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.

If loophole closures are benefit cuts, are benefit cuts tax hikes?

Eduardo Porter suggests that raising new tax revenue by cutting loopholes opens up a semantic loophole:

Though the offer to raise money by closing loopholes has a bipartisan pedigree — based on a plan proposed last year by the Democrat Erskine Bowles and the Republican Alan Simpson, the chairmen of President Obama’s deficit commission — it relies on rhetorical sleight of hand. If tax breaks are equivalent to government spending, eliminating them is equivalent to spending cuts. Mr. Boehner’s offer to do away with tax breaks in exchange for cutting entitlements raises no new revenue. It amounts to cutting spending twice.

Porter goes on to point out that a) Democrats have opened many "loopholes" for the poor and middle class because it's often the only form of social spending that Republicans will allow, but b) on balance, tax deductions disproportionately benefit the wealthy. His main point: we should consider each break on its merits, not make a shibboleth out of closing out as many as possible.

I would add a couple of wrinkles. First, Republicans are conflicted about whether to regard tax breaks for the nonwealthy as spending or tax cuts.  On the one hand, they've not only acceded to Democrat-initiated lower-income tax breaks, but sweetened their own wealthy-tilted tax cut goodies by cutting taxes and expanding loopholes for the nonwealthy as well.  On the other hand, they've come to regret the low-end largess, as all that bitching about the 47%, the lucky duckies who pay no income taxes, demonstrates.

Second, if Republicans are pulling the wool over by treating loophole closures as tax hikes, they've got themselves fooled as well.  When such tax "increases" were being bruited in the debt ceiling negotiations of 2011, Tom Coburn and others struggling to wriggle out of Grover Norquist's embrace experimented with casting  loophole closures (e.g., the ethanol subsidy) as "spending cuts."  It didn't fly; Norquist screamed that any phased out tax break would have to be offset by another tax break, and the GOP fell in line.

Coburn: ending the ethanol subsidy is (half?) a tax cut

I have been intrigued in the past to note that some conservatives characterize reductions in "tax expenditures" -- targeted tax breaks, such as for ethanol production or mortgage interest -- as "spending cuts" rather than as "tax hikes."  But Tom Coburn has gotten even more creative. Yesterday, Coburn won the support of 34 GOP senators for an amendment that would end the ethanol subsidy -- a vote he staged as a refutation of Grover Norquist's insistence that every closed-out tax break has to be offset with an equal tax cut.  Last week, ratcheting up his months-long feud with Norquist, cast ending a wasteful tax subsidy like this:

In weekly address, Obama lays markers for long-term deficit reduction

As I've suggested before, I regard Obama's investment agenda and proposed budget as a carefully laid frame for negotiation of a plan to take care of the long-term structural deficit.  The investment agenda -- education, R&D, infrastructure -- is a marker laid down to prevent budget-cutting frenzy from hobbling his long-term goals; his 2012 budget, with its cuts in discretionary domestic spending, is a foil for the GOP's budgetary meat ax; and in the space between preserving long-term investments and a show of short-term discipline, he is laying out the parameters of a negotiation for a long-term budget/tax deal in which all "get in the boat together"

Obama's current weekly address brings that strategy into sharper focus. He begins with anecdotal illustrations of the good effects of investments in education, R&D and infrastructure; emphasizes the discipline in his proposed budget, which he says will bring discretionary domestic spending to "its lowest share of our economy since Dwight Eisenhower was President"; blithely waves away the prospect of a government shutdown by expressing an expectation that both parties will compromise on a continuing resolution on his terms ("I urge and expect [both parties] to find common ground so we can accelerate, not impede, economic growth") -- and lays out an interesting set of priorities for long term budget/tax reform.  Here it is:

Still, a freeze in annual domestic spending is just a start. If we’re serious about tackling our long-run fiscal challenges, we also need to cut excessive spending wherever we find it – in defense spending, spending in Medicare and Medicaid, and spending through tax breaks and loopholes.

Chambliss, Coburn, Crapo to Norquist: kowtow or brush-off?

No question, Ramesh Ponnuru is far more attuned than I will ever be to linguistic code of true-blue GOP supply siders. So perhaps I should accept at face value his report (via Sullivan) of this little tax-pledge tango between Grover Norquist and the Republican half of the new Senate gang of six currently in early-stage discussions of a comprehensive tax reform/deficit reduction deal:

After yesterday’s Wall Street Journal reported on work toward a bipartisan deal on the budget, Grover Norquist of Americans for Tax Reform sent three Republican senators a letter noting that the deal, as outlined in the Journal article, would violate their pledge not to raise taxes. The response letter from Senators Chambliss, Coburn, and Crapo strongly suggests that the senators will not support a deal that raises taxes on net. Instead they want a bill that raises revenue only by increasing economic growth.

If you read the letter, though (link above), you might wonder whether Chambliss et al have really promised not to raise taxes "on net."  They do say that the Journal article, which reported that the six were contemplating an (apparently erroneously low) boost in tax revenues, should not be taken at face value. They do intone,  "Like you, we believe that tax hikes will hinder, not promote, economic growth." And they do plead that "we do not believe that our efforts to avert tax increases on hardworking Americans violates any pledge we have taken..." Of course not!  But...

"Cuts"? Or "tax cuts"?

The Dish flags Heather MacDonald's challenge to the Tea Party to get serious about deficit reduction. I find MacDonald's terminology interesting. It points to a kind of liminal zone on the ideological battlefield of tax hikes vs. spending cuts:

It would be refreshing if, instead of exclusively blasting the proposal’s relatively modest tax increases, such as raising the federal gas tax fifteen cents to pay for transportation projects (a legitimate user fee), they supported the proposal’s more audacious cuts, such as reducing the mortgage deduction.   (The commission would eliminate the deduction only for mortgages over $500,000, alas.)  The willingness to take on this middle class subsidy would be stronger proof of iconoclastic independence than pushing for repeal of 17th Amendment, a favorite piece of Tea Party arcana.   Both would be an uphill battle; I’d rather see political capital expended on getting rid of a constitutionally-suspect government hand-out, especially given the contribution of the federal government’s obsession with increasing home ownership to the 2008 fiscal crisis.

MacDonald seems to think of eliminating 'tax expenditures' (targeted tax breaks) as spending cuts rather than tax hikes. Those expenditures are in an ideological nether zone; conservatives and liberals alike could swing either way on them, or differently on different ones.  By focusing on them, Bowles-Simpson opens up a negotiating space, albeit one stocked largely with sacred cows.

Rudolph Penner points a steep path toward budget salvation: tax reform and health care reform

As Ezra Klein points out, the long-range budget options laid out in a detailed analysis of the nation's fiscal future under the leadership of the Urban Institute's Rudolph Penner, who was director of the CBO under Reagan, are sobering.  The report, Choosing Our Nation's Fiscal Future, was prepared by a committee organized by the National Research Council and the National Academy of Public Administration.

The report lays out four menu options designed to cap the national debt at 60% of GDP by 2020, ranging from freezing taxation at current levels and cutting spending accordingly, to maintaining benefits at current levels and raising taxes accordingly. The consequences of freezing tax rates at current levels are scary. That would require a Paul Ryan-like budget converting Medicare and Medicaid to a system of vouchers of rapidly diminishing value. Maintaining benefits at current levels in its turn generates daunting tax requirements: top marginal tax rates of 50%, a VAT rising to 8%, payroll tax of 15% with a surtax on top.  Imagine Democrats trying to impose those hikes over the decades.

The report suggests that the challenge would be more manageable, however, if structural tax reform is coupled with effective health care cost control. Tax reform would entail elimination of myriad deductions and exemptions to which we've grown addicted. Here's how Penner presented this kind of tax reform to the Atlantic's Derek Thompson:

The other approach was to radically reform the tax system, getting rid of all tax expenditures [such as tax exclusions for employer health care and pension contributions ... see more here] like capping the employer health exclusion. It's really, really remarkable how much money you get back from tax expenditures, especially from capping the health exclusion. We could actually lower rates over time with that solution to the situation, while keeping the overall tax burden the same.

The elimination of "tax expenditures," as described by Penner in his Senate testimony, would be coupled with just a two-tier income tax - 10% starting at an income of $22,475, and 25% starting at $44,950. Fiscal Future claims that  "[t]he economic waste ("deadweight loss") to economic performance...is directly related to marginal tax rates. As marginal rates rise, these efficiency losses rise more than proportionally, roughly as the square of marginal tax rates."  The paper also asserts that various targeted tax incentives (tax expenditures) such as retirement savings or mortgage interest deductions distort economic behavior and so allocate resources less efficiently.

Tax expenditures have long been beloved by both parties -- by Republicans, because they are by definition tax cuts, and by Democrats, because in our right-leaning polity they're often the most politically palatable way to provide breaks to lower and middle class voters; Republicans find them difficult to oppose. Hence the number of targeted tax breaks for individuals has more than doubled since 1974.

I imagine that many economists would dispute the claim that all targeted tax breaks create non-beneficial incentives and economic waste.  A reasonable takeaway from this paper, however, would seem to be that eliminating or limiting some major deductions would yield major revenue and greatly reduce the extent of needed across-the-board tax hikes such as a VAT or increased payroll tax. (There seems to be near consensus, for example, that the current form of the mortgage exemption skews incentives.)  Fiscal Future presents along with each of its four future tax scenarios an equivalent alternative under a radically simplified tax structure that eliminates all "tax expenditures" except the child tax credit and the earned income tax credit. The paper acknowledges, though, that "[t]he current tax structure...and the simplified tax structure discussed here represent two 'bookends,' with many possibilities in between."  One can imagine the mammoth political battles that may come regarding which tax carve-outs to eliminate or radically reduce.

The Senate health bill's excise tax on expensive plans provides a foretaste of such battles. Penner's perspective on the health care tax exemption highlights why Obama is hell-bent on preserving the excise tax in the Senate bill, in the face of furious opposition from unions and House Democrats. The excise tax indirectly caps the health insurance deduction for employers. Proponents expect it both to provide significant revenue and to restrain health care cost growth.  It's a modest step toward eliminating the health care tax exemption for employers, as the Wyden-Bennett alternative HCR bill -- which at present remains a Utopian bipartisan dream -- would do.