freeforall blog is restarting

I have restarted my blog freeforall at www.donaldhtaylorjr.com. Please come and follow along there.

POTUS and Simpson-Bowles

Jackie Calmes with an interesting piece on President Obama and the Fiscal Commission report.

In my book Balancing the Budget is a Progressive Priority, coming out in April 2012 from Springer, I write that I think the President made a mistake in not embracing the Fiscal Commission report. This doesn't mean that I think his embrace would have meant it would have passed. In fact, there is plenty of evidence that Republicans would oppose Obama on just about anything. However, there are several ways in which President Obama embracing the report would have helped politically, as well as in policy terms (maybe).

• The Fiscal Commission report assumes the implementation of the Affordable Care Act, and identifies next steps. Republicans have gotten away with only being clear on what they are against on health reform, and have not coalesced around a replacement plan. Embracing the Fiscal Commission plan could have made it harder for Republicans to get away with only being clear about what they are against.
• The tax reform approach offered in the report raises around $2 Trillion in taxes over 10 years. While this plan was noted as being too conservative when it first came out, it raises more in taxes than any other plan that has come out. It raised far more in taxes that the outlines of the 'near deal' between Speaker Boehner and the President.
• The goal posts have moved 'right' on almost every issue since the initial release of the plan. For example, the Fiscal Commission plan does not propose raising the Medicare age, but that was a part of the potential Boehner/Obama deal, and momentum for this idea has increased.

As the Calmes piece notes, the Fiscal Commission report has remained in the mix, and it is the yardstick to which most any proposal put forth is compared. I think there is a sense in which to eventual grand bargain is likely to look a great deal like the Fiscal Commission report, the question is whether such an agreement can be made short of some sort of economic calamity or not. My book tries to make the Progressive case for seeking such a deal sooner, rather than later.

Bigger tax reform deal easier than smaller?

Steve Bell makes the point that a corporate tax reform is best done alongside a reform of the individual income tax code as well. President Obama released a proposal for corporate tax reform yesterday that seems to have been viewed cautiously as a reasonable step in many quarters that signals interest in tax reform while acknowledging that a big step like that is doubtful before the 2012 election.

It adopts the proposed rate of 28% (down from 35%) suggested by the Fiscal Commission. It is instructive that focusing on the politically charged issues related to oil and gas companies and private jets can only reduce the rate so much. Going lower would require more fundamental changes in how corporations are able to deduct the expenses of doing business.

I have suggested ending the corporate income tax and simply treating dividends and capital gains as normal income, which would represent a large increase in the tax rate for these sources of income for high income persons. The logic of having a lower tax rate on capital gains and dividends is that corporations have already been taxed. However, if we were going to take a huge step like ending, or seriously lowering the corporate income tax, it would only make sense to do so along side an overhaul of the individual tax code to make sure ending/lowering the corporate tax rate doesn't simply drive more use of deductions, credits and exemptions in our current personal income tax code to shield corporate income (think: all the aspects of the current schedule C).

Regardless of what proposal you prefer on corporate tax reform, a key fact to keep in mind is that such taxes have only raised between 10-13% of total federal receipts (~2-3% of GDP) for the past 30 years. It has not been a huge source of federal revenue for some time, and I doubt it ever will be again.

Deal on health reform key to sustainable budget

Someone who wanted to write about my book asked for a 200 word summary on the next steps after the Affordable Care Act that are the heart of my book Balancing the Budget is a Progressive Priority. Here they are:

Health care costs are the biggest obstacle to a sustainable budget, and what our country most needs is a bipartisan way forward to address the inter-connected problems of cost, coverage and quality. This is what I think a bipartisan outcome would look like if the parties actually negotiated:

·         Federally guaranteed, universal catastrophic coverage with more insurance available in exchanges. This would render the individual mandate moot

·         Modify the tax treatment of employer provided insurance

·         End Medicaid by transitioning all dual eligible costs to Medicare, and buying private gap policies for other beneficiaries via exchanges

·         Enable Medicare to become an active purchaser of care

·         Enact comprehensive medical malpractice reform

·         Adopt a cap on overall federal health care spending, with a payroll tax based fail safe that is triggered if specified savings are not achieved

This list includes policy options that I think are clearly warranted along with others that I think are more political in nature. However, that is what we most need, a political solution that provides both “sides” with some credit, but most importantly, gives them both responsibility for moving ahead with the hard work of developing a sustainable health care system.

 **********

As an aside, if you hear a politician talking about our need for a long range balanced budget, you should wonder about their health reform plan. If they don't have one, then they have no plan for how our country ever having a balanced budget again. If they have a plan, ask your self if it can get 60 votes in the Senate, 218 in the House and be signed by this or any President. If no, then they don't have a plan, they have a fantasy. The Affordable Care Act has the benefit of being law, and it is the only reform vehicle we have or are likely to have in the near future. It can be tweaked in small or large ways.

More on walking and chewing gum

Christina Roemer in today's New York Times argues that we need much more in the short term to try and stimulate our economy, while beginning to take credible long run steps to address our budget deficit. In short, walking and chewing gum at the same time. From the prologue to my book Balancing the Budget is a Progressive Priority:

The decision by Standard and Poor’s to downgrade the long term U.S. debt to AA+ from AAA status seems to have been triggered by the political theater we just witnessed, as well as the policy “no man’s land” into which we have arrived. For all the bluster about the deficit, the debt ceiling deal did not address the primary drivers of our long term problem: a tax code that cannot raise the revenue necessary to pay for any plausible level of overall spending, and health care costs.

We have plenty of short term problems that are going unaddressed as well. A quick look at the employment reports of the past year show that if we hadn’t lost government jobs the unemployment rate would be a percentage point lower, there is growing evidence that some sort of mortgage relief will be required to unstick the housing market, and unmet infrastructure needs to enable our economy to thrive in the 21^st Century abound. Any short term economic intervention and investment seems crowded out by the noise of the debt ceiling debate and the quietness of the action so far undertaken to address the nature of the long term problem. We need to be able to walk and chew gum at the same time, but now we appear unable to do either.

The book provides a detailed outline of what the long run next steps in health care reform should look like, along with suggestions for tax reform and Social Security. It does not have to be either/or.... 

The President's Plan

President Obama released an economic growth and deficit reduction plan that he says would reduce the deficit by around $3 Trillion over 10 years. The plan is notable for its call to increase taxes on higher income persons (making over $1 million), reduction of war spending, and a variety of other spending reductions including changes in Medicare payments to certain providers as well as increasing Part B premiums on higher income beneficiaries and increased co-pays for things like home health.

The President's rhetoric today that raising taxes is not class warfare but math is correct. Taxes received as a percent of GDP will have to rise and spending will have to fall if we are ever to have a balanced budget again. I give the President credit for laying out a credible plan with about twice as much deficit reduction as what the Super Committee must identify, while also providing a plan to attempt to increase economic growth. We need to spur the economy in the short run while charting a path to a longer range balanced budget.

I have long preferred to have a Social Security fix sooner rather than later, mainly becasue it must be done some day, there is no guarantee progressives will be in a better position politically later, and most importantly because if we managed to agree to a fix it would work as planned, allowing us to focus on health reform and addressing health care costs which will have many mid-course corrections. My book lays out these arguments in great detail.

However, given the debt limit talks, it is not clear that the House Republicans would vote for any grand compromise in any event. This plan won't pass, but by drawing clear distinctions with Republicans, it may paradoxically make such a compromise more likely down the road. Here's hoping, but I am not holding my breath.

Why I Would End the Corporate Income Tax

There seems to be a consensus that tax reform is the only plausible way that the Super Committee could pass something that increased the revenue collected by the federal government as a percentage of GDP. The table below demonstrates the essence of tax reform: the trade off between eliminating tax expenditures (deductions, credits, exclusions) and declining marginal rates to raise the same amount of revenue. The table also shows the proposed lowering of the corporate tax rate from the current 35% to 28% under the so-called illustrative plan of the Fiscal Commission (that maintained some tax expenditures; p. 29).

The idea in dropping corporate tax rates is to incentivize business activity. In my book, Balancing the Budget is a Progressive Priority, I mostly adopt the tax reform laid out by the Fiscal Commission and agree that 21% of GDP as the amount of tax revenue at which to seek balance is doable and a worthy target. However, I think we should end the corporate income tax (rate of 0%). This is obviously not the typical "progressive" policy suggestion, and it was not what I thought before I began writing the book. But, I changed my mind while considering the options. Here is my thinking:

• It is a small part of total Federal Tax receipts.The proportion of the federal tax receipts raised by corporate taxes was 35% in 1945 and has been no more than 10% the past 30 years; it was 7.2% in 2010.
• It is impossible to efficiently tax corporations. One reason corporate tax receipts are low is corporations have successfully lobbied for loopholes. This means the effective tax rate for most corporations is far below the nominal 35%.
• Dropping the rate to 28% and ending loopholes would be an effective tax increase for many corporations. Many Corporations will have a powerful incentive to oppose such a reform because it would result in an effective tax increase. The most powerful corporations presumably have the lowest effective rate, making any change other than ending the tax very difficult.
• This should increase the incentive to produce new jobs in the U.S. One reality is that job creation is slow now even though many corporations have lots of cash. It is true this policy will provide them with more. Some say that uncertainty is the culprit of slow job creation, and this would certainly end tax-based uncertainty. If this did not spur job growth then we would know that and could move on from there with different policy suggestions. Matt Yglesias suggests greatly lowering the corporate tax; his suggestion makes sense, but I think we might as well go all the way and end it.
• Politically, if progressives would push for this it would end (maybe?) the meme that we hate business.

The current corporate tax system is just not worth it. It seems the best course of action to me is to get rid of it. To make up for the lost revenue of ending the corporate income tax I suggest the following:

• make capital gains and dividends normal income (assumed in table above)
• increase the top marginal personal income tax rate (I am unsure of how much it would have to rise)
• bring back an inheritance tax (I suggest 45% over $3.5 million and index the amount)