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12/20/10 – Out with the old, in with the new
Some previous year-end entries – 2007: Fiscal visionaries at bay; 2008: The Grinch that stole Christmas; 2009: Two crises and a partridge in a pear tree – were grim in tone and/or conveyed forced cheerfulness. This year, the outlook seems a bit brighter. How nice to look forward to a new Congress in which fiscal visionaries will have a chance to do something besides hanging on for dear life.
This entry will report some relatively encouraging developments for both taxes and spending and offer suggestions for the path forward. But keep these caveats in mind:
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Word of caution |
Like the Titanic bearing down on an iceberg, this country is steaming towards fiscal catastrophe. Disaster cannot be averted if our political leaders settle for minor course changes and/or fall back into bad habits. |
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Prediction |
The self-congratulation about bipartisan cooperation will evaporate long before the new (112th) Congress is over. Not for nothing did the Wall Street Journal’s headline for the Dec. 18-19 edition read “Budget Brawl Looms in Congress;” that is precisely what is coming. |
TAXES: The “tax cut” deal reviewed last week went through the Senate and House at warp speed and was signed by the president. None of our suggested changes were made, too bad, but some suggestions from the left were also ignored.
The primary merit of the deal was that it postponed a huge tax increase for a couple of years, and the “pork” that was added will at least go into the pockets of individual Americans, to be spent as they see fit, rather than directed into government-controlled initiatives.
On balance, like Rep. David Camp (R-MI), we can live with the results. Tax cut package awaits Obama’s signature, Stephen Ohlemacher, Washington Examiner, 12/17/10.
"This is just no time to be playing games with our economy," said Camp, who will become chairman of the tax-writing House Ways and Means Committee in January. "The failure to block these tax increases would be a direct hit to families and small businesses."
Let it not be forgotten, however, that two major tasks remain to be addressed:
First, a comprehensive overhaul of the tax system is long overdue. Whether conducted by a Tax Simplification Commission such as we have recommended or by the established committees of Congress, the review should be completed and if possible acted on before the 2012 elections.
Many tax changes will be suggested, and SAFE’s ideas do not necessarily represent the best options. Our SimpleTax proposal illustrates the goals and scope of this project, however, in a manner that may hopefully prove useful in future discussions.
http://www.s-a-f-e.org/the_simple_tax.htm
Second, there should be a moratorium on new taxes or rate increases until the tax overhaul has been accomplished. The “Paygo” rules of the last Congress, in which tax increases could be proposed to “pay for” a particular spending bill (never mind that the proceeds should have been dedicated to deficit reduction), fostered piecemeal tax changes that did not meet the tests of simplicity, efficiency, or fairness. A case in point: the excise taxes, fees, and Form 1099 reporting requirements included in the GovCare bill.
Not that there is anything wrong with specifying how a particular spending bill will be paid for, but the offsets should be spending cuts in other areas – not tax increases.
SPENDING: Everyone knew that legislation would be needed during the lame duck session to keep the government running until next year, but the omnibus spending bill unveiled in the Senate early last week caught many observers (including us) by surprise.
The bill would have approved generous overall spending levels through Sept. 30, 2011 (end of the fiscal year). There were also thousands of earmarks, including funding to implement GovCare and pet projects of members of Congress on both sides of the aisle.
The apparent purpose was to preempt Republican-sponsored spending cuts early in the next Congress, and Senator John Thune (R-SD), for one, was outraged.
The attempt by Democrat leadership to rush through a nearly 2,000-page spending bill in the final days of the lame-duck session ignores the clear will expressed by the voters this past election. This bill is loaded up with pork projects and should not get a vote. Congress should listen to the American people and stop this reckless spending.
Some Republican senators were inclined to support the bill, however, which would have served to cut off debate and put it over the top. Senate Dems unveil $1.1T spending bill, Alexander Bolton, The Hill, 12/14/10.
Conservative groups sounded the alarm, but it seemed unlikely, in the time available, that enough public opposition could be generated to block Senate passage. See, e.g., A spending monstrosity, Jordan Forbes, National Taxpayer’s Union, 12/15/10.
The bill, released yesterday, contains $1.25 trillion in spending and 6,700 earmarks worth $8 billion. Just how much is $1.25 trillion? Try $575.13 million PER PAGE in the 2,000-page spending legislation. *** I still can’t seem to grasp the Majority’s notion of spending their way out of record deficits and a $13+ trillion debt.
Some of the contemplated Republican support was apparently based on earmarks, which should put to rest the notion that earmarks are too small to matter in the overall scheme of things. DC feeding frenzy, Daniel Mitchell (Cato), New York Post, 12/16/10.
Exhibit A is the "omnibus" spending bill Harry Reid is trying to push through the Senate. This monstrosity contains about 6,500 earmarks — special provisions inserted on behalf of lobbyists to benefit special interests. The lobbyists get big fees, the interest groups get handouts and the politicians get rewarded with contributions from both.
Among the earmark payoffs to GOP senators: Thad Cochran (Mississippi), $512M; Bob Bennett (Utah), $226M; Susan Collins (Maine), $114M; Kit Bond (Missouri), $102M; George Voinovich (Ohio), $98M; Lisa Murkowski (Arkansas), $80M. Republicans and the spending dope, Kimberly Strassel, 12/17/10 (link not available).
Senate Minority Leader Mitch McConnell (R-KY), Senator John McCain (R-AZ), et al. buttonholed strays in the party with good results. After recounting the votes, Senate Majority Leader Harry Reid (D-NV) withdrew the omnibus spending bill and sat down with McConnell to negotiate a continuing resolution that would carry the government over to 2011. Reid pulls $1.1T omnibus spending bill, Stephen Dinan & Kara Rowland, Washington Times, 12/16/10.
The stunning turn of events - which was about as much drama as the Senate floor has seen in years - undercuts President Obama, whose White House on Thursday had backed the omnibus spending bill as the best of a bad lot of options.
The relief and delight of fiscal visionaries was summed up by a quip of Citizens Against Government Waste President Tom Schatz. CAGW reacts to pulled pork bill, press release, 12/17/10.
Driving the omnibus over the cliff is the best Christmas present that Washington can give to the taxpayers.
All was sweetness and light at the “tax cut” bill signing on Friday. And if anyone was thinking of the fate of the omnibus spending bill, which the White House had earlier supported, they kept it to themselves. Obama signs massive-tax bill, hails compromise with Republicans, Kara Rowland, Washington Times, 12/17/10.
Mr. Obama on Friday echoed earlier pitches of the deal as the best bipartisan agreement both sides could hope for, holding it up as an example of putting the American people before politics. "That's the nature of compromise: yielding on something each of us cares about to move forward on something all of us care about," he said. "It's a good deal for the American people. This is progress, and that's what they sent us here to achieve."
As with taxes, the outcome of the tussle over the omnibus spending bill is just a start. It is not enough to beat off spending increases in the lame duck session; current spending levels must be decisively cut starting next year.
Many ideas will be offered for where spending cuts should be made. Our ideas were offered earlier. Getting down to brass tacks on spending, 10/25/10.
Some fiscal conservatives seem to view the events of last week as marking a decisive change. Reaganomics 2.0 in the driver’s seat, Larry Kudlow, Townhall.com, 12/18/10.
Smaller government, low taxes, and less spending were key election themes in the Republican landslide. And those themes triumphed this week as a large tax-cut bill finally passed the House and a monstrosity [there’s that word again] of a spending bill was defeated in the Senate. In one fell swoop, Obamanomics is out the window. Reaganomics 2.0 is now in the driver’s seat.
Bear in mind, however, that: (1) the Democratic party still holds both the Senate and the White House; (2) many Congressional Republicans are also enamored with government spending; and (3) while the American people can be counted on to oppose tax increases, their instincts about government spending are less reliable.
Re point 3, two-thirds of mainstream voters favor spending cuts over deficit reduction – a roundabout way of opposing tax increases. 72% of the Political Class (people connected with government) would look to deficit reduction versus spending cuts, however, and many voters doubt substantial spending cuts will occur. Rasmussen Reports, 12/10/10.
Most voters are still not convinced, even with a new Republican majority in the House, that Congress will actually cut government spending substantially over the next year. GOP voters are among the most doubtful.
Nearly half of likely voters fault Republicans for not being sufficiently cooperative with the president, while his ratings for cooperating with Republicans are more favorable. Rasmussen Reports, 12/16/10.
If Republicans push for spending cuts, they will need to play their hand skillfully. It would be easy to paint themselves into a corner and get blamed by the public for the inconvenience or confusion resulting from any budgetary or debt limit impasse that may arise. Democrats beat Republicans in poll with opposition to government shutdown, John McCormick, Bloomberg, 12/10/10.
By a 3-to-2 margin, respondents say they wouldn’t support the kind of impasse that brought the federal government to a halt in 1995, when President Bill Clinton and congressional Republicans couldn’t agree on a budget. *** The Republican Party, a month after an electoral triumph that netted 63 seats and control of the U.S. House, gains in the U.S. Senate, and increases in state offices, remains unpopular, with a plurality having a negative view.
If the Republicans do not push for spending cuts, no one is likely to do it for them. Based on his statements to supporters, the president apparently envisions being able to blame the fiscal problem on the Republicans in 2012. Obama vows to fight Republicans – next year, the Oval, 12/13/10.
It is not our place to take sides in political disputes, but we do have some advice for all concerned:
Watch out for that iceberg, it is dead ahead and approaching fast.
It is time for decisive action, not playing the blame game.
There is no substitute for victory.
And with that, dear readers, we declare this blog officially closed until next year. Let’s hope Congress has the good sense to follow our example in the near future.
Happy holidays to all!
12/13/10 – DC action: the tax cut deal is overloaded. Read Replies
The results of the November elections were interpreted by some observers – perhaps with a touch of wishful thinking – as a repudiation of soaring government spending, deficits and debt. Obama’s big spending days are over, Donald Lambro, Townhall.com, 11/5/10.
With Republicans gaining more than 60 seats in the House, their largest majority since the Truman years, they are going to be able to drive the budget process in Congress, and Harry Reid won't be able to block them in the Senate. Under the budget's reconciliation rules, there is no filibuster requiring 60 votes to take up the measure that needs only a simple majority to pass it.
“The era of debt denial is over,” proclaimed the Fiscal Commission in its 12/1/10 report (p. 7), and at another point (p. 12) said “we must end redundant, wasteful and ineffective federal spending, wherever we find it . . . including defense, domestic programs, entitlement spending, and spending in the tax code.” Moment of Truth, 12/1/10 (download PDF).
http://www.fiscalcommission.gov/news
So the last thing one might expect is another economic stimulus bill in the lame duck Congress, yet just such a bill is currently taking shape.
The starting point was extension of the Bush tax cuts for all taxpayers (including high earners), and a compromise on the estate tax (which had been phased out by 2010, but under existing law would be restored at a rate of up to 55% in 2011).
Most Democrats wanted to hike existing income tax rates for high earners while leaving the Bush tax cuts in place for other taxpayers and proposed to scale back the estate tax. Republicans supported an across the board extension and/or making the tax cuts permanent, and wanted to kill the estate tax for good.
There was also a difference of opinion about another extension of federal unemployment benefits, with Republicans suggesting that the extension be offset by other spending cuts.
Given GOP gains in the mid-term elections and a jobless rate stuck at nearly 10%, the appropriate answer seemed obvious. Extend all the Bush tax cuts temporarily, pending a top to bottom overhaul of the tax law to be completed by 2012. Split the difference on the estate tax. Reach some sort of understanding about unemployment benefits (which neither party wanted to block).
Feelings about the Bush tax cuts ran deep, however, and the political narratives of the two sides were far apart. Rhetoric rides again, Thomas Sowell, Townhall.com, 12/7/10.
Let's face it, politics is largely the art of deception, and political rhetoric is largely the art of misstating issues. A classic example is the current debate over whether to give money to the unemployed by extending how long unemployment benefits will be provided, or instead to give "tax cuts to the rich."
A full extension of the Bush tax cuts was not ruled out when Congressional leaders of both parties met with the president on November 30, but neither was the point conceded. The upshot was the designation of two Administration officials (Treasury Secretary Tim Geithner and Budget Director Jack Lew) to conduct further negotiations with the Congressional leaders. Obama, GOP negotiating deal on Bush-era tax cuts, Susan Ferrechio, 11/30/10.
Ensuing developments have included the “framework” of a deal between the Administration and the Congressional Republicans, which added various sweeteners, notably a 2% payroll tax reduction (employees only) in 2011; bitter complaints by Congressional Democrats that they had been cut out of the process; a symbolic “no” vote in the House of Representatives; emerging reservations on the conservative side (including Senator Jim DeMint’s announcement that he intended to vote “no”); and a press conference at which President Obama introduced former President Clinton to laud the proposed package as a “good deal” for the Democrats.
The following video (4 minutes) provides an overview of the tax deal from the Administration’s perspective. The White House white board on the tax deal, chief economic adviser Austan Goolsbee, 12/11/10.
Republicans wanted to extend tax cuts for the wealthy and were holding the tax cuts for everyone else hostage – president agreed to a temporary extension in return for an extension of unemployment benefits, payroll tax cuts for all workers, various tax credits, etc. – the president’s tax cuts are more than twice as big as the income tax cuts for the wealthy over the period in question – no impact on long-term deficit – president will keep fighting to raise tax rates on the high earners – we can grow our way out of this problem.
We strongly disagree with Mr. Goolsbee’s statements about the lack of impact on the long-term deficit and the country’s ability to grow its way out of the fiscal problem. As a professional economist (on leave from the University of Chicago no less), he should be ashamed to say such things, which are clearly at variance with historical experience. This Time Is Different: Eight Centuries of Financial Folly, Carmen Reinhart & Kenneth Rogoff, Princeton University Press (2009).
Additional sweeteners have been added to the tax cut bill, including the extension of ethanol subsidies and renewable energy tax credits. Tax plan extends favors to win favor: lawmakers working to preserve breaks, Frederic Frommer & Mary Jalonick, [Wilmington] News Journal, 12/11/10.
http://www.s-a-f-e.org/global_warming.htm (12/11/10 entry)
Even more obscure items are in play, such as the Indian employment tax credit, railroad track maintenance credit, and mine rescue team training credit. Oh, Christmas tree! Tax deal larded up with TARP special interest provisions, David Freddoso, Washington Examiner, 12/9/10.
From the foregoing, it would be hard to say our political leaders have finally accepted the necessity to cut spending and balance the budget. Indeed, according to one observer, the prime lesson is that “no one really cares about the deficit.” Tax-cut deal exposes inner workings (and non-workings) of D.C., Ezra Klein, Washington Post, 12/10/10.
No sooner had Alan Simpson and Erskine Bowles completed their work on the deficit reduction package than Democrats and Republicans reached a bipartisan accord to add $900 billion to the debt. Republicans wanted their unpaid-for tax cuts for the rich, Democrats wanted their unpaid-for stimulus measures and both sides wanted the unpaid-for tax cuts for income under $250,000.
The $900 billion price tag is unrealistic. No one ever expected that the Bush tax cuts (or at least the bulk of them) would be allowed to expire during the midst of what has been billed as the greatest economic crisis since the Great Depression. And the revenue loss from not raising the tax rates on high earners for the two years is reportedly only $82 billion, which is hardly enough to justify all the controversy about this particular item. $860 billion tax-cut deal: Cost breakdown, Jeanne Sahadi, CNN Money, 12/10/10.
An Alternative Minimum Tax fix for two years to prevent millions of additional taxpayers from being subject to this perverse levy is clearly warranted in our opinion. Filing tax returns is too confusing and complicated already. Why make things worse?
We would be inclined to accept the extension of federal unemployment benefits for another 13 months, although the GOP’s point was well taken that offsetting spending cuts (to the tune of about $57 billion) should be sought.
Regarding the estate tax compromise, which is estimated to cost $68 billion versus allowing the estate tax to resume at a top rate of 55% on estates over $1 million, we believe the federal government should cede tax jurisdiction in this area to the states. See our SimpleTax proposal. Perhaps the current proposal is an appropriate step on the path towards our suggested end point, but in any case we do not consider the revenue loss inappropriate.
http://www.s-a-f-e.org/the_simple_tax.htm
A temporary payroll tax reduction would do little to boost employment, especially as the benefit would apply for workers only and not reduce employer costs. Also, a payroll tax cut could create expectations of similar relief in the future. Therefore, we view the $112 billion revenue loss as wasteful and inappropriate – not much of an improvement over dropping the same amount of money from airplanes.
We would also object to the business tax breaks ($69 billion) and personal tax credits ($8 billion) that have been added to the deal. In addition to reducing tax revenues, such provisions inappropriately distort private sector decisions.
In sum, the cost of the tax cut deal can and should be cut by roundly $200 billion. Barring such action, we think the Republicans should reject the deal and see if they can do better in the new Congress next year.
What do you think about this subject? Please let us hear from you, dear readers, whether you agree with our reasoning or not.
* * * This Blogs Replies * * *
A SAFE member in Arizona reminds us that Wednesday, December 15, is Bill of Rights Day. Imagine how James Madison would have felt about the current antics in Washington. http://bit.ly/g8x2fW
I agree with all of the points, especially the overhaul of our tax system. – SAFE director
Extension of the Bush tax cuts is fine, but the estate tax should not be revived (in any form) and government spending must be cut. The bond markets have responded negatively to announcement of this larded-up deal, and Moody’s is warning of a potential downgrade of Treasury securities if it goes through. http://www.cnbc.com/id/40641123 - SAFE director
I liked the comments to Delaware members. http://bit.ly/hUyTjP How about including them in a news release: SAFE, an organization founded and headquartered in Delaware promotes smaller, more efficient government, etc. – SAFE director
12/6/10 – Fiscal Commission sets stage for further discussion. Read Replies
Skeptics said the Fiscal Commission could not possibly recommend a meaningful plan to address the fiscal problem, not with its bipartisan composition and a 14 of 18 votes requirement.
After watching the videotaped meeting on December 1 (all members except Senator Max Baucus and Representative David Camp were present), we thought the proposed recommendations might squeak through. C-Span video, 12/1/10.
But the voting deadline had been extended until December 3, and some commissioners had yet to commit themselves. In the end, the outcome was 11 Yes/ 7 No (recap below). C-Span video, 12/3/10.
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Co-Chairs |
Erskine Bowles (former investment banker, White House chief of staff, and university president); Alan Simpson (former senator, has served on various advisory groups including Iraq Study Group) |
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At large |
David Cote (CEO of Honeywell, identified as a Republican); Alice Rivlin (former Federal Reserve vice chair, budget director in Clinton Administration, now with Brookings Institution); Ann Fudge (former CEO of Young & Rubicam Brands); Andrew Stern (former president of SEIU) |
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The Senate |
Max Baucus (D-MT); Tom Coburn (R-OK); Kent Conrad (D-SD); Michael Crapo (R-ID); Richard Durbin (D-IL); Judd Gregg (R-NH) |
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The House |
Xavier Becerra (D-CA); David Camp (R-MI); Jeb Hensarling (R-TX); Paul Ryan (R-WI); Janice Schakowsky (D-IL); John Spratt (D-SC). |
Our reflections follow on what happened last week and where the fiscal issue now stands.
PLAN – The Fiscal Commission voted on a report entitled “The Moment of Truth,” which represented a modified but still recognizable version of the draft proposal released on November 10. As previously reported, we thought the draft proposal had serious defects. Fiscal Commission: Co-Chairs’ Proposal, 11/15/10.
(1) Did not acknowledge the likelihood of state or local insolvencies, e.g., California, Illinois and/or New York, let alone say what should happen in such an event, (2) perpetuated distinction between “discretionary” and “mandatory” spending, (3) did not meaningfully address soaring healthcare outlays, (4) left minimum retirement age for Social Security at 62 and took too long to raise the normal retirement age (from 67 in 2027 to 69 by 2075), (5) did very little to identify unneeded, wasteful, or duplicative domestic spending programs, (6) did not address double taxation of corporate earnings, marriage penalty for two-earner households, high number of Americans exempted from individual income tax, and proliferation of federal excise taxes (including new GovCare levies), and (7) was not projected to balance the budget until 2037.
The final report did a nice job of expressing the urgency of action, as illustrated by this extract from the preamble:
After all the talk about debt and deficits, it is long past time for America’s leaders to put up or shut up. The era of debt denial is over, and there can be no turning back. We sign our names to this plan because we love our children, our grandchildren, and our country too much to act while we still have the chance to secure a better future for all our fellow citizens.
As for substance, changes in the final report did more to aggravate our concerns about the draft proposal than to cure them. We will have more to say about this in future entries, but here is an example.
A “Fostering an Economic Recovery” section was inserted in the report (page 43), which among other things recommends (a) waiting until 2012 to begin enacting programmatic spending cuts and waiting until fiscal year 2013 before making large nominal cuts, and (b) considering a temporary payroll tax holiday in the interim, to the tune of $50-100 billion in foregone tax revenue, as a means of supposedly promoting “short-term economic growth and job creation.” If the time to act is now, why did the Commission go out of its way to suggest one more drink for the proverbial road?
DISCUSSION - At the December 1 meeting, Co-Chair Bowles summed up the provisions of the final report and invited each commissioner in turn to express their reactions. Here is a brief recap.
There was much praise for the Co-Chairs, staff, and other commissioners, and everyone stated their views in a thoughtful and seemingly sincere way. If the American public has truly been waiting for an adult conversation about spending, taxes, and debt, this session should have been welcome.
One commissioner after another said they did not like various aspects of the plan, but either intended to vote “yes” or would consider doing so. Rep. Schakowsky was the only speaker to flatly declare opposition, and even she expressed appreciation for certain elements of the plan (scrutiny of tax expenditures, defense spending cuts).
Much satisfaction was expressed with the proposal to broaden the tax base, cut tax rates, and increase tax revenues overall. Conservatives and liberals alike said lower tax rates should stimulate the economy, thereby speeding deficit reduction.
With all due respect, we do not believe the economy can be stimulated by raising taxes – the best that can be hoped for is to minimize the economic damage. Sorry, but there are no “painless” ways to raise taxes, 8/9/10.
. . . while it might be modestly better to eliminate tax deductions and credits than to raise tax rates, a tax increase by any means could be expected to cut into individual income, business profits, and the inclination of people in the private sector to work and invest. Therefore, the anticipated increase in tax revenues would tend to dissipate over time – just as with any other type of tax increase.
Rep. Ryan said his primary concern with the plan was that it did not adequately address soaring healthcare outlays.
Rep. Hensarling said quite enough tax increases were built into the baseline projection already. History shows, he asserted, that tax increases in budget deals get implemented, whereas promised spending cuts often fail to materialize.
Rep. Becerra applauded the elimination of $1.0T in tax expenditures per year, but questioned why only 10% of this amount was applied to reduce the deficit while the rest would be dissipated in lower tax rates.
Andrew Stern stressed the need for “investment” expenditures, and expressed his support for a Value Added Tax to support new “investment” programs.
As a doctor, said Senator Coburn (sporting a goatee grown for the lame duck session), I tend to look for the real problem versus symptoms. In this case, deficits are the symptom. The problem is erosion of fundamental principles, with the federal government expanding its influence over state issues and ever more people being put on the dole. Nevertheless, the report represented a down payment on a solution – and “history says we are not going to make it” unless everyone starts sacrificing.
Co-Chair Bowles invited everyone who was able to return for a meeting on December 3, or failing that advise of their votes.
Whatever the outcome, said Co-Chair Simpson, “this baby is stuck in the craw of America, and it’s indigestible.”
VOTES - At the meeting on December 3, the remaining question – would the Fiscal Commission officially approve the report – was put to rest. There was also further discussion among the commissioners who were present (conspicuously excluding Senator Coburn, despite his “yes” vote, and the three Republican members of the House).
Co-Chair Simpson made a joke about the Commission’s process, which he said was like sticking a bunch of bananas in a gorilla cage. The gorilla might play with the bananas, but eventually he would eat some of them.
Co-Chair Bowles expressed appreciation to everyone for working hard, in a nonpartisan way, predicted that the Commission’s report would have a real effect, and announced four of the “no” votes (seemingly leaving open the possibility of 14 “yes” votes). He then called on the commissioners in attendance to comment. They spoke in the following order: Senator Durbin (yes), Rep. Spratt (yes), Senator Conrad (yes), Rep. Becerra (no), Rep. Schakowsky (no), Andrew Stern (no), David Cote (yes), Alice Rivlin (yes), and Senator Crapo (yes).
All told, 5 of 6 of the president’s appointees and 5 of 6 from the Senate voted “yes.” All of the House members except Rep. Spratt (a lame duck) voted “no.”
Alluding to the Senate vs. House results, David Cote paraphrased a historical quote and expressed his hope that things would work out accordingly.
George Washington is said to have told Jefferson that the framers had created the Senate to "cool" House legislation just as a saucer was used to cool hot tea.
http://www.senate.gov/artandhistory/history/minute/Senate_Created.htm
Speakers who were explaining “no” votes emphasized that action was needed, and that they simply happened to think there was a better way to go about it than the plan presented in the Fiscal Commission report.
Thus, as Andrew Stern put it, the Commission had put to rest the question of whether there should be a plan to deal with the fiscal problem. There were now five plans (the Commission’s, Alice Rivlin’s, Rep. Ryan’s, Rep. Schakowsky’s, and his own), and the president should outline his plan in the upcoming State of the Union Address.
By garnering 11 of 18 votes, it was suggested, the report had exceeded the super majority standard in the Senate (60%). 14 of 18 votes would have represented 77% approval, a challenging requirement indeed for recommendations on such a controversial subject.
“Be ready,” said Co-Chair Simpson in closing. Having underestimated the Commission’s chances of success, the zealots would pull out all the stops to attack its report. The report was a matter of record, however, and he predicted it would prove influential in further discussions.
Co-Chair Bowles thanked everyone, said he was thrilled by the outcome, and urged all concerned to keep working together, make the tough choices, and eliminate those dreadful deficits. “The Committee stands adjourned.”
PATH FORWARD – The Fiscal Commission’s efforts could be viewed as either a promising start or a bust. On balance, we are inclined to the optimistic view.
It was never likely that the Commission could offer a definitive solution to the fiscal problem, so no one should be surprised by deficiencies in the report. There will be plenty of opportunity to make needed improvements.
The failure to secure 14 votes was not a big setback. An 11 to 7 vote, coupled with general acknowledgment that the fiscal problem is for real, has taken this country’s leaders beyond the “denial” stage. That is progress.
Also, we would not favor a fast track vote on this subject during the current “lame duck” session – as the current Congressional leadership promised when the Fiscal Commission was established. Time enough to pursue the matter after the new Congress takes office.
We do worry, however, that many of the players will continue to mischaracterize the issues at stake and cite the fiscal problem as a rationale for misguided solutions.
Amidst all the rhetoric about “tough choices” and such, it would be easy to forget that the basic solution to the fiscal problem is rather simple – spending cuts.
Spending freezes, pay freezes, and other across the board measures never work for long – the only way to effectively cut spending is to identify departments, programs or activities that are wasteful or unnecessary and eliminate them. But efforts along these lines have often failed in the past, and they will not be easy now.
As an example, some readers may remember that President Ronald Reagan recommended the elimination of two federal departments in his 1982 State of the Union Address.
The budget plan I submit to you on February 8th will realize major savings by dismantling the Departments of Energy and Education and by eliminating ineffective subsidies for business. We'll continue to redirect our resources to our two highest budget priorities—a strong national defense to keep America free and at peace and a reliable safety net of social programs for those who have contributed and those who are in need.
http://millercenter.org/scripps/archive/speeches/detail/5679
Reagan’s proposal was spot on, in our opinion, but he was unable to sell it. The Energy and Education Departments are still around – bigger than ever. Fiscal visionaries who want to change the outcome (count us in) should be prepared for a tough fight!
Then there is the hand wringing over the recession, continued high rate of unemployment, and urgency of “creating jobs.”
The economic stimulus package pushed through in February 2009 was a misguided effort, as SAFE and others said at the time. We can’t spend our way to prosperity, John Stossel, Real Clear Politics, 2/4/09.
Washington never changes, no matter who's in power. Give a gang of politicians a chance to spend our money, and they will spend it -- the more the better. An economic downturn is hog heaven; for now they have a justification to spend big time: "economic stimulus." Anything and everything can be proposed as long as it can be said to "inject money into the economy" and "create jobs."
It seems clear at this point that the stimulus package has been a failure. More generally, we believe that government meddling in the economy has done more harm than good and represents the chief obstacle to economic recovery. Judging from the election results, many Americans agree with us.
But some people continue to insist that more stimulus is needed and will eventually bring things right. Consider the argument for continuing to extend jobless benefits: recipients would spend the money quickly and thereby stimulate the economy. Tax cut fight highlights Democrats’ missing convictions, Eugene Robinson, Washington Post, 12/3/10.
. . it's hard to find any economist who believes that ending jobless benefits is a good idea, since this money gets spent almost immediately - recipients, after all, are without other income but still have to pay for housing, food, clothing, transportation and other necessities. That's why unemployment payments pack such a stimulative punch.
Unfortunately, long-term jobless benefits encourage unemployed workers to stop looking for jobs (or collect benefits while working on the side). There is also a bigger misconception, which is that the economy can be raised by its own bootstraps. Keynesian economics is wrong: economic growth causes consumer spending, not the other way around, Hiwa Alaghebandian, Center for Freedom and Prosperity (Cato), November 2010, video (5 minutes).
http://www.youtube.com/watch?v=D9kfMx8Llcc
As several SAFE directors noted at our meeting on December 2, solving the fiscal problem is not a sprint, it is a marathon. Be willing to start small. Go for goals within our reach. But there must be action, not just talking, if it only consists of researching the issues, posting this blog, issuing our quarterly newsletter, and communicating with anyone who might potentially listen.
A saying of Justice Louis D. Brandeis was noted in a holiday e-mail from Martha Minow, Dean of the Harvard Law School: "Most of the things worth doing in the world had been declared impossible before they were done.”
Liberals/ progressives relish this mantra, but it could equally well apply to our agenda. Why should fiscal visionaries throw up their hands in recognition of past defeats? Why shouldn’t we look for new ways to make our points and win?
As the lame duck session grinds on towards an ignominious end (our topic next week), SAFE will be planning how to redouble our efforts. Are you in?
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Looks like the Fiscal Irresponsibility Commission didn’t dare propose eliminating political schemes not authorized in the Constitution; that would cut the budget in half. Keep up your good work, exposing the political elites who are destroying America. Only 23 months to go until the 2012 elections, when maybe things will be put back on track. – SAFE Member, Arizona
Given past performances of Congress, any new revenues will go into new social programs and the cuts will never be enacted. Nothing substantial will happen until we have another financial crisis. – SAFE director.
I will be surprised if anything comes of this Commission's recommendations, but I was encouraged today to hear Erskine Bowles say the spending must be curtailed (or something like that). Coming from a Clinton adviser, that is significant. – SAFE director.
11/29/10 – Dear EPA: shape up or ship out Read a Reply
Last week’s survey of the federal regulatory landscape might be summarized by a four-quadrant model. The vertical axis is need for federal regulation; the horizontal axis is regulatory burden.
Many federal agencies are in the lower left quadrant – while their services are marginal, they are not doing much harm. A few tweaks may be in order, but not major changes.
In some cases (top left), necessary federal regulation is being provided effectively. Support is in order; consider elimination of duplicative state efforts.
In other cases (bottom right), federal regulation of marginal utility is causing considerable harm. Shut down the agency or program involved, e.g., dismantle the federal Department of Education.
Finally, there are instances (top right) in which federal regulation is necessary but has gotten out of control. Here the agency or program needs to be redirected.
|
|
Support (e.g., NRC) |
Redirect (e.g., EPA) |
|
Watch (many) |
Eliminate (e.g., DOE) |
Burden Þ
In lieu of an abstract discussion of reining in a necessary but overbearing agency, let’s consider a specific case – what to do about the Environmental Protection Agency (EPA).
BACKGROUND – Formed in 1970 to administer the Clean Air Act and assume responsibility for generally applicable environmental nuclear radiation standards, the EPA’s mission is to protect human health and the environment. Today, the agency administers or plays a role under some 25 federal statutes, including the Atomic Energy, Clean Air, Clean Water, Resource Conservation & Recovery, Toxic Substances Control, Comprehensive Environmental Response, Compensation & Liability (Superfund), Energy Policy, and Energy Independence & Security Acts.
The EPA has some 17,000 employees. Its $10 billion annual budget (FY 2011) goes for: State & Tribal Assistance Grants ($4.8B), Environmental Programs & Management ($2.9B), Superfund ($1.3B), Science & Technology ($0.8B), and All Other ($0.2B).
In addition to headquarters offices in Washington, D.C. and northern Virginia, the EPA has offices, labs, and other facilities around the country. Its Region 3 office (located in Philadelphia) exercises jurisdiction over Delaware.
The EPA is headed by an administrator appointed by the president with the advice and consent of the Senate, currently Lisa Jackson. Jackson’s professional experience: 16 years as an EPA employee, headed New Jersey Department of Environmental Protection, served as former New Jersey Governor Jon Corzine’s chief of staff.
Jackson’s bio states that she and the EPA staff are “working across the nation to usher in a green economy, address health threats from toxins and pollution, and renew public trust in EPA’s work.”
UPSIDE – There may be people who would abolish the EPA and permit business and individuals to pollute the environment as they choose. If so, SAFE is not among them.
It is not desirable for factories to belch SO2 into the atmosphere or discharge untreated industrial waste products into the nation’s waterways, for companies to sell lead paint of demonstrated toxicity, etc. But if such practices were left to the discretion of the actors involved, they might prove profitable and/or convenient. Sure, claims for damages and injunctive relief could be pursued in the courts, but litigation is a slow, expensive and uncertain way to set environmental policy.
Clearly, however, the EPA should regulate in a manner that will not cripple responsible economic activity. The challenge is to strike a balance between environmental laissez faire on the one hand and unreasonably stringent regulation on the other.
The need for economic realism has been communicated to the EPA often enough, and the agency’s mission statement suggests it will be respected:
EPA's purpose is to ensure that . . . environmental protection is an integral consideration in U.S. policies concerning natural resources, human health, economic growth, energy, transportation, agriculture, industry, and international trade, and these factors are similarly considered in establishing environmental policy . . .”.
http://www.epa.gov/aboutepa/whatwedo.html
Other EPA documents are written in a similar vein, as indicated by this extract from the FY 2011-2015 strategic plan (red font added):
EPA is developing a strategy aimed at reducing toxic air pollution from stationary sources in a way that targets priority categories of sources, reduces pollution in communities, utilizes a more cost-effective “sector-based” approach; and provides tools to help communities and other stakeholders participate in rulemaking. These priority categories include petroleum refining, iron and steel, chemical manufacturing, utilities, non-utility boilers, oil and gas, and Portland cement.
http://www.epa.gov/ocfo/plan/plan.htm
Sounds OK. After all, who could be against a cost-effective, “sector-based” approach? Quite a few people as it turns out. We will review this policy from another angle under the next heading.
Although believing that much work remains to be done, the EPA is delighted with its own performance thus far. Check out this speech by Administrator Jackson on the 40th anniversary of the Clean Air Act.
[The Act] is literally a life saver. We estimate that it has prevented tens of thousands of premature deaths – each year. Along with lives saved, the Clean Air Act has reduced asthma attacks, heart disease, and numerous other health conditions Americans suffer from. *** Those protections have added up to trillions of dollars in health benefits for our nation. Breathing cleaner air has kept people from needing expensive treatments and costly hospital stays. It has also kept our kids in school and our workers on the job, increasing productivity and economic potential. * * * For every one dollar we have spent, we get more than $40 of benefits in return. Say what you want about EPA’s business sense, but we know how to get a return on an investment. In short, the Clean Air Act is one of the most cost-effective things the American people have done for themselves in the last half century.
Naysayers predicted economic disaster at every step, according to Jackson, only to be repeatedly proven wrong.
In the 1970s, lobbyists told us that using the Clean Air Act to phase in catalytic converters for new cars and trucks would cause “entire industries” to “collapse.” Instead, the requirement gave birth to a global market for catalytic converters and enthroned American manufacturers at the pinnacle of that market.
In the 1980s, lobbyists told us that the proposed Clean Air Act Amendments would cause, quote, “a quiet death for businesses across the country.” Instead, the US economy grew by 64 percent even as the implementation of Clean Air Act Amendments cut Acid Rain pollution in half. The requirements gave birth to a global market in smokestack scrubbers and, again, gave American manufacturers dominance in that market.
The complaints have continued like a “broken record,” but they remain wide of the mark in today’s world.
We can take on the remaining challenges of pollution in our air. I know because the Clean Air Act took on big challenges – and it worked. We can come together in a collaborative effort, ignore the doomsday exaggerations, and build a commonsense plan together. I know because we’ve done it before – and it worked. And we can absolutely grow our economy at the same time we protect our environment, our health, and safeguard the planet for the next generation.
ANOTHER VIEW – We will now recap some reactions to recent proposals and actions of the EPA, which do not exactly add up to a vote of confidence.
• Impractical – There has been considerable pushback against proposed limits on “coarse particulate matter,” e.g., dust clouds that farm machinery kicks up while in operation. One wonders how the EPA would enforce such restrictions if they were imposed. Farmers fear dust rules won’t reflect rural life, Rick Callahan, ABC News, 9/20/10.
Grain farmer Charles Schmitt, who farms about 2,000 acres of corn and soybeans near the southwestern Indiana town of Haubstadt, called the possibility of tougher rules on dust "ridiculous." The 59-year-old, who's farmed for more than four decades, said there's little farmers can do to reduce dust, especially after a dry summer like this year's that left his fields parched.
• Incompetent – GAO reported that the EPA/ Department of Energy identified 15 of 20 bogus products submitted for testing as energy “efficient.” Overall, the government made the correct decision on 11% of the tested products. This should raise a few questions about whether the Energy Star program has saved Americans $17B on their electric bills to date. Close enough for government work, Washington Times, 4/6/10.
• Inflexible – The EPA has designated the Gowanus Canal in Brooklyn as a Superfund site and announced plans to clean up more than a century’s worth of noxious pollutants. This approach will supposedly guarantee the best results for the environment and ensure that the polluters cover all of the costs. The project will take 10+ years and cost up to $500 million. Say goodbye to an alternative plan, proposed by the city and private investors, which would have accomplished the cleanup more quickly and brought new investment ($250 million project for housing units and retail space) to the area as well. Gowanus Canal gets Superfund status, Mireya Navarro, New York Times, 3/2/10.
• Draconian – New EPA restrictions on valley fills from mountaintop mining will be practically impossible to comply with. Coal miners rally for mountaintop mining, Frederick Frommer, Washington Times, 9/15/10.
The coal industry has filed a lawsuit against the EPA’s new policy which tightened water quality standards for valley fills at surface coal mines in West Virginia, Kentucky, Pennsylvania, Ohio, Virginia and Tennessee. EPA Administrator Lisa Jackson has said the goal is a standard so strict that few, if any, permits would be issued for valley fills.
• Political – A decision to allow more (15% vs. 10%) ethanol in gasoline will create headaches for gasoline distributors and service stations, inflate food prices, and increase the cost of ethanol subsidies (assuming renewal by the end of 2010). The only apparent justification was to gratify farmers and ethanol producers. EPA approves more ethanol in gas, Mary Clare Jalonick, Washington Times, 10/19/10.
"Thorough testing has now shown that E15 does not harm emissions control equipment in newer cars and light trucks," EPA Administrator Lisa Jackson said in a statement. "Wherever sound science and the law support steps to allow more homegrown fuels in America's vehicles, this administration takes those steps."
Note: use of more ethanol in gas would be counterproductive from an environmental standpoint. Administration caves in to Big Corn, Washington Times, 10/18/10.
Corn-based fuel is not only an economic disaster, it's an ecological nightmare as well. By the EPA’s own numbers, an across-the-board switch to E15 would "significantly impair the emissions control technology" if used in 74 million cars in America's fleet. That's because E15 burns 6 percent leaner than gasoline - often exceeding manufacturer design specifications - leading to higher exhaust temperatures, misfires and catalytic-converter damage. In addition to this problem, burning ethanol produces heightened levels of pollutants such as nitrogen oxides and deadly carcinogens such as formaldehyde.
• Inopportune – A protracted economic slump is no time to load the business community down with complex and expensive new regulations, yet the EPA and other agencies seem intent on doing just that. In an interview on CNBC, Indiana Governor Mitch Daniels (R) suggested that the president should impose a moratorium on new regulations – drawing a “you must be joking” gibe from one of the commentators. What EPA really stands for: “Employment Prevention Agency,” Mark Tapscott, Washington Examiner, 10/31/10.
• Relentless – Having reduced ozone limits in 2008 (under the previous Administration), the EPA is proposing to do so again – without any new scientific finding that might be thought to require action, and in the face of predictions of dire economic consequences. EPA to drain $1 trillion from economy, Washington Times, 10/7/10.
Using NERA Economic Consulting data, the Manufacturers Alliance/MAPI last month predicted that implementing the technologies needed to meet EPA's proposed goal would cost the economy a staggering $1 trillion every year. [As might be expected, the EPA estimates of economic cost are much lower.] A total of 7.3 million jobs would be lost along the way, adding 4.3 percent of the work force to the unemployment line by 2020.
• Ideological – The EPA’s fixation with cutting the emission of CO2, etc. assumes that global warming is taking place, driven by accumulation of human-produced carbon emissions in the atmosphere, and will have catastrophic consequences. The EPA’s classification of carbon emissions as “pollution” for purposes of the Clean Air Act was based on the findings of US and international entities with an institutional interest in the human-induced global warming theory. A survey of the scientific literature, which would have revealed contrary opinions and conflicting information, was not conducted. SAFE comments on the proposed EPA finding, 6/4/09.
http://www.s-a-f-e.org/epa_letter.htm
After Climategate broke, the EPA declined to reconsider its position. Bad news for the economy: EPA refuses review of CO2 “endangerment” finding, Ted Hadizi-Antich, Pacific Legal Foundation, 7/30/10.
Remember the EPA’s “sector-based” approach to mandating reduction of “pollution” from stationary sources. It relates to the proposed curbs on carbon emissions. The strategy is to target big industrial installations while ignoring carbon emissions from schools, hospitals, offices, other factories, etc. A court challenge is being mounted. Texas fights global-warming power grab, Peggy Venable, Washington Times, 8/25/10.
The EPA . . . is attempting to rewrite the Clean Air Act administratively via a "tailoring rule," which would reduce the number of regulated sources. The problem with that approach? It's illegal. The EPA has no authority to rewrite the law. To pull it off, the EPA needs every state with a State Implementation Plan to rewrite all of its statutory thresholds as well.
True, guidelines have been issued that would require state and local authorities that issue pollution permits based on federal standards to use “Best Available Control Technology” in shooting to reduce carbon emissions 20% by 2020. But many jurisdictions would be unable to meet the standards being proposed, so new investments in the affected facilities (principally refineries, power plants, and cement plants) might be brought to a grinding halt. New EPA regs would kill jobs, stall economy, Washington Examiner, 11/11/10.
Some critics perceive an Administration (including the EPA) bias against the US economy and lifestyle. Job-killing environmentalists, Jon Basil Utley, Reason, 11/10/10.
President Barack Obama seems more concerned with appeasing environmental extremists in his administration than he is with the lost jobs of poor Americans. He’s letting the environmentalists run wild with long pent-up schemes to force a change in the American way of life that includes small cars, small apartments and, for many, a return to an idealized 19th century lifestyle. It’s not China that’s responsible for American job losses; it’s Washington’s fault for shutting down whole industries and preventing new jobs from being created.
ASSESSMENT – Who is right, an agency delighted with its achievements to date that wants to impose even more stringent controls, or the EPA’s many critics?
Ignore the critics, says EPA Administrator Jackson. They have “cried wolf” before, only to cope with our regulations. Everyone is better off as a result.
This reminds us of an argument that SAFE director Bill Morris has debunked in the past. Just because a large dose of nuclear radiation (or medicine) would be extremely harmful, it does not follow that a small dose is somewhat harmful (linear relationship) – the small dose may actually be beneficial. Nuclear radiation hormesis, letter, 4/22/10.
Similarly, the US economy’s survival of previous EPA regulations does not prove that ever more stringent standards will have no ill effect. This would appear to be a case of hormesis in reverse, where a small dose is OK while a big dose is lethal.
One might also question the assumption that the US economy has suffered no ill effects from existing regulations. This country’s industrial base has been steadily eroding over the past 40 years while manufacturing operations in China et al. have expanded greatly. Perhaps regulatory burdens in the US have had something to do with the trend.
On balance, we think the EPA’s critics make a good case. It is time for the agency to refocus on balancing environmental goals with economic costs.
ACTION – We would note at the outset that subtle adjustments to the regulatory process will not do the trick.
As previously discussed, the Administrative Procedures Act of 1946 accomplished less than conservatives hoped. Regulatory common sense requires eternal vigilance, 11/22/10.
Although the rulemaking process is more deliberate and systematic now, it still fails to produce reasonable results – and ever more attorneys and judges are involved. Death of Common Sense, pages 79-83.
Similarly, the Government Performance and Results Act of 1993 instituted a seemingly promising approach for holding federal agencies (including the EPA) accountable. Mission statements – strategic plans – annual plans – performance measures - accomplishment reports. Perhaps the results have been salutary in some cases, but by now the agencies have grown adept in preparing the paperwork to justify their respective purposes.
There is little indication in the EPA’s strategic plan for 2011-2015, for example, that the persons affected are displeased with the agency’s intended direction. Consider this extract from the box about “consultation efforts” on page 9.
Sent notification letters to over 800 organizations and individuals to request input. These entities included . . . Congressional authorizing and appropriation committees – states and state associations – [Indian tribes and tribal associations] – local government representatives – other federal agencies – public health organizations – environmental, public interest and public policy groups – and representatives of the regulated community.
http://www.epa.gov/ocfo/plan/plan.htm
In 2001, the president issued an executive order re “energy action[s]” that are “likely to have a significant adverse effect on the supply, distribution or use of energy.” In such cases, a Statement of Energy Effects must be prepared and submitted to a designated sector of the Office of Management and Budget.
http://www.epa.gov/lawsregs/laws/eo13211.html
But if this requirement was intended to slow down regulations that might adversely affect the energy sector, it certainly does not appear to have worked.
In short, only direct and specific action could bring about real change in the EPA’s approach.
Thus, the president might announce disappointment with the direction that the EPA has been taking and nominate a new administrator with industry experience and different priorities. Not that we expect this to happen, but it would have an impact.
Congressional action, which seems more likely at this point, might start with a statute (a) barring the EPA from regulating carbon emissions under the Clean Air Act without explicit Congressional approval, and (b) imposing a five-year moratorium on lower ozone limits.
Then extensive Congressional hearings should be conducted on business and consumer complaints about the EPA, with the objective of identifying other cases in which intervention is necessary.
Would such actions be controversial? Absolutely, because environmental and public health zealots, companies and groups hoping to profit from “green” energy, and many academics and commentators support the path on which the EPA has been treading.
But saving the US economy is important, and we say “full steam ahead.”
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Wow! I would love to be on the team with authority to start killing all of these stupid regulations. – Retired finance executive
11/22/10 – Regulatory common sense requires eternal vigilance
SAFE has proposed a Regulatory Common Sense Commission to review the regulatory activities of government with a view to (a) improving the performance of necessary tasks, (b) eliminating unnecessary tasks, and (c) reducing regulatory burden on the private sector. How might the RCSC go about such a review?
BACKGROUND: The primary focus would be on federal regulatory activity, but there are layers of state and local regulation as well. From a business standpoint, it all adds up and the cost is passed on to consumers.
Estimates of the cost of federal regulations are inherently imprecise, but the overall burden is heavy. Thus, one study estimates the total cost of federal regulations in 2008 as $1.75 trillion, an average of over $15,000 per U.S. Household. The Impact of Regulatory Costs on Small Firms, Nicole & Mark Crain, Lafayette College (Easton, PA), SBA Office of Advocacy, September 2010, pages 51-55.
http://bit.ly/caHO7m (download PDF)
Another study estimates regulatory compliance costs in 2009 as follows: Economic $630B, Environmental $236B, Tax compliance $208B, Workplace $113B. The $1.2 trillion total about equaled annual revenues from individual and corporate income taxes. Ten Thousand Commandments 2010, Clyde Crews, Competitive Enterprise Institute, 4/15/10, pages 7-13.
http://bit.ly/dmhc8n (download PDF)
Government enforcement costs add to the overall burden. They are running about $50B per year. Id, page 12.
There is nonstop rulemaking activity. Over 20,000 pages of final federal rules were published in 2009. As of December 2009, 59 departments, agencies and commissions had 4,043 agency rules in the “unified agenda” pipeline (rules recently issued or in process). The eight most prolific issuers were the Environmental Protection Agency (331), and the Departments of Treasury (528), Agriculture (327), Commerce (300), Interior (277), Homeland Security (237), Health & Human Services (231), and Transportation (230). Id, pages 16-21.
Due to passage of GovCare and GovFinance earlier this year, the pace of rulemaking activity is poised to accelerate.
Feast your eyes on the process flow chart of the redesigned healthcare system. "This portrays only about one-third of the complexity of the final bill,” says Representative Kevin Brady (R-TX), “it’s actually worse than this."
http://www.house.gov/apps/list/press/tx08_brady/pr_100728_hc_chart.html
The GovFinance legislation leaves numerous decisions to regulators. No one will be sure what the bill accomplished until the implementing regulations are issued – over the next several years. For financial activities, Congress seeks studies before cracking down, Jim Kuhnhenn, Washington Examiner, 7/8/10.
Time after time as Congress wrestled with contentious decisions on how to re-regulate the nation's financial industry, it opted for what often is the classic Washington punt: further study. In all, the 2,300-page overhaul of financial regulations requires more than 60 such studies, on everything from examining the presence of shoddy Chinese drywall in foreclosed houses to judging the financial literacy of U.S. consumers.
ISSUES: While continuing growth of the regulatory thicket strikes us as alarming, proponents of big government probably feel otherwise. After all, they may reason, there are many problems to be solved and Congress is wise to leave the details to “the experts.”
Experience shows, however, that administrative rulemaking works better in theory than in practice. See, e.g., The Death of Common Sense: How Law Is Suffocating America, Philip Howard [an attorney], Grand Central Publishing, 1994.
http://www.s-a-f-e.org/commom_sense.htm
When asked to address a specific problem, a government agency will often prescribe a solution that gives inadequate recognition to cost and other practical considerations, e.g., by prescribing the “ideal daycare center.” Page 40.
Annual tuition costs over $4,000 [as of 1994] in Massachusetts. What happens to the parents who cannot afford this Norman Rockwell vision? Approximately 80 percent of all children are cared for in unregulated facilities, many in illegal day care operations.
Regulators tend to focus on preselected points while ignoring other possibilities. Thus, after Amoco spent $31 million at its Yorktown, VA refinery to comply with EPA rules for waste pipes, it was discovered that the primary benzene pollution problem was on the loading dock and a much less expensive solution was possible. Page 7.
The effort to cover all possibilities and leave no room for judgment results in regulations so long and cumbersome that they are disregarded in practice – unless and until agency inspectors bring them up.
[OSHA inspectors] spend a lot of time upstairs in the office looking at paperwork; [A company] was recently cited because the wrong box was accidentally checked on some internal forms. About 50 percent of OSHA violations across the nation are for not keeping the forms correctly. [Page 13-14]
One observer has noted that it is common knowledge in the meat-packing industry, “denied only by USDA spokesmen, that if all meat-inspecting regulations were enforced to the letter, no meat-processor in America would be open for business.” [Page 32]
Federal government intervention was appropriate to end racial segregation, but the recognition and enforcement of many other “rights” that are not to be found in Constitution has had unfortunate results. Page 140.
Lose your job? Consult the Yellow Pages. The same lawyers who advertise for personal injury claims now seek out fired employees. It’s just a business. Defending the claim can easily cost an employer more than $100,000, so there is a powerful inducement to settle. Even the most dedicated fighters of discrimination acknowledge, as one did to me, that “it is possible to create a discrimination claim out of almost any workplace dispute.”
And while seeking to tell everyone else what to do, government agencies are notoriously inefficient in running their own operations. Page 74
Fixing a $50 lock in a New York public school takes ten steps over a six-month period, including review by someone called the “supervising supervisor.” *** The federal government has estimated that, annually, 289 million hours are spent complying with its procurement procedures.
For readers who might view a 16-year-old book as passé, here are some current examples of rulemaking run amok.
The San Francisco Board of Supervisors recently banned McDonald’s Happy Meals with toys on grounds that they promoted childhood obesity. Mayor Gavin Newsome vetoed the ban on grounds that it “went too far” in telling people how to spend their own money, but this may not be the end of the story. San Francisco Sentinel, 11/16/10
http://www.sanfranciscosentinel.com/?p=95373
The Pentagon has assembled 26 pages of regulations about making brownies. Watch the video (3+ minutes) to gain an appreciation of the level of detail involved. There is no common sense in government, David Freddoso, Washington Examiner, 11/10/10.
An SEC rule would require companies to subsidize the campaigns of director candidates nominated by as few as 3% of their shareholders. The rule will allegedly “empower unions, animal rights activists, and other political special interest groups in the corporate boardroom at the expense of ordinary shareholders.” A legal challenge is in process. Getliberty.org, 9/30/10.
http://blog.getliberty.org/default.asp?Display=2682
Then regulators have differences of opinion, such as about what the street signs in New York City should look like. A federal proposal would force the state, already on the edge of bankruptcy, to replace 250,900 signs at a cost of $110 each. $27 million to change NYC signs from all-caps, Jeremy Olshan, New York Post, 9/30/10.
STRATEGY: A generalized assault on government regulations would be pointless. Every regulation has supporters – if only the government employees involved in its administration – and not all regulations are bad.
As for separating the wheat from the chaff, who has the time to review hundreds of thousands (perhaps millions) of pages of regulations? The RCSC’s mission could become a 1,000-year study.
Therefore, the game plan would be to change attitudes, encourage cooperation, and home in on the worst offenders. The following tactics might help the RCSC gain traction.
# Sell problem before offering solutions. We are not in agreement with everything the Fiscal Commission has done this year, but they deserve credit for broadcasting a series of discussions – complete with expert testimony – about the scope and gravity of the fiscal problem. The RCSC could conduct similar sessions about the dire consequences of regulatory bloat for businesses and the American public.
# Support “quick hit” results. Americans resent rules or programs that interfere with decisions they are accustomed to making for themselves. If members of the new Congress are up for rolling back some “nanny state” regulations, emulating repeal of the 55 MPH national speed limit in 1995, this could set the stage for other gains. A bright idea for Boehner: GOP majority needs to banish Big Brother from the bathroom, Washington Times, 11/11/10.
Unless Congress acts, Thomas Edison's greatest invention - the standard old light bulb - will become contraband in 2012, and American homes will be haunted by the pallor of deadly, mercury-filled fluorescent fixtures. Like so many "green" laws, this measure is corporate welfare for some manufacturers who stand to enjoy a tidy profit when the government forces the public to buy the more expensive curlicue bulbs.
Along the same lines, the GOP needs to repeal the foolish ban on high-flow toilets and functional shower heads. Past Congresses thought that by passing a law forcing Americans to use commodes designed by bureaucrats, water savings would magically appear. The reality is that Americans ended up flushing more often, using the same amount of water - or more.
Overbearing airport screening might be another target. Whatever the best technique is, perhaps the Israeli airline El Al model (sophisticated profiling and questioning), the Transportation Security Administration (TSA) has surely yet to find it. Amid airport anger, GOP takes aim at security, Byron York, Washington Examiner, 11/15/10.
"When the TSA was established, it was never envisioned that it would become a huge, unwieldy bureaucracy which was soon to grow to 67,000 employees," says Rep. John Mica (R-FL). "As TSA has grown larger, more impersonal, and administratively top-heavy, I believe it is important that airports across the country consider utilizing the opt-out provision provided by law."
# Attack programs or agencies. The public is typically disinterested in regulatory legalese. The deficiencies of a program or agency are more tangible, and therefore easier to communicate. Also, victory over a flawed regulation may prove temporary, as the responsible agency will likely propose a new one that is not much better.
Here are some regulatory arrangements that merit scrutiny. The list is meant to be illustrative rather than exhaustive.
• U.S. Department of Education – DOE is involved in an area that has traditionally been managed at a state or local level. Its role is only tolerated due to the provision of federal grants, and its provable contribution is meager.
• Nuclear Regulatory Commission – The NRC oversees a technological area in which the federal government has played the lead role. State agencies are also seeking to regulate nuclear power plants, but they cannot do much except slow down progress. Preemptive federal jurisdiction would seem appropriate.
• Securities & Exchange Commission; Commodity Futures Trading Commission – These federal agencies preside over the issuance and trading of securities in two segments of the financial markets. Why not combine them? Similarly, why have two antitrust watchdogs: Antitrust Division (Justice Department) and Federal Trade Commission?
• Programs that entail tinkering with the free market through the use of tax credits, import duties, direct subsidies, government financing, or punitive regulation of non-preferred activities. Examples: farm subsidies, renewable energy, ethanol, proposed EPA regulation of greenhouse gas emissions.
• Programs premised on the inability of ordinary Americans to manage their own affairs, wherefore the government proposes to do their thinking for them. Examples: GovCare definition of acceptable healthcare insurance coverage, Consumer Financial Protection Bureau created by GovFinance.
# Hold leaders accountable. U.S. political leaders sometimes act as though they have no connection with the activities of regulatory agencies. In reality, however, the president and Congress between them set the ground rules, appoint (or remove) agency heads, and can clip the wings of an erring agency. Control is a question of will, not of power.
Furthermore, administrative initiatives generally originate in Congress. Witness the Commercial Advertising Loudness Mitigation (CALM) bill, which would direct the Federal Communications Commission to address a longstanding complaint that may not be as simple to resolve as it sounds. Senate votes to turn down the volume on TV commercials, Andrew Taylor, Washington Examiner, 10/1/10.
Managing the transition between programs and ads without spoiling the artistic intent of the producers poses technical challenges and may require TV broadcasters to purchase new equipment.
Hmm, wonder who will pay for that new equipment – could mean more commercials – maybe viewers should use their remotes instead. In any case, wouldn’t you think the US Senate would have more important things to think about?
Another example is a proposed overhaul of the food safety laws, which would give the Food and Drug Administration greater authority to order food recalls. Proponents say the FDA needs to get involved because “food-borne illnesses contribute to 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths in the United States each year.”
Food safety has improved over the years, however, and the states are already regulating in this area. Is it truly desirable to saddle the food industry with two full-blown sets of regulators? Lame ducks take on food safety, Jillian Bandes, Townhall.com, 11/17/10.
# Be flexible and pragmatic – There is no universal cure for the regulatory morass. Conservatives thought they had one in 1946, but the results of the Administrative Procedures Act have been decidedly mixed. Although the rulemaking process is more deliberate and systematic now, it still fails to produce reasonable results – and ever more attorneys and judges are involved. Death of Common Sense, pages 79-83.
As already discussed, Congress may be prepared to tackle some regulatory programs that have aroused public ire – the so called “quick hits” – without much prompting.
In some areas, the most effective approach may be to cut spending. That is how we would suggest trying to get federal bureaucrats out of U.S. schools and to end subsidies for renewable energy and ethanol. Sorry, folks, these programs are simply not affordable.
The regulations in some areas may be OK, or close enough not to spend time and effort trying to fix them.
Organizational rationalization may sometimes be helpful, e.g., pushing to have one agency – versus two – involved in antitrust policy.
Then there are regulatory agencies that should not be eliminated or defunded, as they have valid reasons for existence, but are spiraling out of control and need to be redirected. The only promising approach with such “hard core” offenders is intervention by Congress and/or the president. As an example, tune in next week for our thoughts about reining in the Environmental Protection Agency.
11/15/10 – Fiscal Commission: Co-Chairs’ Proposal Read a Reply
|
Apr. 27 |
May 26 |
June 30 |
July 28 |
Sept. 29 |
Nov. 30 |
Dec. 1 |
On recently visiting the Fiscal Commission’s Website, we noted that the date of the sixth meeting had been changed from November 10 (eight days after mid-term elections) to November 30. No explanation was provided, and it seemed curious that the next to last and last meetings of the Commission would take place on successive days.
Things became clearer on November 11, when it was reported that Co-Chairs Erskine Bowles and Alan Simpson had released a series of draft recommendations. Apparently, a meeting of the Commission did take place on November 10, after all, but the proceedings were blacked out.
In any case, a detailed proposal is now in play. It takes the form of two 11/10/10 documents: (a) Co Chairs’ Proposal (50-slide presentation), and (b) $200 billion in illustrative savings (a 24-page list of 58 ideas to save money, basically documenting suggestions in the presentation).
http://www.fiscalcommission.gov/news (click links to download PDF files)
SUMMARY: The Co-Chairs’ Proposal (CCP) begins with ten “guiding principles and values,” including: Patriotic duty to come together on a plan . . . Washington must lead . . . a sensible, real plan requires shared sacrifice . . . tell Americans the truth . . . don’t disrupt a fragile economic recover, start gradually . . . protect the truly disadvantaged . . . cut [red tape and inefficient spending] and invest [education, infrastructure, high-value R&D] to promote economic growth and keep America competitive . . . cut spending we simply can’t afford . . . bring spending down to 22% and eventually 21% of GDP . . . set goal of 3% annual productivity growth in public sector . . . reform and simplify tax code . . . cap revenue at or below 21% of GDP . . . keep [entitlements] sound over the long run . . . reduce debt burden as a share of GDP.
Highlights: Nearly $4 trillion in deficit reduction through 2020 (see table below) . . . reduces deficit to 2.2% of GDP by 2015, exceeding president’s goal (about 3% of GDP) . . . reduces tax rates, abolishes AMT, cuts “backdoor spending” in the tax code . . . stabilizes debt [as a % of GDP] by 2014 . . . ensures lasting Social Security solvency.
|
DEFICIT REDUCTION ($ in billions) |
||||||
|
|
2012 |
2013 |
2014 |
2015 |
2016-20 |
2012-20 |
|
Spending* |
68 |
128 |
188 |
241 |
1,571 |
2,196 |
|
Tax increases** |
1 |
25 |
51 |
98 |
786 |
961 |
|
Interest savings |
0 |
5 |
16 |
33 |
618 |
673 |
|
TOTAL |
69 |
158 |
255 |
372 |
2,975 |
3,830 |
*About 2/3 discretionary spending, 1/3 “mandatory” spending.
**Includes “other revenue” (an increase in the gas tax).
Another chart projects the longer-term outlook, showing a downtrend in deficit spending that would balance the budget around 2037.
|
KEY FISCAL DATA (% of GDP) |
|||||
|
|
2010 |
2015 |
2020 |
2030 |
2040 |
|
Outlays |
23.8% |
21.4% |
22.0% |
21.8% |
20.5% |
|
Revenue |
14.6% |
19.3% |
20.5% |
21.0% |
21.0% |
|
Deficit |
(9.1)% |
(2.0)% |
(1.4)% |
(0.8)% |
0.5% |
|
[Public] Debt |
62% |
69% |
65% |
52% |
34% |
Discretionary spending cuts: The basic mechanism to force spending discipline would be spending caps, to be enforced by (1) a point of order against legislation approving excess spending, and (2) a sequester triggered at end of session if final appropriations were above the cap. The dollar amount in 2015 would be $204B below the president’s budget request (FY 2011 budget).
Half of the cuts would come from defense spending, but with a “firewall” so that the defense percentage could not readily be raised or cut. “New Congress will renegotiate firewalls beyond 2015.” Move Transportation Trust Fund to mandatory. Change to biennial budgeting. “Establish bipartisan Cut-and-Invest Committee to de-authorize outdated, low priority and inefficient programs and recommend high priority long-term investments.”
Illustrative defense cut and domestic cut lists are presented ($100B each in 2015). The military list is relatively specific, e.g., overhead savings Secretary Gates has promised ($28), reduce procurement by 15% ($20), freeze noncombat military pay for 3 years ($9.2), reduce overseas bases by one-third ($8.5), cut spending on R&D, etc. by 10% ($7), etc. Listed domestic cuts are rather general, e.g., eliminate 250K non-defense contractors ($18.4), eliminate all earmarks ($16), freeze non-Defense employee compensation ($15.1), cut [non-Defense?] federal workforce by 10% ($13.2), Cut-and-Invest Committee activity ($11), 26 other options of $2 billion or less ($17). The only functional non-defense cuts on the chart: reduce Congressional & White House budgets by 15% ($0.8), slow growth of foreign aid ($4.6), eliminate Rural Utility Service programs ($0.5), eliminate funding for commercial spaceflight ($1.2), and sell excess federal property ($1).
Tax reform: Goals: lower rates, simplify tax code, broaden tax base, reduce “tax expenditures”, improve compliance, “make America the best place in the world to start and grow a business,” and reduce the deficit.
Three approaches for reforming the income tax are offered: (1) “The Zero Plan”: set three individual tax rates and one corporate rate, eliminate AMT, eliminate all $1.1 trillion of tax expenditures, “dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates,” and then “add back any desired tax expenditures, and pay for them by increasing one or all of the tax rates from their zero-expenditure low.” (2) Wyden-Gregg plan (somewhat similar to the Zero Plan, except tax preferences would be eliminated on a case-by-case basis). (3) Tax Reform Trigger: Call on Finance Committee in Senate, Ways & Means Committee in the House, and Treasury Department to “develop and enact comprehensive tax reform by end of 2012.” Enforce by escalating “haircuts” to itemized deductions, etc. starting in 2013.
Mandatory budget options: Planned healthcare savings ($282B total for 2011-20) to pay for the “Doc Fix” (payment increases necessary to keep doctors seeing Medicare patients): “expand cost sharing in Medicare and create a cap on catastrophic costs” ($85), enact comprehensive tort reform ($64), require drug rebate payments ($59), etc.
Beyond the Doc Fix: basically assumes productivity improvements: (1) expand successful cost-containment demonstration projects by 2015, (2) identify an additional $200B [annually or over what period?] in federal health spending, and (3) strengthen the Independent Payment Advisory Board. Alternatives to administratively determined savings would require affirmative Congressional approval.
A table of illustrative healthcare savings is provided, which sums to $47B in 2015 (over half of projected mandatory spending cuts for that year). Of this total, $15B would be achieved at the expense of the states (convert federal share of Medicaid payments for long-term care into a capped allotment, reduce taxes that state may levy on Medicaid providers) and $5B (changes to Tricare to increase cost sharing for military retirees was also listed on the Defense spending cuts chart).
After 2020, federal healthcare expenditures would be monitored every 2 years. If the rate of growth exceeded GDP+1%, “require president to submit and Congress to consider reforms to lower spending, such as: increase premiums . . . overhaul the fee-for-service system . . . add a robust public option and/or all-payer system in the exchange . . . further expand authority of IPAB.”
Other mandatory savings: (1) shift to “chained CPI” for all indexed programs because current measures of inflation [supposedly] overestimate increases in cost of living by failing to account for “substitution bias.” (2) Reduce farm subsidies by $3B per year. (3) Adjust the formula for calculating civil service pensions and increase federal worker contribution requirement. Etc. Aggregate savings: $23B in 2015.
“Enforcing the plan to ensure deficit reduction goals are met”: Annual review, action required by the president and Congress if: (a) before 2015, the budget is projected to be out of primary balance (revenues to cover all outlays except interest); (b) after 2015, if the debt has increased as a percentage of GDP from the prior year. However, Congress and the president could waive requirement for corrective action “during years with low economic growth, unanticipated military conflict, or major disaster.”
Reforming Social Security: Treated separately on grounds that the goal in this area is to “reform Social Security for its own sake, not for deficit reduction.” Proposed changes: (A) reduced benefits for well to do retirees, (B) raising the retirement age, currently being raised to 67 by 2027, so that it would reach 68 in about 2050 and 69 in about 2075 – with “hardship exemption for those unable to work beyond 62,” (C) “chained CPI” for cost of living adjustment of pension benefits, (D) “reduce elderly poverty by putting into place a new, effective special minimum benefit,” and (E) gradually increase the taxable maximum payroll tax basis to capture 90% of wages by 2050.
Also, “promote smart retirement decision” by (1) giving retirees a choice of collecting half of their benefits early to minimize actuarial reduction; (2) direct Social Security Administration “to design a way to provide for the early retirement needs of workers in physical labor jobs,” and (3) improve information on retirement choices via “an education campaign.” Also, a laundry list of other “alternative Social Security options,” including: uncap the disability insurance portion of FICA taxes (clearing the way for higher payroll taxes), reinstate college benefits for child survivors, etc.
REACTIONS: What should one make of the CCP? Before offering our assessment, let’s review some public statements by others. Here goes (links omitted for brevity, in alphabetical order, Fiscal Commission members in red print):
#Andrew G. Biggs, American Enterprise Institute: “Congress should consider a reform that could increase retirement incomes while boosting the economy and federal tax revenues: gradually raising Social Security's early retirement age of 62.”
#Co-Chair Erskine Bowles: “This debt is like a cancer that will truly destroy this country from within if we do not address it."
#Senator Tom Coburn (R-OK): "In the real world, no family facing tough economic times has the luxury of treating portions of their budget as sacrosanct. Neither should Congress. The fact is, if our country is going to survive for another generation, Congress has to make the tough choices now that will put us on a sustainable path."
#Senator Kent Conrad (D-ND) on ABC’s Good Morning America: The nation faces the real possibility of becoming a "second-tier economic power" if it fails to address the trillion-dollar-plus deficit. Simply cutting waste and fraud will not solve the problem, and changes to Medicare and Social Security are needed because both programs are headed toward insolvency. "People can say we want to keep what is. What is is not affordable."
#Jon Cowan, Third Way, says that it is “put our shut up” time for both conservatives and liberals. Republicans failed to produce their often-promised deficit reductions when they controlled the government, while Democrats refuse to acknowledge that entitlement programs such as Social Security and Medicare must be trimmed.
#Senator Jim DeMint (R-SC) sees no need to trim Social Security. "If we can just cut the administrative waste," he said on NBC’s Meet The Press, "we can cut hundreds of billions of dollars a year at the federal level."
# Senator Richard Durbin (D-IL) said he would not vote for the plan. "There are things in there that I hate like the devil hates holy water."
#Allison Acosta Fraser, Heritage, called the proposal a good first step. “Like many such reports, there are good and bad policy elements. Indeed, there’s something for everyone to like and hate, though two issues have special importance. First, the co-chairs do not kick the can down the road but lay out some tough choices for cutting spending. Second, the co-chairs did not propose a value-added tax, or VAT.”
#Diana Furchtgott-Roth, columnist: “If Congress regularly overrides an existing law requiring Medicare payments to doctors to be cut when the program is in deficit, as it is today, why should the Commission's recommendations be taken more seriously? What is needed is a radically new model for Medicare, one that lowers costs through competition and market forces, just as prices for cosmetic surgery and Lasik have declined over the past decade.”
#Senator Judd Gregg (R-NH) called the plan "a genuine product that deserves very serious attention." Overall, he said, federal spending would take a bigger hit than taxpayers. Deficit reduction would supposedly be achieved “about 75% in spending reductions and about 25% on the tax side.”
#David Harsanyi, columnist: The $200 billion in proposed spending cuts are reductions in planned spending [increases]. “That's like promising to lose 10 pounds in two years -- after first gaining 20. And if politicians remain true to their calling, we know that discretionary budgets cuts will last until the first ‘emergency’ emerges. New taxes and spending programs, on the other hand, typically sunset when the sun actually runs out of hydrogen.”
#Scott Hodge, Tax Foundation: "Many pundits and lobbyists were expecting the deficit commission to suggest a value-added tax, which would have triggered many denunciations. The absence of a VAT makes everyone take a hard look."
#John Irons, research and policy director for the Economic Policy Institute: "By beginning austerity in 2012, the report does not allow enough time for the economy to recover, nor does it call for the policies necessary to get the economy back on track."
#David Limbaugh, columnist: “Our astronomical deficits are the result not of low taxes, but of profligate spending. So why do we accept the premise that the starting point for deficit and debt reduction discussions must be various tax hikes, tolerating unacceptably high levels of spending, and seeming to take off the table the eradication of programs the government was never intended or constitutionally authorized to establish in the first place?”
#Maya MacGuineas, president of the Committee for a Responsible Federal Budget: "In a period when there has been little good news on the deficit and debt front, this is truly a most encouraging sign. If this co-chair plan is meant to be the starting point, I'd say it would be a pretty terrific ending point.”
#Grover Norquist of Americans for Tax Reform: "[This] confirms what everyone has known—this commission is merely an excuse to raise net taxes on the American people.”
#President Barrack Obama, from Seoul, South Korea: “Before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts.”
#Representative Nancy Pelosi (D-CA) slammed the plan as “simply unacceptable.”
#Peter G. Peterson, Peterson Foundation: “It is critical that all viable reform options be on the table for consideration, and this draft proposal sets the table for a constructive dialogue.”
#Representative Paul Ryan (R-WI): “There ‘s things in here that are good, that can be built on.”
#Representative Janice Schakowsky (D-IL), commenting to reporters as the draft was being released: “This is not a proposal I could support. On Medicare and Social Security in particular, there are proposals I could not support."
#Co-Chair Alan Simpson: "We have harpooned every whale in the ocean, and some of the minnows. No one has ever done that before."
#Martin Sullivan, Tax Analysts: “The proposals are a major step forward and would help get the tax code out of business decision-making.”
#Eric Toder, Tax Policy Center: “In theory, a territorial tax system will help U.S.-based firms to compete more effectively in global markets.” But, “it may also increase incentives for them to invest abroad.”
#Matt Towery, former aide to Newt Gingrich: “[The] Commission recommended treating capital gains at the same tax rate as ordinary income. Are they insane? It was the capital gains cut that . . . got the economy moving in the late 1990s.”
#Richard Trumka, AFL-CIO president: "The chairmen of the deficit commission just told working Americans to drop dead. Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare."
#David Walker, former comptroller general: "In the end, the president is going to have to decide whether to incorporate some of this into the 2012 budget. He's going to have to lead, because if the president doesn't lead on this, it goes nowhere fast."
#Robert Willens, independent tax expert, cautioned that if corporate tax rates were to drop, so would the value of deferred tax assets (such as tax loss carryforwards). Thus, Citigroup might have to book a $14B charge to earnings.
ASSESSMENT: It should be acknowledged at the outset that the CCP represents a serious proposal, which stands in marked contrast to the irresponsible posturing on spending and taxes that has become all too common in Washington. Co-Chairs Bowles and Simpson deserve credit for putting it on the table for discussion.
Despite strenuous objections at both ends of the ideological spectrum, there seems to be considerable support in the middle. If the object of the exercise is to craft a political consensus, one would have to say that the CCP is shrewdly designed.
Other commentators have characterized the CCP as a bold and tough proposal, which cannot win majority support of the Commission. Deficit plan matches $3.8 trillion math with tough politics, Heidi Przybyla and Brian Faler, Bloomberg News, 10/11/10.
A plan offered by the leaders of President Barrack Obama’s commission to reduce the federal deficit might work. It just won’t happen.
We are not convinced of the impossibility of lining up 14 Commission members in support of the proposal, particularly given the possibility of “horse trading” about the details. Certainly, the Republican commissioners do not seem to be united in opposition.
There is far more at stake than reaching a consensus, however, because the Commission’s report will be for naught unless it proposes a workable solution for the fiscal problem. We cannot agree that the CCP has “harpooned all the whales” (to use Co-Chair Simpson’s metaphor), nor even that it represents a bold and tough proposal. Without getting into a detailed (and necessarily lengthy) critique, here are our basic concerns:
First, the analysis ignores the deteriorating fiscal situation of state and local governments around the country. If California declared bankruptcy, say, who could doubt this development would be deemed to trigger the “low economic growth, unanticipated military conflict, or major disaster” exception that is specified on slide 41?
A similar problem exists with SAFE’s spending ceiling, which could be exceeded in “a true national emergency.” However, our proposals would provide some recognition of state fiscal problems by (a) ceding exclusive state tax jurisdiction over alcohol, tobacco, and estates, and (b) relieving the states of federally imposed requirements for education (federal grants would end) and Medicaid (federal block grants would continue).
Second, it is time to end the artificial distinction between “discretionary” and “mandatory” spending, which is perpetuated in the CCP. Compare the approach in our recent analysis. Getting down to brass tacks about spending, 10/25/10.
De-liberalizing benefit programs to which people have grown accustomed is a delicate matter, and the changes cannot be made overnight. But if all these programs are regarded as “mandatory” expenditures, which cannot be adjusted, drastic cutbacks will be unavoidable down the line.
Third, the CCP does not address soaring healthcare outlays in a meaningful way. Top-down driven productivity improvement is doomed to fail, and the only way to control costs without de facto rationing is by enhancing competition and individual choice.
http://www.s-a-f-e.org/healthcare.htm
Fourth, the proposed Social Security “reforms” would leave the minimum retirement age at 62, and a new increase (from 67 to 69) in the normal retirement age would not begin to take effect until after 2027. We believe much faster action is needed.
Also, the proposed “smart retirement” options represent an attempt to claim some of the advantages of converting Social Security into a businesslike retirement plan (with funded personal accounts) for younger workers. The real thing would be far better.
Fifth, a successful program for cutting “discretionary” spending programs will necessarily involve a thoughtful review and pruning of government functions/programs so that unneeded, wasteful, or duplicative programs are eliminated while justifiable programs are adequately supported. The illustrative domestic spending cuts in the CCP go to great lengths to avoid this reality – and are basically useless.
Our suggestion for a follow on Spending Reduction Commission has been perverted into a proposal for a “bipartisan Cut-and-Invest Committee” which would be charged with recommending new spending programs to replace the ones that it proposed for elimination. Oh, please!
Sixth, the “Zero Plan” for tax reform has some attractive features, but it would leave several major problems unscathed – including the double taxation of corporate earnings, the marriage penalty for two-earner households, the high number of Americans who are exempted from the individual income tax, and the proliferation of federal excise taxes (including the new GovCare levies).
With all due respect, our SimpleTax proposal would be a better choice. Also, we would prefer a 20% (versus 21%) of GDP target for federal revenues in tandem with greater discipline on the spending side.
Seventh, the budget should be balanced by 2015, not 2037.
http://www.s-a-f-e.org/the_simple_tax.htm
* * * *
Many apologies, dear readers, for going on at such length this week. But the subject is time critical, and we wanted to get our reactions out fast.
Your input would be greatly appreciated, so do let us know what you think.
* * * This Blogs Reply * * *
Maybe the draft Fiscal Commission
proposal is better than nothing, but balancing the budget many years later is
very unrealistic. We do not know what the future will bring. Your proposal for
earlier balance is in the right direction. However, we need much stronger as
well as earlier action.
I think the key is the American
public. We should make it clear that we will punish members of Congress who do
not at least support the proposals and will reward those who work for more
drastic action than described in the proposals.
One example: Stop payments from the
bankrupt federal government to the states. This includes Medicaid. – SAFE
director
My hat is off to you! Hope our legislators are listening. – IBM alumnus.
11/08/10 – Internal Revenue Code 2.0 – part two
SAFE has developed a SimpleTax proposal that would streamline the tax law and also – together with a spending ceiling of 20% of Gross Domestic Product (GDP) – help to balance the budget. Most revenue components (payroll taxes, corporate income tax, etc.) were discussed last week. We now turn to the individual income tax, which accounts for 40+% of government revenue.
REVENUE GOAL: To bring total revenues up to 20% of GDP in 2015, the individual income tax would be increased as indicated in the following recap.
|
($ in billions) |
1990 |
2000 |
2005 |
2010 est. |
2015 est. |
2015 GOAL |
|
INCOME TAX |
$467 |
$1,004 |
$927 |
$936 |
$1,733 |
$2,041 |
|
% of GDP |
8.1% |
10.2% |
7.5% |
6.4% |
9.0% |
10.6% |
|
% of revenues |
45% |
50% |
43% |
43% |
48% |
53% |
INCIDENCE: As a result of a graduated tax schedule, plus applicable tax exemptions, deductions and credits, taxpayers in the top half Adjusted Gross Income (AGI) cohorts currently pay nearly all of the income tax. The following IRS data are based on tax returns (roundly 140 million) for 2008.
|
Adjusted Gross Income |
AGI |
Income tax (net) |
Avg. tax rate |
|
Top 5% ($160K+) |
$2,927B |
$606B |
20.7% |
|
6-10% ($114K+) |
930 |
116 |
12.5% |
|
11-25% ($68K+) |
1,822 |
169 |
9.3% |
|
26-50% ($33K+) |
1,674 |
113 |
6.8% |
|
51-100% (≤ $33K) |
1,074 |
28 |
2.6% |
|
TOTAL |
$8,427 |
$1,032 |
12.2% |
http://www.taxfoundation.org/taxdata/show/250.html
A progressive rate structure for the income tax is generally considered appropriate, and the average tax rates for high-income taxpayers do not appear excessive. The very low average tax-rate for bottom half taxpayers is due in large part to refundable tax credits, which allow some lower income Americans to receive net tax refunds while others are paying substantial income taxes.
PROPOSED CHANGES: (a) taxable income; (b) tax exemptions, deductions & credits; (c) Alternative Minimum Tax; and (d) tax rates.
a. Taxable income: To prevent duplicative taxation of corporate earnings, we recommend that dividends from standard corporations, and capital gains from investments in their stock, be excluded from the taxable income of shareholders. Income of “pass through” entities (S corporations and partnerships), and capital gains from investments in such entities, would remain subject to individual income tax.
Net gambling winnings should also be exempted from tax in the interests of simplification. Since few gamblers come out ahead in the long run, the loss in tax revenue would be minor.
Certain employee benefits are deductible by employers, but not taxable to employees. Such benefits represent economic income, and they should be taxed in the same manner as salaries and wages. As a result, taxpayers with the same economic income would pay the same income tax without regard to their employment status.
Would taxing the cost of employer-provided healthcare insurance (HCI) coverage disrupt the healthcare system? Quite the contrary, and we have recommended that this tax preference be eliminated rather than “leveling the playing field” by providing a healthcare tax credit for individuals who do not receive HCI coverage through an employer. In search of real healthcare reform, May 2009, recommendation 2.
http://www.s-a-f-e.org/healthcare_reform.htm
Gross taxable income after the foregoing changes would be marginally higher than AGI as presently reported. That is, exempting corporate investment income and net gambling winnings from individual income tax would be more than offset by taxing currently exempt employee benefits.
b. Tax exemptions, deductions and credits – Some tax preferences should be preserved, in our opinion, as follows:
* Personal tax exemptions are warranted so that people with de minimis income will not be required to file a return, but the present personal exemptions are too high. We suggest a personal exemption of $1,000 per person, which once established would be indexed for inflation.
* Interest income on state and municipal debt has been held exempt from federal income tax on constitutional grounds; it should continue to be exempt on this basis. (However, the recently instituted program for subsidizing interest payments on taxable municipal bonds has no constitutional foundation; it should be allowed to expire at the end of this year. “Build America” bonds up in the air after GOP victory, CNBC.com, 11/3/10.)
http://www.cnbc.com/id/39990197?par=yahoo
* Expenses for taxpayer businesses should continue to be deductible so that tax will be paid on business income rather than gross receipts.
* For U.S. taxpayers subject to foreign income taxes, e.g., workers on international assignments, foreign tax credit is appropriate to avoid double taxation of their income.
All other income tax exemptions, deductions (mortgage interest, charitable contributions, state and local taxes, childcare, casualty losses, etc.) and tax credits (Earned Income, Child, energy, etc.) would be eliminated.
While some of these tax preferences have arguable merit, a case-by-case review would trigger endless debate. Note: the flat tax or Fairtax would also eliminate them.
c. Alternative Minimum Tax – The AMT is an alternative calculation method for the income tax, not a separate tax. Originally enacted in an attempt to ensure that wealthy taxpayers could not use “loopholes” to avoid all tax liability, the AMT is becoming potentially applicable to more and more taxpayers because the specified income thresholds were not indexed for inflation. Some 4 million taxpayers are currently subject to AMT, forcing them to calculate their tax liability twice and pay the AMT differential.
But for a perennial AMT patch by Congress, nearly 30 million more taxpayers would be thrown in the same boat. It is time to end this annual exercise by repealing the AMT for everyone. Tax cuts to dominate lame-duck Congress, Damian Paletta, Wall Street Journal, 11/2/10.
d. Tax rates – There would be a single tax rate schedule with the SimpleTax (versus four schedules under current law: married & filing separately, single, head of household, and married filing jointly). However, two-earner households would have the option of separate tax calculations for each spouse in order to prevent any “marriage penalty.”
With the foregoing pruning of tax preferences, income tax rates at all income levels could be cut by 5+ percentage points. Here is an example, which compares the proposed SimpleTax rates to the 2009 actual rates for a married couple, filing jointly.
|
SimpleTax |
2009 actual |
||
|
Income bracket |
Tax rate |
Avg. rate* |
Avg. rate* |
|
$0-30K |
5% |
5.0% |
12.2% |
|
31-70K |
10% |
7.9% |
14.0% |
|
71-140K |
20% |
14.0% |
19.6% |
|
140-300K |
25% |
19.8% |
25.7% |
|
300K+ |
30% |
<30% |
<35% |
*Calculated for income at bracket top.
Applying these rates to 2008 AGI cohort data (see earlier chart), the SimpleTax would produce marginally higher tax revenue than was paid for that year.
|
2008 Actual Income Tax ($B except in first column) |
@ SimpleTax Rates |
||||
|
AGI Cohort |
AGI |
Inc. Tax |
Avg. rate |
Inc. Tax |
Avg. rate |
|
Top 5% ($160K+) |
$2,927 |
$606 |
20.7% |
$667 |
22.8% |
|
6-10% ($114K+) |
930 |
116 |
12.5% |
126 |
13.5% |
|
11-25% ($68K+) |
1,822 |
169 |
9.3% |
186 |
10.2% |
|
26-50% ($33K+) |
1,674 |
113 |
6.8% |
116 |
6.9% |
|
51-100% (≤ $33K) |
1,074 |
28 |
2.6% |
54 |
5.0% |
|
TOTAL |
$8,427 |
$1,032 |
12.2% |
$1,149 |
13.6% |
A further tax increase would result from recommended net additions to taxable income, as discussed above, which should bring total revenue to roundly 20% of GDP. Matters would then stand as shown in the far right column of the following table.
|
Sources of revenue |
1990 |
2000 |
2010 est. |
2015 est. |
2015 GOAL |
|
Individual inc. taxes |
8.1% |
10.2% |
6.4% |
9.0% |
10.6% |
|
Corporate inc. taxes |
1.6% |
2.1% |
1.1% |
2.1% |
2.0% |
|
Payroll taxes, etc. |
6.6% |
6.6% |
6.0% |
6.2% |
6.2% |
|
Excise taxes |
0.6% |
0.7% |
0.5% |
0.5% |
0.6% |
|
Other receipts |
1.0% |
0.9% |
0.8% |
1.1% |
0.6% |
|
TOTAL REVENUE |
18.0% |
20.6% |
14.8% |
18.9% |
20.0% |
ASSESSMENT: In reaction to last week’s entry, which began the rollout of the SimpleTax proposal, a SAFE director suggested more urgent action than we have envisioned. Here is an extract from his comment.
Nibbling away at little features in the tax code does nothing in the medium run. Paying higher taxes is not helpful. The national aggregate budget must be cut more than 15% this next fiscal year to get close to a balanced budget [in all states and the fed] with the enormous tax load we currently carry. Then, taxes must be cut until new revenues come from new business growth in the private sectors.
You cannot ignore California, New York, Illinois, New Jersey and some others. They will continue to spend and beg Washington for alms, and sadly Congress is likely to give it to them in return for meaningless promises to do better in the future.
In defense of our suggestions (as presented in the 10/25, 11/1 and current entries) for balancing the federal budget by 2015, we would make the following points.
First, Congress can only directly control federal spending and taxes; the state and local fiscal situations are a separate matter. But the proposed 20% of GDP spending ceiling assumes no exceptions for any situation short of a true national emergency. If California (for example) cannot pay their bills, then let them declare bankruptcy. (Although there is no formal procedure for this, a state could presumably repudiate selected obligations and defend its position based on inability to pay.)
State and local fiscal problems have been concealed by the availability of federal stimulus funds (which will not continue), creative accounting (raiding trust funds, etc.), and underfunding ($1+ trillion) of pension and healthcare benefit obligations. Some securities analysts expect the municipal bond market to collapse. States face crisis when fed funds dry up, Washington Examiner, 10/4/10.
Would Washington really stand firm in such a situation? Based on past performance, probably not – but with the federal government facing severe fiscal problems of its own, there may be no alternative. The next big crisis: State bankruptcy, Dick Morris & Ellen McGann, Townhall.com, 6/23/10.
If it is the states and Obama that blink first, we will free our local governments of the grip of municipal unions, their rigid work rules and their unaffordable pensions. If the Republicans blink first, they will forfeit their right to represent the American people, having backed down from the challenge of our times.
Second, we did not tackle taxes with the idea of raising revenue, the idea was to help restore confidence in the private sector by simplifying the tax system and making it more business friendly. The budget was to be balanced by cutting spending.
A 20% of GDP spending ceiling was selected after reviewing spending levels in past years because the exceptionally low spending level in 2000 did not seem an appropriate ceiling. Note: the median spending level for 1990-2010 was 20.1% of GDP.
When we got to the tax data, it became obvious that an increase would be needed to hit 20% of GDP (and thereby balance the budget). We incorporated one in the SimpleTax proposal, reasoning that any surplus could be used to reduce debt if Congress spent less.
No one wants to pay higher taxes, including us, but a moderate tax increase that affected all income levels (rather than being imposed only on high earners) seems acceptable so long as the accompanying spending ceiling would be strictly enforced.
Third, political realities cannot be ignored. Although the recent elections shifted the balance of power in Washington, with the Republicans regaining a majority in the House, their opponents continue to occupy the White House and control the Senate. If the Republicans moved too aggressively in attempting to restore fiscal responsibility (a goal they have promised to pursue), this could pave the way for a big setback in 2012.
Indeed, some political observers predict political gridlock for the next two years, which would prevent further action on the liberal agenda but also blunt efforts to address the fiscal problem. Is the Dow right to be in such a celebratory mood? Methinks not, Jeremy Warner, UK Telegraph, 11/4/10.
With the Hill paralyzed, there is now virtually no possibility of a credible deficit reduction plan being agreed at any stage in the next two years – or not unless fiscal crisis before then forces the House to come to its senses.
What strategy should fiscal conservatives (or hopefully visionaries) pursue? One suggestion is to pursue limited goals, e.g., an earmarks ban, that they have a solid chance of winning. Big win, small opportunity: GOP still needs to win trust of voters for big change, David Mastio, Washington Times, 11/2/10.
You can hear it already from The Washington Post's Slate magazine: "If the new leaders make a big deal about banning 'earmarks' - which amount to less than 1 percent of federal spending - count it as a feint. If they propose means-testing Medicare or raising the retirement age, count them as serious." *** Such thinking is a trap.
With GOP victory, time for political compromise, Washington Examiner, 11/2/10.
Americans want less spending, less regulation, less government, but they also expect their elected leaders to forge ahead in that effort forcefully and with due regard for the difficulties along the way. That means they must compromise. The measure of how they perform will be the degree to which they accomplish what the people expect them to do, which is to send Washington to the fat farm.
Others say the Republicans must seek to defund GovCare and other initiatives because the Administration will be unwilling to rethink its agenda. Employ the power of the purse strings: GOP-led House must restore financial accountability, Tony Blankley, Washington Times, 11/3/10.
Whether the GOP likes it or not, it may have its hand forced. We may well see a season of government shutdowns. And once that gets going, it may well be used to try to block various parts of Obamacare as well. The Tea Partiers may not be denied easily. Nor should we be.
Time will tell what happens in the new Congress, but we do not foresee any easy or total victories. In our opinion, conservatives may do well to use several strategies.
If immediate spending cuts can be achieved, great, but we also like the idea of creating a Spending Reduction Commission to review the entire budget and report back before the next election. There needs to be a specific goal, such as a 20% of GDP spending ceiling, and it would send the wrong message to ask the SRC to also review the tax system.
The Bush tax cuts must be extended, another AMT fix is due, and the 1099 reporting requirements in the GovCare bill have to go, but there is also a need for fundamental reform of the tax system. Since Congress has shown itself incapable of dealing with taxes in a rational manner, a Tax Simplification Commission should do the job for them. We are ready, willing and able to testify for the SimpleTax.
As for what a Regulatory Common Sense Commission might accomplish, stay tuned – we will address this subject in a future entry.
11/01/10 – Internal Revenue Code 2.0
If our proposal for a Spending Reduction Commission clicked, the federal budget could be balanced by 2015 – ideally without raising taxes. Getting down to brass tacks on spending, 10/25/10.
Streamlining of the tax system could contribute to renewed business confidence, a robust economic recovery, and rising federal tax revenues over time. Accordingly, SAFE has also suggested a Tax Simplification Commission.
This analysis will (a) state some premises for tax simplification, (b) review three alternative approaches, and (c) present a specific proposal for consideration
PREMISES: What is the purpose of the tax system? We take it to be collecting revenue in a manner that is simple, efficient, and perceived as fair – not achieving social goals or influencing economic decisions.
How much money should be collected? Presumably the amount that is intended to be spent, or perhaps more (any excess can be used to reduce debt). So with a spending ceiling set at 20% of Gross Domestic Product, as we have recommended, a logical target for tax revenue would be 20% of GDP as well.
The tax system is only collecting about 15% of GDP at present – but this percentage should rise as the economy recovers. See the following revenue recap for selected years. Source: Office of Management and Budget, Fiscal Year 2011, Historical Tables.
http://www.whitehouse.gov/omb/budget/Historicals/
|
Sources of revenue |
1990 |
2000 |
2010 est. |
2015 est. |
|
Individual inc. taxes |
8.1% |
10.2% |
6.4% |
9.0% |
|
Corporate inc. taxes |
1.6% |
2.1% |
1.1% |
2.1% |
|
Payroll taxes, etc. |
6.6% |
6.6% |
6.0% |
6.2% |
|
Excise taxes |
0.6% |
0.7% |
0.5% |
0.5% |
|
Other receipts |
1.0% |
0.9% |
0.8% |
1.1% |
|
TOTAL REVENUE |
18.0% |
20.6% |
14.8% |
18.9% |
Note that tax revenue in 2000 was extraordinarily high. Total revenue has not hit 20% of GDP or higher in any other year since World War II. With a 20% of GDP spending ceiling, a marginal tax increase would probably be needed to balance the budget.
ALTERNATIVE APPROACHES: Advocates of tax simplification often suggest a brand new system (options 1 & 2 below) instead of proposing changes to the current one (option 3), and with some logic. Focusing on details of the current system might tend to inhibit the boldness of proposed changes due to a psychological phenomenon known as “anchoring,” which could reduce the overhaul to ineffectual tinkering. On the other hand, defects of a new system could be overlooked in the push to get it adopted.
• Option One – Replace the current income tax with a “flat tax,” as has been done in Russia, Hong Kong, and elsewhere. Numerous tax deductions and credits would be abolished, ditto double taxation of business earnings, and there would be only one tax rate (17%). Exempt interest income, dividends, capital gains, and employer fringe benefits from taxation. Abolish the Alternative Minimum Tax (AMT).
Raise personal exemptions sharply (to $13,200 per adult, $17,160 for an unmarried head of household, and $4,000 per child or dependent), with the result that about half the population would pay no income tax. Those who did owe tax could supposedly file their tax return on “a postcard.”
The flat tax would not actually be “flat.” Average tax rates would range from 0% (for people whose exemptions exceeded taxable income) to nearly 17% (for high earners). Some people would continue to receive net tax refunds, as the Earned Income and Child tax credits would be retained.
Corporate income taxes would also be greatly simplified. There would be one tax rate, again 17%. Interest income, dividends and capital gains would be exempted from tax. There would be no deduction for interest expense or employee fringe benefits. Capital expenditures would be currently deductible (in lieu of taking depreciation). Numerous tax preferences would be eliminated, and also the corporate AMT. Flat Tax Revolution, Steve Forbes, Regnery Publishing (2005).
http://www.s-a-f-e.org/flat_tax.htm
What’s not to like: (1) Refundable tax credits should be eliminated; there is no good reason for anyone to “pay” negative tax. (2) A tax exemption for fringe benefits could result in different tax liabilities for taxpayers with the same economic income. (3) A sharply reduced number of income taxpayers is not necessarily a plus; non-payers would be inclined (as is already evident with the current tax system) to favor expanding government programs that someone else was perceived to be paying for. (4) The corporate tax changes would predictably be labeled as a gift to business interests, making the flat tax proposal nearly impossible to sell.
• Option Two – There has been growing interest in replacing all income (individual and corporate) and payroll taxes with a federal retail sales tax (aka “the FairTax”) levied at a rate estimated to raise the equivalent amount of revenue. The necessary rate has been estimated at 30% of sales prices, which is equivalent to 23% of the sales prices + tax. (Example: Sales price $100, tax $30; tax = 23% of $130.)
The logic: It is economically beneficial to tax consumption instead of taxing income. Also, undeclared income (the “hidden economy”) is currently escaping taxation, which is unfair to those whose income is fully declared.
FairTax advocates envisage that the 16th Amendment would be repealed to ensure permanent elimination of the income tax. There would be no change in federal excise taxes or state & local taxes.
To minimize the burden of the FairTax on lower income Americans, all households would receive a monthly rebate on poverty level (as determined by the government for the household size) expenditures. Thus, a person who consumed only the poverty level amount would wind up paying zero tax.
Some drawbacks: (1) There is little chance of the 16th Amendment being repealed, so the upshot might well be a federal sales tax and an income tax. (2) Imposition of a sales tax of over about 10% of sales value could spark massive tax evasion, so the IRS would not be abolished as advertised (although it might be given a different name). (3) The monthly rebate program would represent a new entitlement program, which would require a bureaucracy to administer. (4) Elimination of payroll taxes would break the existing linkage (however tenuous) between the amount of Social Security and Medicare taxes collected and the benefits these levies are supposed to cover, thereby heightening the perception that these programs are welfare plans rather than insurance arrangements. Forbes, Flat Tax, Chapter 5.
Only a few politicians have touted the FairTax, generally with negative results for themselves, and the prospects for FairTax candidates in the future appear bleak. FAIR Tax Trap, Wall Street Journal, 10/29/10 (link not available).
Our advice to the FAIR taxers is that voters will start to take the idea seriously once the income tax is on the way to repeal. Until then, our advice to candidates would be to avoid the FAIR tax and focus on goals that are more achievable and less politically self-destructive.
• Option Three – A thorough overhaul of the current tax system could achieve some of the same benefits as the flat tax or FairTax with less collateral damage. Also, it would be nice to develop a proposal that all fiscal visionaries could support without an intramural debate about theoretical purity.
Surely we could all get behind a proposal to slash tax rates, eliminate arcane tax preferences, and junk 80% of the Internal Revenue Code and associated regulations. A specific proposal follows.
SIMPLETAX – We are not about to propose a truly flat tax, any more than Steve Forbes did. Labeling our tax proposal as “fair” might seem presumptuous, and in any case that name is already taken. Nor will our proposal be touted as the key to being competitive in the 21st Century global economy or whatever, because no tax system is truly beneficial from an economic standpoint.
The goal should be more modest, namely a tax system that will minimize the damage from withdrawing money from the private sector to pay for the agreed level of government spending. To this end, we should avoid favoring specific industries or economic activities, reduce the clerical burden for taxpayers and the government alike, and hopefully reduce the incidence of noncompliance.
Tax rules should be understandable, and, while not necessarily “permanent,” not in constant flux – which undermines confidence in the private sector. Tax rates should be kept low. The tax base should be broadened. The vast majority of the population should pay taxes, even if the burden varies with ability to pay. For lack of a better name, our proposal might be labeled the SimpleTax.
Existing taxes would be systematically reviewed vis-à-vis these principles, as suggested by the following review (which saves individual income taxes for last).
• Payroll taxes – Roughly 1/3 of total federal revenues come from social insurance and retirement receipts (SIRR), principally payroll taxes for Social Security, Medicare, and Unemployment Compensation (paid by employers only). Here is an SIRR recap for selected fiscal years:
|
($ in billions) |
1990 |
2000 |
2010 est. |
2015 est. |
2015 goal |
|
Social Security |
$282 |
$481 |
$635 |
$856 |
$856 |
|
Medicare |
69 |
137 |
180 |
251 |
251 |
|
Unemployment Comp. |
21 |
27 |
52 |
79 |
79 |
|
All other |
8 |
9 |
9 |
9 |
9 |
|
TOTAL |
$381 |
$653 |
$876 |
$1,195 |
$1,195 |
|
% of GDP |
6.6% |
6.6% |
6.0% |
6.2% |
6.2% |
Departing from the design of the FairTax, we do not advocate elimination of payroll taxes for Social Security and Medicare. Unemployment compensation benefits should be controlled more carefully than they have been recently, but covering them with payroll taxes seems appropriate. Ergo, no changes are recommended.
Payroll taxes represent a drag on employment, however, and the current rates are at about the maximum tolerable level in our judgment. Any proposed increases should be intently scrutinized.
In that regard, the OMB data series we are working away from does not reflect a sharp hike in Medicare taxes for high-income taxpayers, scheduled to take effect in 2013, and other GovCare tax changes. Tax Foundation analysis, 3/21/10.
Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers - additional HI tax of 0.9% on earned income in excess of $200,000/$250,000 (unindexed), and Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed).
http://www.TaxFoundation.org/news/show/26037.html
This Medicare tax increase will hopefully be eliminated via repeal of GovCare, an action needed to clear the way for real healthcare reform. Even if there is no such repeal, there are surely better ways to raise tax revenue than haphazardly increasing the tax bills of high earners (versus, say, the idle rich) as a means of pushing the cost of the GovCare legislation under the rug.
• Excise taxes represent a comparatively small share of total revenue, as shown in the following table.
|
($ in billions) |
1990 |
2000 |
2010 est. |
2015 est. |
2015 goal |
|
Alcohol* |
$6 |
$8 |
$10 |
$10 |
$0 |
|
Tobacco* |
4 |
7 |
17 |
17 |
0 |
|
Gasoline# |
14 |
35 |
36 |
40 |
90 |
|
Air Transport# |
4 |
10 |
12 |
16 |
16 |
|
All other*# |
7 |
9 |
(2) |
5 |
0 |
|
TOTAL |
$35 |
$69 |
$73 |
$88 |
$106 |
|
% of GDP |
0.6% |
0.7% |
0.5% |
0.5% |
0.6% |
*Federal funds, #Trust funds
To raise a more revenue in a much simpler fashion, we would suggest (a) hiking the federal tax on motor fuels to 50¢ per gallon (now 18.6¢ per gallon for gasoline and 24.4¢ per gallon for diesel fuel), crediting the added revenue to general revenues vs. the highway trust fund, (b) continuing air transport taxes at current levels, and (c) eliminating all other federal excise taxes.
While it may be appropriate to impose special taxes on alcohol and tobacco, aka “sin taxes,” these taxes are highly regressive and in the case of tobacco products have been raised to unreasonable levels. Exclusive jurisdiction in this area should be ceded to state and local governments, which are in dire need of more tax revenue these days.
Trust funds to cover anticipated outlays, e.g., black lung disability, inland waterway, superfund, oil spill liability, aquatic resources, leaking underground storage tanks, tobacco assessments, and vaccine injury compensation, could be eliminated or replaced with mandatory private insurance.
GovCare excise taxes are not reflected in the projected data, e.g., a 10% tax on indoor tanning (2010), annual fees on drug companies (2011), 2.3% tax on medical devices (2013), annual fees on healthcare insurance (HCI) providers (2014), and 40% tax on “excess” HCI coverage (2018). Tax Foundation analysis, 3/21/10. As with the increase in Medicare taxes, we would recommend that these levies be stricken (via repeal of GovCare or otherwise).
• Other receipts – Here is a recap of this catchall category:
|
($ in billions) |
1990 |
2000 |
2010 est. |
2015 est. |
2015 goal |
|
Estate & gift taxes |
$11 |
$29 |
$17 |
$28 |
$0 |
|
Customs duties & fees |
17 |
20 |
24 |
39 |
39 |
|
Federal Reserve deposits |
24 |
32 |
77 |
48 |
48 |
|
All other |
4 |
11 |
6* |
92* |
18 |
|
Incremental leasing |
0 |
0 |
0 |
0 |
10 |
|
TOTAL |
$56 |
$92 |
$124 |
$207 |
$115 |
|
% of GDP |
1.0% |
0.9% |
0.8% |
1.1% |
0.6% |
*Includes “allowances” re proposed legislation of $(6) in 2010 and $74 in 2015.
Somewhat surprisingly, given the long-running debate about the “death tax,” the amount of federal revenue at stake is “only” about $30B a year gross (surely much less on a net basis). It would make sense, in our opinion, to eliminate federal estate and gift taxes and cede tax jurisdiction in this area to the states.
We have no suggestions with respect to customs duties and fees or Federal Reserve deposits.
“Allowances” of $74B have been purged from our 2015 goal data; these were merely placeholder entries and have no economic significance. No breakdown of the “all other” category is available, but revenues from oil and gas leasing are probably included. This activity brought in some $6B (principally from offshore leases) in 2000, and it is said to be one of the federal government’s largest sources of non-tax income. American Petroleum Institute fact sheet.
http://www.api.org/aboutoilgas/sectors/explore/oilandnaturalgas.cfm
The “incremental leasing” line for 2015 represents the additional revenues that could be realized from a more aggressive oil & gas leasing program. Such a program would also increase corporate income tax revenues.
• Corporate income tax is one of the most complex areas of the tax law, creating a great opportunity for simplification. It is also an erratic revenue producer, e.g., yielded only 1.1% of GDP in 2010 vs. 2.7% in 2006 & 2007. A recap follows:
|
($ in billions) |
1990 |
2000 |
2010 est. |
2015 est. |
2015 goal |
|
TOTAL |
$94 |
$207 |
$157 |
$411 |
$380 |
|
% of GDP |
1.6% |
2.1% |
1.1% |
2.1% |
2.0% |
In years past, the revenue from this tax was more significant than it has been lately, e.g., 6.1% of GDP in 1952 vs. 1.1% in 2010. Several factors have contributed to the relative decline.
ü About half of U.S. business income (up from about 20% in 1980) is not taxable at the corporate level, but rather at the individual level via “pass through” entities (S corporations and partnerships).
ü Much of the earnings of U.S.-based corporations is from international business activities, and as such is subject to foreign income taxes – which are creditable against U.S. tax when the earnings are repatriated. In cases where a substantial net tax would apply on dividends, U.S. companies typically defer repatriation.
ü The corporate tax rate is reduced by numerous special tax deductions and credits, with the result that the effective federal tax rate on new investments in the corporate sector is somewhat lower than 35%, e.g., 29% according to a recent Treasury study. Volcker tax study, 8/27/10, pp. 65-66. (For more about this report, see our 9/20/10 entry.)
http://www.whitehouse.gov/blog/2010/08/27/perab-tax-task-force-report
Realistically, the potential for increasing corporate income tax revenues is limited. For example, an attempt to tax worldwide earnings while allowing only a deduction for foreign income taxes or force repatriation of low-taxed international earnings would likely boomerang because U.S.-based corporations would be placed at a competitive disadvantage versus international competitors.
The typical legislative response to requests for tax relief has been to enact narrowly defined tax preferences. Accordingly, as the Volcker study (p. 67) dryly observes, “the current corporate tax system contains numerous provisions that encourage businesses to invest in certain kinds of assets or to engage in certain kinds of activities for tax reasons rather than for reasons of economic efficiency.”
The clearest way to improve matter without substantially reducing tax revenue would be to cut the corporate tax rate sharply, say to a top rate of 20%, while eliminating a host of special exemptions, deductions and tax credits (other than the foreign tax credit) that are currently in effect.
Don’t make the R&D tax credit permanent, eliminate it – a tax deduction for the expense should be good enough. Say goodbye to energy tax credits, percentage depletion for oil and gas, low-income housing tax credits, and the special domestic production deduction to subsidize US-based manufacturing. Also repeal corporate AMT, which forces many companies to calculate their taxes in two ways without raising much additional tax revenue.
Jettisoning tax preferences would offset much of the revenue loss from reducing the corporate income tax rate, and a permanent rate cut should encourage new investment and enhance tax revenue over time. Nevertheless, we have assumed marginally lower corporate tax revenue in the 2015 goal data.
* * * *
This discussion of tax simplification was envisioned as a one-entry topic, but the subject is complex and a second entry will be required to do it justice.
We started with a goal of identifying ways to raise overall 2015 tax revenues by 1.1% of GDP. The analysis to this point has increased the apparent shortfall to 1.6% of GDP, and with only the individual income tax left to talk about it appears that many of us would wind up paying higher income taxes under the SimpleTax.
Tune in next week for a discussion of what the new income tax system might look like, and some reasons why the likely increase seems reasonable under the circumstances.
10/25/10 – Getting down to brass tacks about spending. Read Replies
Three weeks ago, SAFE sent the Fiscal Commission some suggestions for its upcoming report. Among them was a Spending Reduction Commission, to be created by the next Congress, which would be tasked with recommending ways to reduce government spending as a percentage of Gross Domestic Product (GDP) to 2000 levels. Fiscal Commission: tough decisions in November, 10/4/10.
An op-ed column about our recommendations was published by the [Wilmington, DE] News Journal, and we forwarded the link – plus a companion note written by SAFE Director Bill Morris – to the Fiscal Commission and others.
http://www.s-a-f-e.org/contacting_legislators_2.htm#10/20/10
Offering such suggestions is one thing; demonstrating their practicality is another. Here are some obvious questions: (1) How much would spending be cut? (2) In what areas would the cuts be made? (3) Would Americans support such cuts?
1. MAGNITUDE OF CUTS – Let’s begin with some top-level fiscal data for selected years. Source: Office of Management and Budget, Fiscal Year 2011, Historical Tables.
http://www.whitehouse.gov/omb/budget/Historicals/
|
|
$ in trillions |
% of Gross Domestic Product |
||||
|
Fiscal Year |
Receipts |
Outlays |
Surplus (Deficit) |
Receipts |
Outlays |
Surplus (Deficit) |
|
1990 |
1.0 |
1.2 |
(0.2) |
18.0% |
21.9% |
(3.9)% |
|
2000 |
2.0 |
1.8 |
0.2 |
20.6% |
18.2% |
2.4% |
|
2005 |
2.2 |
2.5 |
(0.3) |
17.3% |
19.9% |
(2.6)% |
|
2008 |
2.5 |
3.0 |
(0.5) |
17.5% |
20.7% |
(3.2)% |
|
2010 est. |
2.2 |
3.7 |
(1.6) |
14.8% |
25.4% |
(10.6)% |
|
2015 est. |
3.6 |
4.4 |
(0.8) |
18.9% |
22.9% |
(3.9)% |
We proposed a goal of reducing spending to FY 2000 levels for two reasons: (1) the budget was balanced in 2000, and (2) selecting the 2008 spending level as the target would implicitly attribute current deficits to the Democratic Party (both parties are to blame). It turns out, however, that federal outlays in 2000 stood at the lowest percentage of GDP since 1966. Accordingly, we would not be averse to rounding the spending ceiling up to 20% of GDP, to be phased in by 2015.
Spending would have to be cut by roundly 13% from projected levels – or from $4.4T to $3.8T in 2015. Sounds like a challenging goal, but – subject to considering where cuts might be made – hardly an impossible one.
Other countries with fiscal problems have reduced their spending by similar percentages, and they survived the experience. Spending can be cut, Veronique de Rugy, Reason Magazine, Aug-Sept. 2010.
Other countries have managed to cut spending. According to the IMF study, over the last 30 years nine developed nations have cut their structural deficits by at least 10 percent of GDP. Ireland reduced spending by 20 percent from 1978 to 1989. Sweden and Finland both achieved cuts of 13 percent from 1993 to 2000, and Sweden pulled off another 13 percent cut from 1980 to 1987. Denmark managed a 12 percent reduction from 1982 to 1986; Greece, 12 percent from 1989 to 1995; Israel, 11 percent from 1980 to 1983; Belgium, 11 percent from 1983 to 1998; Canada, 10 percent from 1985 to 1999.
http://reason.com/archives/2010/07/14/spending-can-be-cut
The new coalition government in the UK has proposed spending cuts averaging 19% for most spending programs so as to shore up the nation’s credit standing. Critics complain that the cuts will be more severe than necessary due to a preference for smaller government (the same motivation probably applied in reverse when government programs were being expanded to current levels). UK government stakes its future on austerity plan, David Stringer, ABC News, 10/20/10.
As many as half a million public sector jobs will be lost, about 18 billion ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned. Even Queen Elizabeth II will take a hit, asked to trim the budget the government provides for her staff by 14 percent.
http://abcnews.go.com/Business/wireStory?id=11924137
So let’s accept a 20% spending ceiling for discussion purposes and proceed to the next question.
2. MAKEUP OF CUTS – You think we should cut spending. OK, what do you want to cut? If someone asks you this question, choose your response carefully. The dialog could easily turn into an unwinnable “why not, yes but” game. We couldn’t possibly do that to seniors, to the economically vulnerable, to small business, to farmers, to veterans, to the environment, to (fill in the blank). Where to cut spending, Cal Thomas, Townhall.com, 10/19/19.
It's a loaded question, of course, and those who ask it follow it up with vitriolic assertions that any cuts will mean that children will go hungry, the elderly will be evicted from nursing homes and the federal government will be forced to close, meaning no more Social Security checks. This is precisely the approach taken in 1995 when the Clinton administration set a trap for the new Republican congressional majority and shut down the government, sending Republicans into a hasty retreat, from which they and their proposed spending cuts never fully recovered.
A starting point might to look for spending areas that have grown faster than the overall economy. For example, here is the “super function” breakdown of spending for Fiscal Years 2000, 2010 est., and 2015 as projected. OMB tables.
|
|
Percentage of GDP |
|||
|
|
1990 |
2000 |
2010 est. |
2015 est. |
|
Human resources |
10.8% |
11.4% |
17.1% |
14.6% |
|
National defense |
5.2% |
3.0% |
4.9% |
3.6% |
|
Physical resources |
2.2% |
0.9% |
1.2% |
0.7% |
|
Net interest |
3.3% |
2.3% |
1.3% |
3.0% |
|
Other functions |
1.2% |
1.2% |
1.5% |
1.5% |
|
Offsetting receipts |
-0.7% |
-0.4% |
-0.5% |
-0.5% |
|
TOTAL OUTLAYS |
21.9% |
18.2% |
25.4% |
22.9% |
Hmm. The growth in national defense spending between 2000 and 2010 reflects two wars, and significant defense cuts are already projected (and being planned for). Interest expense will go up, too bad, but that is the inevitable consequence of rising debt and interest rates.
The biggest opportunity for spending cuts appears to be in “Human resources” (HR), which has been growing faster than the economy for decades and now accounts for 2/3 of the total budget. Given an aging population, moreover, the projected reversal of the HR growth trend between 2010 and 2015 seems optimistic. Let’s drill down a bit.
|
|
Percentage of GDP |
|||
|
|
1990 |
2000 |
2010 est. |
2015 est. |
|
Social Security |
4.3% |
4.2% |
4.9% |
4.7% |
|
Medicare |
1.7% |
2.0% |
3.1% |
3.4% |
|
Medicaid |
0.7% |
1.2% |
1.9% |
1.8% |
|
Other health |
0.3% |
0.4% |
0.6% |
0.4% |
|
Education, training, etc. |
0.6% |
0.5% |
1.0% |
0.7% |
|
Income security |
2.6% |
2.6% |
4.7% |
2.8% |
|
Veteran’s benefits & services |
0.5% |
0.5% |
0.9% |
0.8% |
|
TOTAL OUTLAYS |
10.8% |
11.4% |
17.1% |
14.6% |
The bulk of HR outlays go to seniors via Social Security, Medicare, part of Medicaid, federal retirement benefits (in Income security), and Veteran’s hospitals. Demographic trends will continue inflating the costs of these programs barring changes that are not currently planned. Notwithstanding the hoped-for economic recovery, we would question the projected decline of HR outlays vs. GDP in every area but Medicare.
De-liberalizing benefit programs to which people have grown accustomed is a delicate matter, and the changes cannot be made overnight. But if all these programs are regarded as “mandatory” expenditures, which cannot be adjusted, drastic cutbacks will be unavoidable down the line. Here are some changes that should be considered now:
• Social Security is a “pay as you go” (or unfunded) pension plan that will become increasingly costly as the number of beneficiaries grows. The only way to stabilize the program is to convert it to a funded (individual accounts) retirement savings plan. This could be accomplished over time by allowing younger workers to choose between an individual account and traditional Social Security benefits.
We recognize that an individual accounts option was rejected in 2005, but the proposal offered was poorly designed (partial conversion to individual accounts, creating a plan that was neither fish nor fowl) and even more poorly explained. The selling point should not have been purported cost savings, which were obscured by the upfront outlays required to fund the program, but rather ownership, inheritability and choice. It would make sense to try again, and this time offer a complete conversion to individual accounts.
http://www.s-a-f-e.org/social_security.htm
Pending an opportune time to offer such a proposal, here are two suggestions for shaving Social Security costs:
ü Raise the early retirement age from 62 to 65 and the normal retirement age from its current level (being raised from 65 to 67 by 2027) to 70, in recognition that Americans are living longer on average. These changes would be phased in over the next decade.
ü Tighten the eligibility requirements for disability benefit payments, which currently account for about one dollar out of six of Social Security outlays. Clamor builds for another Social Security fix, 8/16/10.
• Medicare cost cuts are needed, but they should not be achieved by arbitrarily slashing reimbursement rates or rationing allowable care. The effect of such cutbacks would be to degrade the quality of care for patients, as has already happened with Medicaid.
Our suggestion would be to provide capped funding for private insurance coverage to future retirees. Traditional Medicare coverage would be phased out as current retirees pass on. For discussion of the rationale and expected benefits, see In Search of Real Healthcare Reform, proposal 6.
http://www.s-a-f-e.org/healthcare_reform.htm
• Medicaid is worse off than Medicare, both fiscally and operationally, in part due to being jointly run by the federal and state governments. We find it hard to envision much improvement unless one level of government or the other takes charge.
Our suggestion would be for the states to assume full responsibility for Medicaid. The federal government would provide block grant funding without attempting to dictate the coverage provided. Once established, block grants would be indexed for general price inflation. See In Search of Real Healthcare Reform, proposal 4.
• The word “education” does not appear in the Constitution, and the founders doubtless expected that schools would remain a private or at most state area of responsibility. With the notable exception of ending racial segregation in the schools, we believe that federal intervention in the educational arena has done more harm than good. State school systems tend to be administratively top heavy already, and a federal overlay is clearly overkill. Education page, this Website.
Operating responsibility for schools is best vested in the administrators and teachers, who should then be held accountable for results. To the extent that school district and state level personnel have tried to micromanage the details, issuing rules and regulations to cover every situation, they should step back.
We see no need for another layer of monitoring at the federal level. If there is going to be a U.S. Department of Education, we would suggest that it be charged with maintaining a data bank of best educational practices at the state and local level, sponsoring national and international educational contests, and the like.
We have similar reservations about federal programs for higher education, which are projected to more than double between now and 2015.
Accordingly, it is suggested that federal expenditures for secondary and higher education be eliminated by 2015, or nearly so, reducing spending by 0.5% of GDP in that year.
There might be some hardship for state governments that have been receiving federal grants, but the impact would be softened by eliminating the federal strings and red tape that have accompanied these grants. All things considered, we would not propose that the current federal grants be converted to block grants.
• “Income security” is a catchall term, and another table seems necessary (sorry) to convey what is in the category.
|
($ in billions) |
1990 |
2000 |
2010 est. |
2015 est. |
|
General retirement & disability (ex Social Security) |
5 |
5 |
8 |
11 |
|
Federal employment retirement & disability |
52 |
77 |
121 |
141 |
|
Unemployment compensation |
19 |
23 |
194 |
69 |
|
Housing assistance |
16 |
29 |
77 |
50 |
|
Food & nutrition assistance |
24 |
33 |
99 |
99 |
|
Other income security |
33 |
87 |
187 |
168 |
|
TOTAL - $ in billions |
$149 |
$254 |
$686 |
$538 |
|
TOTAL - % of GDP |
2.6% |
2.6% |
4.7% |
2.8% |
Our off the top suggestions for this area are that (1) the federal government should follow the example of private industry and convert its defined benefit pension plans to defined contribution retirement savings plans (aka 401-Ks); and (2) eligibility requirements for food stamps should be tightened. It would also be interesting to know the makeup of the “Other income security” category.
• Finally, while no one wants to skimp on veteran’s benefits, we can envision considerable savings from eliminating VA hospitals and covering the cost of treatment for veterans in private sector facilities.
Would the foregoing changes suffice to reduce total government spending in 2015 from the projected 22.9% of GDP to our proposed 20% ceiling? Possibly, but it would seem prudent to make sure by diligently economizing in other areas.
There are many potential targets, including corporate welfare, agricultural price supports, alternative energy subsidies, Amtrak subsidies, federal employee compensation (excessive vis-à-vis comparable positions in the private sector), selling the post office to FedEx or UPS, selling part of the huge federal landholdings, merging the Army & Marine Corps, and defunding National Public Radio (shame on them for firing Juan Williams).
Cato’s recap of potential spending cuts on a department-by-department basis (currently under development) should be a handy resource, check it out.
http://www.downsizinggovernment.org/
3. PUBLIC SUPPORT – Having proposed a 20% spending ceiling and concluded that compliance is doable, we get to the really tough question – would such action be politically feasible? One retired finance executive puts it this way:
Clearly, you are correct to promulgate balancing the budget, lower taxes, etc. But, without really tackling the problem by politicians, which I believe will never happen, nothing else will matter. With 50%+ of our voters not paying taxes, and looking for the proverbial free lunch, then I feel we (our children and grandchildren) are doomed.
In a similar vein, over half the Democrat members of the House recently wrote the president threatening to torpedo the Fiscal Commission’s report if there are any recommendations to privatize or de-liberalize Social Security. House Dems pressure Fiscal Commission against Social Security changes, Jordan Fabian, The Hill, 10/19/10.
"If any of the [fiscal] commission’s recommendations cut or diminish Social Security in any way, we will stand firmly against them," they wrote. "We urge you to join us in protecting and strengthening Social Security rather than letting it fall victim to a misguided attempt to reduce budget deficits on the backs of working families."
But let’s not be too quick to blame the politicians, because the general public has been lax too. Sure, the Tea Partiers have shaken things up a bit, but many people are still sitting on the sidelines or even defending the status quo. Economists question “tea party” push for drastic spending cuts, Patrice Hill, Washington Times, 10/20/10.
The tea party movement appears to be the only constituency for such drastic action in the U.S. While most American voters are focused on the economy and what the government can do to make things better, tea party supporters view the public debt — not the economy — as the most important issue facing the country.
Here is an example of the vagaries of public opinion. A majority dislikes GovCare, based on what they know or have heard about this legislation, but there is considerably less support for urging its repeal. AP-GfK Poll: Americans split on healthcare repeal, Jennifer Agiesta & Ricardo Alonso-Zaldivar, Washington Times, 10/22/10.
#Overall, Americans remain divided about the changes. Among likely voters, 52 percent oppose the legislation, compared with 41 percent who said they support it. Strong opponents outnumber strong supporters by 2-to-1.
#Among likely voters, 36 percent said they want to revise the law so it does more to change the health care system. A nearly identical share — 37 percent — said they want to repeal it completely.
Sorry, folks, but you can’t have it both ways. Assuming that this huge and complex bill was a step in the wrong direction, as we believe, the only practical way to fix things is to repeal GovCare and start over. If someone’s feelings get hurt in the process, too bad.Nixing – or “fixing” – health[care] law? Don’t hold your breath, Carrie Dunn, NBCWashington.com, 10/21/10.
Some “fixes” could receive bipartisan support. Republicans are likely to target one particularly unpopular IRS reporting requirement that could add a hefty paperwork burden to many companies. But health policy experts and congressional aides on both sides of the aisle agree that the core pieces of the bill are so intertwined that it would be almost impossible to remove its most unpopular parts without collapsing the system on which the legislation is premised.
Building a consensus for spending cuts of the magnitude discussed in this entry seems well nigh impossible right now, and it may not look a whole lot easier after the elections. Why a potential Republican majority shouldn’t excite fiscal conservatives, Timothy Carney, Washington Examiner, 10/20/10.
But perhaps there is enough support to take the first step by creating the Spending Reduction Commission that we have recommended and giving it a crack at the job.
It might help to make clear that (a) taxes will have to be raised big time if the spending cuts are not made, and (b) 50% of the population is not going to be exempted. In our experience, no one is real fond of paying taxes. Tune in next week for a discussion of the role of the Tax Simplification Commission.
This could be this country’s last chance to avert a fiscal meltdown. Let’s go for it!
* * * * This Blogs Replies * * * *
Would the politicians treat a spending ceiling like they did the debt ceiling? Anyway, it sounds like worth trying to me. - SAFE member, California
Right on, right on, right on, & have the chairman represent the taxpayers, who are forced to pay the bills. - SAFE member, Arizona.
If you want to see what an ingrained entitlement attitude does to people, watch the unions in France rioting and bringing the country to a standstill solely because the government wants to (has to, if it doesn't want to go broke!) move the full retirement age for their equivalent of our SS up 2 years from 60 to 62. We just did that; instead of 65, it's now 67 for anyone age 50 or younger, and the American public accepted it without a peep. It probably needs to be moved to 70. Heck, I'm 72, and still working (have my own consulting business), still cut my own grass, change the oil in my cars, fix shingles on my roof, climb my (large) Pin Oaks to cut limbs off with my chain saw, and see no reason to move to a "retirement community". If my full SS payments hadn't started until I was 70, it would not have cramped my life style materially. – Climate Common Sense member
10/18/10 – Surveying the path forward
In addition to substantive news and analysis, we occasionally muse about how to promote SAFE’s agenda. With mid-term elections that could alter the political balance of power only two weeks away, another strategy review may be in order.
This entry will begin by reprising some earlier observations and then discuss a current challenge (promoting SAFE’s suggestions for the Fiscal Commission).
THE OPPOSITION: Liberals believe the country will thrive under the aegis of big government, whereas free markets and competition are not to be trusted. They tend to overlook any evidence to the contrary, such as the role of supply and demand. The Icarus syndrome: why the bad ideas keep coming, 4/28/08.
Instead of attacking high gas prices, in our opinion, the government should stand back and allow market forces to operate. Better yet, it could help things along by removing barriers to U.S. petroleum production, scrapping ethanol mandates and subsidies, etc.
Such a strategy would work pretty well, we believe, but it is so simple that anyone could lead the charge. Promising to “stand up to big oil” or cure “America’s addiction to oil” has a more inspirational ring, never mind whether a tax & subsidy scheme would result in lower energy prices or push them up some more.
Given that higher energy prices are the all but certain result of tax & subsidy, politicians engage in a bit of fancy footwork. The idea is to point to a problem that “must be solved” and propose a solution without talking much about cost. Enter the manmade global warming (aka climate change) theory.
Political self-interest is also a factor, and some politicians get in the habit of trading earmarks for support. Here is an example from a 2008 television report (Bill Moyers, PBS). What legitimate motive could there be in this case for making the military buy unneeded equipment?
A $4.65 million patrol boat the Coast Guard hadn’t even asked for and decided it couldn’t use was eventually given away by the Coast Guard to a California sheriff’s office.
The sponsors of big government programs probably do believe in them, however, so let’s not be overly cynical. Connecting the dots: earmarks matter, and words also, 3/3/08.
. . . we are not inclined to impugn the motives of those of a big government persuasion. They sincerely believe in their vision of how the world should work, just as we believe in ours. But this does not mean that our ideological opponents are above incomplete and/or misleading arguments, and when they make such arguments we should call them on it.
THE MUDDLED MIDDLE: Most Americans lack strong convictions as to the appropriate size or role of the government. They focus primarily on how the government seems to be working for them. If dissatisfied, they will likely switch their votes next time. That seems fine, except for one thing: many voters have distorted perceptions and/or unrealistic expectations.
Thus, according to Professor Bryan Caplan (George Mason University, also affiliated with Cato Institute), the public’s thinking about economic policy issues is systematically biased in four identifiable ways:
# Anti-market bias, or tendency to believe that prices and output should be determined by the government rather than by supply and demand.
# Anti-foreign bias, or tendency to underestimate the economic benefits to be gained from interactions with foreigners.
# Make-work bias, or tendency to underestimate the economic benefits of conserving labor.
# Pessimistic bias, or tendency to overestimate the severity of economic problems while underestimating the underlying strength of the economy.
As a result, Professor Caplan concludes, bad answers may quite possibly carry the day. Getting through to “irrational” people, 9/17/07.
Another problem is that government benefits are addictive. Although current entitlement programs (Social Security, Medicare, etc.) are economically unsustainable, Americans who have grown accustomed to being on the dole will not willingly agree to take less. This promotes conflict between the makers and takers in our society, which Arthur Brooks of the American Enterprise Institute characterizes as a culture war. And never the twain shall meet: the Left/Right divide, 6/28/10.
[This is] a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise -- limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.
SAFE’S AGENDA: For those who dislike the way this country is headed, there are two basic strategies. One approach is defensive, i.e., attempt to block anticipated changes. The other is to propose changes to the status quo that would be more to their liking.
We believe that defensive strategies are ineffective. Change is inevitable, remember the story of King Canute, and it is even less feasible to turn back the clock. How to win: be proactive, not reactive, 10/29/07.
So we consider ourselves “visionaries” rather than “conservatives,” and when possible offer creative alternatives instead of simply saying “no.” Thus SAFE did not content itself with opposing the proposals that led to GovCare, we offered our own plan, which would have steered the healthcare system in a very different direction.
Although the healthcare battle has been lost for now, the problems we identified still exist – and they need to be fixed. If enough people become disenchanted with GovCare, which was sold to a skeptical American public by promising far more than the plan is likely to deliver, our proposals remain available for consideration. In search of real healthcare reform, May 2009.
There is general agreement that the U.S. healthcare system is in serious trouble, although the level of services available is perhaps the best in the world. The problem is soaring costs, which if allowed to continue will make healthcare unaffordable for everyone except the wealthy – and also threaten the fiscal safety of the U.S. government.
http://www.s-a-f-e.org/healthcare_reform.htm
PRESENTATION: There is an art to promoting one’s ideas, and we have offered many suggestions in this vein, including the following (in chronological order):
• Ask pointed questions that cannot readily be ducked. Thus, we suggested a series of questions on healthcare in 2008 – too bad no one posed them to the candidates. If you want good answers on healthcare, ask good questions! 2/11/08
Healthcare spending represents a higher percentage of GDP in the United States than in any other country, yet the outcomes in our country are less favorable in many respects, such as life expectancy at birth, than those in other leading countries. Are we getting our money’s worth? Why should we spend ever more on healthcare versus housing, food, transportation, education, national defense, and the other needs of life?
Do you agree that present and projected healthcare outlays by the government are unaffordable, raising the likelihood of a financial crisis within the next 5 to 10 years?
How much would your healthcare proposals cost the government over the next 20 years versus the cost of continuing present programs? If there would be added cost, how can your proposals be responsibly advocated when we will not even be able to pay for the existing programs? If there would be a net savings, how much and what would be done with the money?
If your proposals would both raise the quality of healthcare service and reduce costs, how would these seemingly contradictory goals be achieved? How can we be sure that the costs of your proposal are not being underestimated by a wide margin, as has happened repeatedly with proposed healthcare initiatives in the past?
One criticism of the current healthcare system has been that insurance companies have too much power to make healthcare decisions versus patients and their families. Do you think this is currently a valid criticism? How would you propose to prevent this from happening in the future? Would you agree that it would be equally unacceptable to empower government bureaucrats to make such decisions?
Some providers of healthcare prices and services are charging what seem to be extortionate prices, e.g., thousands of dollars per night for a hospital stay, $5 to $10 per pill for prescription drugs, etc. What would you propose to do about this, if anything?
Do you think it is right for people without medical insurance to be charged substantially more for healthcare services and drugs than people with insurance, i.e., why shouldn’t the price be the same for everyone except to the extent justified by demonstrable cost differences?
• Remember Aristotle’s theory that a persuasive message has three elements: logos (reason), pathos (emotion), and ethos (credibility). Logical arguments provide a starting point, but images and stories are needed to get people interested. And unless you avoid overstated or misleading pitches, no one will give you “the time of day.” Getting action on Social Security, 4/14/08.
• Do not hesitate to address hard-core opponents, even though there is little hope of changing their minds, as when SAFE challenged the EPA’s proposed finding that CO2 et al. are “pollutants” for purposes of the Clean Air Act. But don’t stop there; leverage your efforts by letting others know of the position you have taken. See our 6/8/09 letter to the members of Congress from Delaware, which advised of what we had told the EPA and urged that Congress call the agency to heel.
http://www.s-a-f-e.org/contacting_legislators_2.htm#June_8,_2009
• No matter how complex the policy issues in question, focus on explaining them in a clear and understandable manner. Among the ways to do this: shorter sentences, less jargon, and punchier conclusions. Once again, this time in plain English, 12/1/08.
• Target logical people, weave some information pertaining to the target into your letter or call, be concise (one page letters are best), and provide sources for key points that are not a matter of common knowledge. Pointers for the loyal opposition, 12/22/08.
• Be creative. See our response to an inquiry from a member of the Fiscal Commission. Such an inquiry is about as likely as a White House call to the red phone on the set of Glenn Beck’s TV show, but it enabled us to address some potential concerns that the commissioners are unlikely to talk about publicly. Resolving the fiscal mess: SAFE responds to a fictional inquiry, 7/19/10
CURRENT CHALLENGE: Given a December 1 deadline, it is hard to visualize the Fiscal Commission coming up with satisfactory recommendations to address a fiscal problem that has been in the making for decades. The Commission might do better to acknowledge the root cause and dimensions of the fiscal problem and recommend a process to tackle it during the next session of Congress (2011-2012).
Our three-commission approach was proposed in this blog two weeks ago. Fiscal Commission: tough decisions in November, 10/4/10.
We also e-mailed an executive summary to the Fiscal Commission with a link to SAFE’s blog entry for the details. Note the invitation to readers to send their own e-mails to the Commission (there is still time to do this).
http://www.s-a-f-e.org/contacting_legislators_2.htm#10/4/10
OK, what else should we or could we do to sell our proposal?
A threshold inquiry might be whether the proposal is aligned with SAFE’s general principle of being proactive rather than reactive. After all, cutting spending to the levels of 2000 sounds like trying to go back in time instead of looking to the future.
The point is not to replicate the pattern of spending in the year 2000, however, but merely to match the overall level of spending (as a percentage of Gross Domestic Product) in that year. Some spending programs that existed in 2000 might be eliminated entirely in meeting the goal, while other programs maintained current funding levels. The issue would be cost vs. benefits for all areas of the budget, which should be the key issue in any logical budgeting process unless political considerations are allowed to take precedence (as has often happened).
We had a specific reason for keying on spending levels in 2000, by the way, which was to blunt the partisan implication of the cutting spending to 2008 levels reference in the GOP’s Pledge to America. So long as the two parties keep blaming each other for the fiscal problem instead of accepting joint responsibility, it will be tough to make any progress in solving the fiscal problem.
By way of follow-up, the blog entry about our suggestions for the Fiscal Commission was condensed into a story for the SAFE newsletter. Opportunity knocks, Issue 59, October 2009.
http://www.s-a-f-e.org/nwsltr59.htm#OPPORTUNITY
We also submitted an op-ed column to the [Wilmington] News Journal, which was published on October 15.
Finally, dear readers, if you like our suggestions for the Fiscal Commission, we would appreciate it if you would pass them on with your endorsement to family members, friends, and public officials. If enough people get on board, it just might be possible to get some constructive action in Washington for a change.
10/11/10 – The bailout mentality puts us all at risk
There is something in the human psyche that does not want to accept losses. Up to a point, resistance is admirable, but when carried too far it can block acceptance, adjustment, and renewed progress. Thus, to use a simple analogy, “don’t cry over spilled milk,” clean it up and buy another bottle.
Some other examples: It may make sense to scrap a damaged car and buy a new one. You may do better to sell stock in Company X at a loss than hold on in hopes of a rebound. Having lost a lucrative job, a lower-paying job may be your best option. If you cannot pay your bills and debt service, bankruptcy may pave the way for a fresh start.
The choice should be based on a rational evaluation of the alternatives. You would be foolish to scrap the car because a fender is dented; get the problem fixed or live with it. If there is good reason to consider Company X stock a bargain at the current price, be patient (or even buy more). Having searched diligently for a comparable job, to no avail, this may indeed be the time to lower your sights or consider relocation. Could you avert bankruptcy by pruning your spending?
Businesses can face similar issues, as for example when the subprime mortgage and housing bubble burst in 2007-2008 and many firms were left holding substantially devalued assets. Was it better to liquidate the assets for what they would fetch, claiming any applicable tax write-offs, or hold on hoping the housing market would recover?
So long as such choices are up to the individual or business concerned, the goal is relatively straightforward – make the best deal you can. Things may get more complicated, however, if a third party with deep pockets intervenes.
“Don’t take that analyst job,” says your rich aunt, “I’ll pay your rent until something better turns up.” For better or worse, her support may induce you to keep looking for an executive position.
The would-be rescuer is more commonly the government, which seems increasingly wedded to the idea that people facing problems should be supported rather than left to their own devices. This entry will review several examples of this phenomenon, which we have dubbed the “bailout mentality.”
Let it first be noted, however, that SAFE does not condemn government assistance in principle – the question is how much help, under what circumstances, and for how long.
Thus, Tennessee fire fighters were justly criticized for watching a family’s house burn to the ground because the annual service fee had not been paid. Probably they will keep their jobs, government workers are rarely held accountable for mistakes, but their inaction was inexcusable. When Uncle Sam’s in charge, no one claims responsibility, Ashley Herzog, Townhall.com, 10/7/10.
TROUBLED ASSET RELIEF PROGRAM – TARP was launched in the fall of 2008 during a financial panic. Many conservatives objected, but there were compelling arguments that the program was necessary under the circumstances. Are we there yet: go to sleep, it’s another 500 miles, 9/29/08.
In Congressional hearings last week, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke attempted to convince legislators of the need to authorize up to $700 billion in federal funds to buy financial assets that do not have a ready market and have led to a vicious circle of declining asset values, write-downs, capital increases, and further declines in asset values.
Action was needed, it was said, to head off a panic in the global financial markets that could have disastrous consequences. Needed changes in the regulatory scheme of things, tax policy, etc. could be dealt with later.
Paulson and Bernanke warned that global financial markets might collapse if action was not taken. The initial idea was to purchase mortgage-backed securities at their estimated fair value, not shovel out cash to financial firms (as was actually done). SAFE declined to oppose TARP, albeit resolving to be wary of any such proposals in the future. Time to get real, 10/6/08.
Fast forward to the present. The financial panic of 2008 has long since passed (although more financial turbulence may lie ahead), and it is easy for critics to label TARP as an unjustifiable handout to Wall Street.
Supporters say the Troubled Asset Relief Program rescued the country from another Great Depression. Critics counter that it simply handed money to the same Wall Street banks that plunged the country into recession in the first place and, moreover, it failed to help Main Street Americans.
The best thing anyone has to say about the program at this point is that it cost far less than $700B. R.I.P., TARP: Government rescue ends Sunday, ABC News, 9/30/10.
The non-partisan Congressional Budget Office has estimated that the costs of the program will be 90 percent lower than the original $700 billion of taxpayer funds. On top of that, the Treasury Department has steadfastly said that taxpayers will earn a profit on the portion of the program that invested money in banks. To date, over half the money invested by Treasury has been repaid to the government.
Some observers question the TARP cost estimate, which is based in part on rosy expectations of how much money can be raised by selling the equity stakes taken in General Motors and AIG. But the key point is not whether the program cost $50B or $150B; it is the precedent that was set. The “toxic” truth about TARP, Howard Rich, Townhall.com, 10/7/10.
If certain firms are deemed “too big to fail,” which was the justification for TARP, then their managers can assume excessive risks in the serene conviction that they will get rich if things go well and the government will step in if things go sour. Many people resent this scenario, and their anger has had two important results:
# A sweeping financial regulation bill was enacted. The legislation was touted as a means to prevent future bailouts, but it will actually institutionalize the procedure by granting sweeping new powers to the Financial Stability Oversight Council, Secretary of Treasury, and others. GovFinance: too bad to fix, 5/10/10.
# Pressure built to even the scales with a bailout for “Main Street.” This idea would come to fruition within less than six months.
ECONOMIC STIMULUS – In February 2009, the president and his party won approval for a two-year, roundly $800B economic stimulus package that was supposed to spark an economic recovery. There were some short-term tax cuts in the mix, but the ESP was primarily a spending bill – and many of its provisions did not meet the “timely, targeted and temporary” criteria that are generally advocated in this context. Economic stimulus program: what’s the rush? 2/2/09.
Many elements of the ESP (as passed in the House) were designed to promote agendas other than getting the economy back on track, and the effects are clearly not expected to be temporary. Ergo, this is not a stimulus bill meriting fast track consideration – it is a spending bill that should be evaluated as such.
No matter, the stimulus bill was swiftly enacted to “put this economy back on track and put this country back to work.” Playing hardball, 2/16/09
In summary, the economic stimulus bill was rammed through without thoughtful consideration, and the press conference to explain it was a sham. Americans have a right to expect more from the president and his party. We suggest that they demand it.
This outcome might seem forgivable if the ESP had worked, but it did not – unless one accepts the lame argument that things would have been even worse without it. Time to admit Obamanomics has failed, Washington Examiner, 8/8/10.
[Outgoing White House economic adviser Christina] Romer is best known for drafting the February 2009 report "The Job Impact of the American Recovery and Reinvestment Plan," which the White House used as an ammunition belt in the fight to gain passage of its $862 billion economic stimulus bill (the actual cost of which exceeds $1 trillion when interest is included). Romer predicted that following passage of the stimulus bill, unemployment would plateau below 8 percent last fall and by this month register at 7 percent. That's not close enough for government work, as unemployment stands at 9.5 percent today. It would be higher except that hundreds of thousands of frustrated job seekers have given up looking for new jobs and dropped out of the labor force.
Writing off the ESP solely because it has failed to create jobs would be simplistic. After all, the goal was economic recovery and jobs are a lagging rather than leading indicator.
But although the National Bureau of Economic Research has now ruled that the recession ended in 2009, the rate of recovery has been slow and there is continuing concern that this may prove to be a “double-dip” recession. Recession over, but recovery not felt, Patrice Hill, Washington Times, 9/20/10.
A pile of business cash (nearly $2T by some estimates) is sitting on the sidelines. In addition to the normal risks associated with proposed investments, uncertainties about future government regulatory and tax policies are blocking a recovery of business confidence. It’s not political, it’s common business sense, Tom Bell, U.S. Chamber of Commerce, 10/4/10.
They passed health care and financial reform legislation that will result in hundreds of thousands of pages of new regulations, more bureaucracy, and more government involvement in the private sector. Business leaders are certain that these laws will increase their health care costs and hinder their access to capital, but they don’t know when or by how much until all of the pending regulations are in place.
Further, Congress went home to campaign for the elections without extending marginal income, capital gains, and dividend tax rates that are set to expire at year-end, leavin