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Tuesday, February 05, 2013

Obama and further deficit reduction

In response to Obama's reiteration during a pre-Super Bowl interview that he's seeking new revenue by curbing tax deductions for the wealthy, Andrew Sullivan reverts to favorite (though somewhat modified) mantras:
I’d love those loopholes to be closed. But that’s not real, serious revenue-raising tax reform. It’s old-school class demagoguery, not 2008 Obama honesty. If we are to control future debt, and to do so in part through ending tax deductions, we simply have to include the mortgage deduction, the state tax deduction, and the charity deduction – or find a way to cap those deductions past a certain income level. Nothing else comes close to making a difference. And yes, that means the middle class will get hurt a little. That’s what “additional revenue” in the amount required entails.

So less about the Cayman Islands and more about the sacrifices we need to make, please. I really hope the ACA reduces healthcare costs, but I don’t think it’s fiscally responsible to rely on experiments that may well yet fail. Baiting the super-rich is easy. Reducing the deficit responsibly is extremely hard – unless this president is prepared to be blunter and clearer than he was in this interview. And this, recall, is at the beginning of his second term, with maximal leverage at his disposal.

In the two years since Obama's 2011 SOTU, when Andrew called on Obama to make a crusade of deficit reduction, he has come a long way toward a liberal perspective on the budget -- acknowledging that the Tory austerity program in the UK has been a failure and at least partially recognizing, as here, that controlling healthcare costs is basically the whole of the U.S.'s long-term budget challenge.  But Sullivan still can't quite shake the notion that long-term budget planning calls for "sacrifice,", as if deficit reduction were some kind of war effort rather than a component of seeking the greatest prosperity for the greatest number.  And he misreads Obama more than one way here.
First, it was in 2008 -- or 2007 -- that Obama called for ending the Bush tax cuts for households making more than $250,000 a year -- and not raising taxes on anyone below that threshold. He has stuck to that benchmark through thick and thin -- so as of now, he will seek to reduce tax expenditures for those making more than that benchmark, adjusted a bit for inflation, and for corporations, but not for households earning less. He is just as "honest" about this now as in 2008.

Second, Obama is currently seeking, via tax code changes, about $600 billion in new revenue over ten years. The tax hike on households earning over $450k raises about $600 billion, which gets him halfway to the last goal he floated in his grand bargain negotiations with Boehner, $1.2 trillion over ten years.  In his 2013 budget, he proposed capping the value of all personal deductions at 28%, a reform projected to yield just shy $600 billion over ten years. If now adopted, that reform would yield less, since income tax rates were raised only for households earning more than $450k rather than $250k -- so now, the difference between the allowed 28% deduction and the second highest tax bracket is smaller than it would have been. Say then that the 28% cap yields about $400 billion over ten years rather than $600 billion.  But that's still in the ballpark of what Obama is seeking. He may in fact settle for a few scraps gleaned from closing or reducing selected loopholes in the corporate tax code.  It's hard for me to imagine the Republicans this year agreeing to any meaningful new revenue; I expect either stalemate, with no new revenue and a series of sequester postponements, or an "unbalanced" deal, in which Obama gets a few revenue scraps ($200b/10 yrs?)  in exchange for say $800-900 billion in spending cuts more targeted than in the sequester, including cuts to Medicare included in his 2013 budget. Chained-CPI would yield a little bit of both.

The point is that Obama is not seeking revenue beyond what he can get by reducing tax expenditures for households over $250k alone, or out of limited corporate tax reform. Yes, he is using a sloppy populist shorthand to get that point across somewhat inaccurately.  But he's neither hiding nor embracing an agenda that raise taxes on a broader swath of the population.

As for the call to go beyond the ACA in new attempts to reduce government spending on healthcare: Sullivan's working assumption is that much more costs have to be passed on to healthcare consumers. Obama's goal is to squeeze healthcare providers and reduce unnecessary care. Republicans are likely to block serious reforms to do the latter, denouncing them as top-down bureaucratic control --and to undermine measures written into the ACA, like the Independent Payment Advisory Board. The problem is not that Republicans want to cut entitlements too much and Obama too little. The problem is that Republicans will block further meaningful reform to payment and incentives in Medicare and the ACA.
One ray of hope: negotiations with governors over their acceptance of the ACA Medicaid expansion may yield some useful experiments and reforms in Medicaid service delivery.

Update: while I was writing this, it was announced that Obama will this afternoon propose a more limited deal to stave off the sequester -- a stopgap deal.

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