand, they asserted their belief that “tax hikes will hinder, not promote, economic growth.” Finally, they included the usual disclaimer: The news story that reported their participation in budget talks provided only “rumored details.”
Before the day was out, Norquist gave the three his blessing. Their letter, he said, was “very encouraging.”
Yet, Chambliss, Crapo, and Coburn (who is said to have a good working relationship with Obama) never did rule out new revenues in a consensus budget deal. And Norquist seemed uncharacteristically conciliatory. Maybe it is the near-arrival of spring, but I find this encouraging.
Of course, no bipartisan agreement will be reached with GOP heterodoxy alone. The three Democrats in the Senate’s gang of six—Budget Committee Chairman Kent Conrad (D-ND), Virginia’s Mark Warner and, most importantly, #2 Senate Democrat Dick Durbin (D-IL) have gone out on their own limb by expressing a willingness to tackle Social Security. This issue generates as much heat on the left as tax hikes do on the right. Liberal bloggers have already dubbed them the “cat food caucus” for their trouble.
These six pols– who have yet to reach consensus even among themselves—have a long way to go before they can round up the 50 or 60 votes necessary to pass a serious budget in the Senate, to say nothing of getting it out of the House. And, as regular readers of TaxVox know, I have been extremely skeptical of a big budget deal before the next presidential election. Still, these bits of rebellion against party orthodoxy matter. They are small first steps. But they are steps.
Why Obama Punted on Deficit Reduction
Posted by: | CommentsThe latest Republican talking point is that President Obama is “punting” on his fiscal responsibilities by not proposing deep cuts in Medicare and Social Security. It is true that Obama’s 2012 budget was exceedingly timid when it came to deficit reduction. But Obama’s GOP critics ooze hypocrisy when they accuse him of fiscal irresponsibility.
This, after all, is the party that just last year, in its zeal to defeat “Obamacare,” demonized as “death panels” the president’s modest effort to constrain future cost growth in Medicare. And it is the party that continues to demand the 2001 and 2003 tax cuts be made permanent for all.
As usual, Republican message discipline is impressive: “We got a punt,” said House Budget Chairman Paul Ryan (R-WI) of the Obama fiscal plan. “When it comes to the real issues facing our country, he just punted,” said House Speaker John Boehner. “Obama Punts the Debt to the GOP” read a headline in the GOP mouthpiece The Weekly Standard. And so on.
The Republican death panel argument has taken on a curious double-meaning. Initially, it was their criticism of a provision in the 2010 health law that allowed Medicare to pay doctors for end-of-life discussions. Then, it morphed into the GOP’s objection to an independent board created to recommend Medicare cost savings to Congress.
The combined messages were a huge political winner for the GOP in 2010. In the non-presidential election year of 2006, voters 65 and older split evenly between Republican and Democratic congressional candidates. In off-year of 2010, GOP candidates won this group by 21 percentage points. The major reason according to pollsters: seniors’ fear of Medicare cuts under Obamacare, a worry aroused by the same GOP leaders who now criticize the president for not proposing Medicare cuts.
Obama is no fool. In the wake of 2010 election debacle, it is absurd to expect him or congressional Democrats to stick out their necks again on Medicare—to say nothing of Social Security. By choosing to trash the health law’s Medicare constraints for short-term political gain, Republicans dealt a serious blow to deficit reduction efforts.
How steep a hill must those who want to trim Medicare climb? According to a recent poll by the Kaiser Family Foundation, nearly half of those surveyed oppose any reductions to the program, which accounts for one-sixth of all government spending.
Obama may have a bit more room to maneuver on taxes, but not much. Polls suggest Americans support tax increases on high-earners to reduce the deficit. But the public opposes other new revenues. And last December, of course, Obama seemed unwilling to engage on the tax issue at all. The president, who vows to never raise taxes on individuals making less than $200,000 (or couples making less than $250,000) agreed with the GOP to extend the Bush-era tax cuts for all for two more years.
The GOP leadership, boxed in by its own “no new taxes” pledges and pressure from the tea party, shows no sign of budging on revenues. Obama has boxed himself in on taxes. And why would any but the most naive Democrat unilaterally propose unpopular Medicare cuts without so much as a hint of GOP movement on revenues?
Thus, Obama and the GOP do budget battle on the exceedingly narrow ground of non-security domestic spending—roughly 12 percent of government. In this environment, small-government, anti-regulatory Republicans get what they want: big cuts in highly visible (though relatively small) programs. And Hill Democrats get what they want—the opportunity to rip the GOP for allegedly increasing the suffering of those in need.
A small bipartisan group of senators is struggling mightily, with quiet White House backing, to find a way out of this maze. But given recent political history, it is hard to see how they’ll succeed.
Where Will New Revenues for Deficit Reduction Come From?
Posted by: | CommentsIf Washington is going to need new tax revenues to bring the deficit under control—which it inevitably will– I increasingly wonder where the cash is going to come from. If you listen to what President Obama has been saying in recent days, it appears that while corporations and nearly all individuals and families would avoid any tax hit at all, a handful of high-income households would get socked with major increases.
These tax hikes would be so big, in fact, that top-bracket taxpayers might end up paying a rate of 67 percent on ordinary income and nearly 50 percent on capital gains.
Since proposing his 2012 budget, the president has laid out three goals: He wants to reform the corporate income tax, but in a way that raises no more money than the current code. He’s repeated his long-standing vow to never raise taxes on individuals making $200,000 or less (or couples up to $250,000). Thus, he’d exempt 96.5 percent of households from any tax hikes. And despite those self-imposed constraints, he also wants to dramatically reduce the long-term deficit.
As a result, a relative handful of individuals and families (fewer than 6 million) would foot the entire revenue bill for deficit reduction. The pain of spending cuts would be distributed very differently, of course.
How big would these tax hikes have to be? To find out, my Tax Policy Center colleague Rachel Johnson crunched some rough numbers. Although Obama has never quite set a specific deficit reduction target, let’s assume his goal is fiscal balance. And let’s say Obama would get there with the same formula as his fiscal commission—two-thirds of deficit reduction from spending cuts and one-third from taxes.
To reach balance in 2020, Obama would have to reduce the deficit by $735 billion in that year alone. Using the two-thirds/one-third formula, the tax hike would be about $245 billion.
Also, keep in mind that to get the deficit down to $735 billion, Obama is already assuming the Bush era tax cuts expire after next year for high earners and new taxes in the health law kick in. That means those folks will already be paying a top tax rate of 39.6 percent on ordinary income as well as higher rates on capital gains and dividends. Even after that, the top 3.5 percent of earners would be hit with an additional average annual tax hike of more than $42,000.
These folks are doing quite well, thank you, making an average of well over a half a million dollars a year after taxes. And they’ve been big beneficiaries of tax cuts over the past decade. Still, their incomes would fall by 7 percent, on top of the cut in incomes of 2.5 percent to 4 percent they’d face with the expiration of the 2001 and 2003 tax cuts.
If they had to pay just through higher rates, the top bracket on ordinary income would rise to more than 67 percent and the rate on gains would approach 50 percent. Note to president: This isn’t going to happen.
Among the oddities of this policy: While corporations would, on average, pay no more in tax than they do today, nearly one million successful businesses that report their income on individual tax returns would get clobbered. But rather than writing a bigger check to the IRS, many firms would simply reorganize themselves as corporations, especially if Congress also slashed the corporate rate below today’s 35 percent.
Perhaps budget balance isn’t really the goal for Obama and Congress. Maybe they’ll be happy with a long-term deficit of 3 percent of Gross Domestic Product–a level many economists believe is sustainable since the debt would be growing no faster than the economy. Or perhaps some future budget deal will rely even more heavily on spending cuts (though that seems pretty unlikely as long as Democrats have some say in the matter). In those cases, the burden on high-earners may be eased.
But if Obama and Congress are serious about balancing the budget, they are not going to get there by squeezing tax revenues from just a small sliver of households.