Deficit Panel Goes Wobbly on Tax Overhaul

November 10th, 2010 at 5:20 pm | 25 Comments |

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When it comes to tax reform, the bipartisan deficit commission needs to think more boldly. The co-chairs’ draft report includes options for a simpler income tax structure with lower rates and fewer deductions. That would be nice, and would repeat the basic thrust of the 1986 bipartisan tax reform (which was a significant achievement but one watered down in subsequent tax code changes).

Co-chairs Erskine Bowles and Alan Simpson raise politically sensitive possibilities such as reducing or eliminating the mortgage interest deduction and the child tax credit. They offer the interesting idea of an automatic trigger that would reduce loopholes if broad tax reform is not enacted by end-2012.

In other words, Bowles and Simpson don’t seem to be afraid of shaking things up, which raises the question of why their proposals ultimately amount to fiddling with the current tax system rather than replacing it with something fundamentally different.

Missing from the document are any options that would shift the tax burden from income to consumption, something much needed in an economy that’s habitually long on consumption and short on long-term investment. Why not consider a VAT or other consumption tax as a full-on substitute for the income tax? That kind of reform would not be chipped away at so easily in future years.

Similarly, the proposal suggests a small but gradually increasing gas tax to fund transportation spending. There’s no mention of a broader carbon tax, which would address environmental and national-security issues as well as raise money. If you want to maximize the national security benefit, consider adding an oil import fee. If we’re going to have a new federal gas tax, let’s have a serious energy tax overhaul.

The co-chairs’ proposed tax policies would be better than what we have now, but that’s too low a standard. The 21st century requires tax reforms more sweeping than any done in recent decades.

Recent Posts by Kenneth Silber



25 Comments so far ↓

  • think4yourself

    @ Kenneth Silber – I think that Bowles and Simpson were doing their best to address deficit reduction and related shortfalls in S.S. & Medicaid – not overhaul the entire financial system. As we have heard so far, it does not appear that even with these “modest proposals” that it is likely to get 14 of the 18 commission members to send it to Congress. So adopting anything more dramatic would be even more of a failure.

    There is absolutely no consensus on a VAT tax among within the parties, much less between them and a comprehensive energy policy died earlier this year.

  • medinnus

    Well, since even these watered-down proposals are being greeted with a HELL NO from Dems and GOP, I suspect its on the right track. It’ll be interesting to see if the Tea Party candidates are pro-debt-reduction or merely anti-Obama reactionists.

  • Rabiner

    An import oil fee wouldn’t do much except be a windfall for domestic oil producers while raising the cost of gas to everyone. They decided on the gas tax since it is a consumption tax like what you support in your document anyhow.

    A VAT would of been nice for reforming the business tax code but what they propose for person income tax is pretty radical for our government and does the job nicely IMO.

  • armstp

    Unserious People

    OK, let’s say goodbye to the deficit commission. If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent.

    I mean, what’s this about? There is no — zero — evidence that income taxes at current rates are an important drag on growth.

    Oh, and they’re talking about raising the retirement age, because people live longer — except that the people who really depend on Social Security, those in the bottom half of the distribution, aren’t living much longer. So you’re going to tell janitors to work until they’re 70 because lawyers are living longer than ever.

    Still, I guess this is what it takes to get compromise, if by compromise you mean something the center-right and the hard right can agree on.

    Update: It’s here. And it really is that bad. The idea that co-chairs of a commission whose charge is fiscal sustainability should take it upon themselves to (a) declare that federal revenue must not exceed 21 percent of GDP — that’s right, putting a cap on receipts and (b) call for reducing the top rate from 35 to 23 is just awesome.

    http://krugman.blogs.nytimes.com/2010/11/10/unserious-people-2/

  • armstp

    “So you’re going to tell janitors to work until they’re 70 because lawyers are living longer than ever. ”
    .

    Income And Life Expectancy

    I’ve referenced this before, but here’s the Social Security Administration study. Look at Table 4: since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half.

    http://krugman.blogs.nytimes.com/2010/11/10/income-and-life-expectancy/

    http://krugman.blogs.nytimes.com/2010/08/13/live-long-and-prosper-2/

  • Rabiner

    armstp:

    It isn’t ‘large cuts in income taxes’ if the effective tax rates go up. Doesn’t matter if the marginal rates went down if there are no more deductions.

  • dante

    Rabiner – note the “if all deductions stay the same” line on the proposal… With all deductions remaining the same, the top line rate goes from 35% (currently, or 39.5% next year) down to 28%. Obviously in the options where the deductions going away, some pay more and some pay less, depending on who has which deductions.

  • armstp

    Social Security is solvent for the next 27 years. If we do nothing you will be 100% paid out over the next 27 years. If we do nothing after the 27 years you will get 75-80% of your benefits until you die. If they raise the cap on social security beyond the first $100,000 creating a donut hole, all this goes away and social security is not an issue.

  • armstp

    You know how you solve medicare. Have everyone buy into it or go to single payer.

    Social security will not go bust, as I say above everyone will get 100% of their money for at least the next 27 years and likely longer as the trustees use conservative assumptions and after that people will get 75%-80% of their money. Social security is hardly going bust. After 27 years people will just get less, which is essentially the same as the cuts that come from raising the retirement age.

  • SkepticalIdealist

    This deficit commission’s suggestions are by far the most monstrous things I’ve ever heard.

    You can literally see the income redistribution upwards. They want to reduce social security benefits by 3% for every 10 years a person is alive and raise the retirement age. In exchange they get to cut the corporate tax rate from 35 to 23 percent.

    It’s unconscionable. They won’t get away with it. And the American people will have their nuts in a jar if they even fucking try it.

  • Rabiner

    SkepticalIdealist:

    Sorry but I totally disagree with you. Americans need to wake up and realize that they can’t take all these services and not pay for them. If you read the plan it increases tax revenues (tax increases) through a simplification of the tax code. Deductions are removed and rates are lowered but taxes increase. Services are cut as well which is necessary.

    Argue over the merits of each cut if you want but calling this unconscionable is irresponsible by you. We all knew to deal with social security taxes had to increase, benefits had to be cut, retirement age had to go up or a combination of any of those 3.

    You also didn’t realize they increased capital gains taxes which affect the rich disproportionately.

  • SkepticalIdealist

    It is monstrous and it is unconscionable.

    We can have two unfunded wars, we can extend the bush tax cuts for the rich, we can spend more on defense spending than the next 25 countries combined (24 of which are allied with us), and yet people like you want to pay for it by raiding social security, which by the way posted a 2.4 trillion dollar surplus? Who’s the one being irresponsible here?

    On capital gains, don’t make me laugh. The rate is 15%. That’s the same that people making 8k a year a pay on their income taxes. You could double it and it’d still be lower than the top marginal tax rate, which is already at a historical low to begin with. The problem is not with people who want to keep the entitlement programs they’ve always had and that they’ve paid into every single day of their lives. The problem is that we think tax cuts for corporations and the wealthy will always solve everything, when they have done nothing to stop the recession, and are one the main reasons we have this massive deficit.

  • Rabiner

    SkepticalIdealist:


    On capital gains, don’t make me laugh. The rate is 15%. That’s the same that people making 8k a year a pay on their income taxes. You could double it and it’d still be lower than the top marginal tax rate, which is already at a historical low to begin with. The problem is not with people who want to keep the entitlement programs they’ve always had and that they’ve paid into every single day of their lives. The problem is that we think tax cuts for corporations and the wealthy will always solve everything, when they have done nothing to stop the recession, and are one the main reasons we have this massive deficit.”

    First off: people earning 8,000 annually don’t pay income taxes. They have enough credits to absolve any liability.

    Secondly: Taxes go UP under this plan. The marginal rates my decrease but the effective rates go up due to a reduction in deductibles.

    Thirdly: Their plan is 75% budget cuts and 25% tax increases.

    “We can have two unfunded wars, we can extend the bush tax cuts for the rich, we can spend more on defense spending than the next 25 countries combined (24 of which are allied with us), and yet people like you want to pay for it by raiding social security, which by the way posted a 2.4 trillion dollar surplus? Who’s the one being irresponsible here?”

    There are defense cuts in their plan. There are cuts on just about every segment of the federal budget actually. Could there be more? I’d think so regarding defense spending. But I’d also of done more severe cuts in Social Security through means testing and perhaps not reducing baseline benefits as much or reducing the increase in retirement age.

  • JonF

    Re: So you’re going to tell janitors to work until they’re 70 because lawyers are living longer than ever.

    Look closer. There’s a (new) hardship Social Security program for people who can’t work longer.

  • armstp

    JonF,

    I don’t think you get it. The excuse is often made that we can raise the retirement age because people are living longer. But, only wealthy people are really living longer.

    It is not about hardship, it is about people that earn the least will be forced to work longer, even though the increase average life expendency is less than people who earn the most and do not need social security and live longer on average.

    Poorer people will be working longer to pay the social security of people who live longer and do not need it.

  • armstp

    Rabiner,

    “Americans need to wake up and realize that they can’t take all these services and not pay for them.”

    Are you that stupid that you do not know how social security works? It is an earned benefit, which means you only take out of it what you put in. People have been paying 5-6% out of their paycheck since they began working and putting it into the social security fund. They are just getting their own money back. There is absolutely no free hand-out.

    As I mention above the fund is fully funded for at least the next 27 years, so for the next 27 years people will get 100% of “their” money back. After that there is not enough of “their” money left in the fund to guarantee you get all you money back, but you will still get 75-80% of your money, so was are only talking about bridging the gap fo the 20-25% shortfall in funds which was created by governments having robbed the fund in the past. However, this is still an IOU that the U.S. government owns people who put their own money in. Cutting spending or raising taxes in other areas to simply pay people back their “own” money is only fair, especially those retired people who really need their social security checks and really need to be paid back.

  • Non-Contributor

    As armstp stated SS is not a problem and I have no idea why a deficit panel even exists. I am truly starting to believe that Obama has no clue what he is doing.

    If you really worried about the deficit then fix the unemployment problem.

  • Rabiner

    Armstp:

    before you call me stupid why don’t you read what I wrote. Did the line you quoted mention Social Security specifically? No it did not. So why don’t you just apologize for the unnecessary name calling.

    Also just because Social Security is solvent for another 27 years doesn’t mean it will last forever. I’m 27, so it would become insolvent before I could ever use Social Security.

    Non-Contributor:

    I find it ironic your name is ‘non-contributor’ when you write a line like this:

    “If you really worried about the deficit then fix the unemployment problem.”

    Do you really think government hasn’t been trying to use policies to fix the unemployment problem?

  • LFC

    Step 1: Take Social Security and Medicare out of the general budget and make them real stand-alone programs. They each have their own dedicated revenue streams, so it can be done. Decide how to keep them solvent.

    Step 2: Decide if/when/how the Social Security trust fund will be paid back. If there’s to be no paying it back, then let’s face that now and not put it off. Same for partial payment or delayed payment. And if anything is being paid back, put the general budget on an auto-pilot payment plan.

    Step 3: Work on increasing tax revenues (which they are trying to address) which are at a 50 year low, and unsustainable.

    Step 4: Cut spending on the rest of the budget except for interest payments on our debt which really can’t be touched.

  • trk113

    While I appreciate the effort to protect Social Security, I think the idea of raising the retirement age is completely out of touch with reality.
    Exhibit A…for all workers reading this post, look around you and identify the number of workers over the age of 60.
    I have friends who worry about age discrimination in their late 40′s and we’re trying to pretend that all we need to do is to have people work until they’re 70? This disconnect is potentially serious. If someone in their mid to late 50′s loses their job, they are already forced in most cases to accept a big cut in pay if they are able to find anything at all. WalMart can only hire so many greeters to put happy face stickers on the little kiddies. I think the panel may need to consider some other options.

  • think4yourself

    All of the posts above are exhibit A, as to why this is so difficult. I find the contributors on this site some of the smartest around, even when I don’t agree with them yet the positions staked out above have no room for finding solutions.

    Obviously I believe that deficits matter. I would prefer an equal measure of increased revenue (taxes) to spending cuts, but I can live with the basics of the plan. I think that Social Security is a problem (though Medicare is a greater one). I think the commission fairly dealt with those who have done hard physical labor with the exception on increasing the age. Outside of physical issues, people can work longer, I have an employee of my company who is 74. Every year I ask him if he wants to retire and every year he says no (we ain’t digging ditches here). Regarding taxes; lowering them but removing exemptions makes it revenue nuetral or revenue increasing – I think it’s okay if more people pay income tax (I understand that we are all paying S.S. & medicare).

    I think it’s a moot point we’ll do nothing about the deficit because politicians are unwilling to make a stance on hard issues of lowering benefits and raising taxes; I don’t watch Keith Olberman, but last night heard him rail about the “Death Commission” (that this plan would kill senior citizens). I find that to be no better than the Republican’s “Death Panel’s” regarding health care.

  • Non-Contributor

    I truly don’t understand how changing anything with social security helps the deficit. Do people know what the deficit is?

    I’ll say it again if your serious about fixing the deficit then lower unemployment. End the wars. Then look to see if the deficit is a problem.

  • Rabiner

    Non-Contributor:

    “I truly don’t understand how changing anything with social security helps the deficit. Do people know what the deficit is?

    I’ll say it again if your serious about fixing the deficit then lower unemployment. End the wars. Then look to see if the deficit is a problem.”

    Well considering Social Security is part of the federal budget I don’t see how reducing long term liabilities is not going to have a positive effect on balancing the budget.

    Considering the wars issue, the Iraq war is coming to an end and who knows about Afghanistan but you are being naive if you think that Afghanistan only has to end to balance the budget.

  • armstp

    Rabiner,

    The line I quote from you does not mention social security specifically, but you are commenting on Skeptical’s comment, which does mention social security.

    You need to read what I wrote. SS is solvent for at least 27 years, but as I say above, after 27 years people will still be getting 75-80% of their money back, so we are only talking about making up the 20-25% shortfall (which is the money which has been looted from the SS fund). There are many ways to make up that shortfall. Like not giving social security to those who do not need it. There is no need to cut SS for those who need it or to raise the retirement age, which is effectively just cutting SS, which is the same as doing nothing and only paying out 75-80% of what people are owed. It is a myth to think SS is a big problem or that it is entirely going away or will run out of funds.

  • Non-Contributor

    Social Security is a pension plan sponsored by the federal government and financed by contributions of workers/employers matching contributions.

    Social Security by law cannot impact the federal deficit, it is a totally separate trust fund. And as armstp stated with no policy changes it is projected to be in balance for the next 26 years.