Plans to rein in the U.S. budget deficit remain in the spotlight as the Bipartisan Policy Center’s Debt Reduction Task Force released its plan to solve the debt crisis. Brookings experts William Gale, Isabel Sawhill, Ron Haskins, Henry Aaron, Bill Frenzel and Jonathan Rauch offer their analysis of the recommendations laid out by Senior Fellow Alice Rivlin and former Senator Pete Domenici, and offer their own recommendations.
Taxes and the Deficit Reduction Plans
William G. Gale, Senior Fellow, Economic Studies
The deficit reduction plan offered this week by the Bipartisan Policy Center is a serious and attractive plan. On the tax side, where I will focus, it shares key features with, but is more nuanced than, the draft proposal released last week by Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s fiscal commission. Both commissions would broaden the tax base and reduce tax rates. That’s the right direction for reform, for all of the reasons described here.
Both of the proposals have been criticized for cutting taxes on the wealthy, but that depends on the baseline used (see reports from the Tax Policy Center here and here). The BPC proposal specifies changes in tax expenditures—cutting the mortgage interest deduction and charitable contributions deductions into 15 percent credits—whereas the Simpson-Bowles proposal would just wipe them all out. Because the co-chairs wipe out more tax expenditures, they can afford to reduce rates by somewhat more than the BPC proposal. The biggest difference between the two proposals is that the BPC also includes a value-added tax. It isn’t called a VAT, it is called a “Debt Reduction Sales Tax,” but it is actually a VAT. That’s good news. It would give U.S. more options for dealing with the fiscal problem and could help solve the fiscal problem, as described here.
Tax increases are going to have to be part of the solution to the fiscal problem. It is encouraging to see two bold plans come out in such a short period. While it is a long way from the release of a non-binding commission report to enacted legislation, one can hope that the release of the two reports will let people talk in terms of one plan versus another, rather than implicitly comparing the plans to the status quo.
Two Commissions, Two Different Plans to Stop the Red Ink
Isabel V. Sawhill, Senior Fellow, Economic Studies and Director, Budgeting for National Priorities
The recent release of not one but two commission reports on the need to get our fiscal house in order is welcome news. The latest report—from the Bipartisan Policy Center’s Debt Reduction Task Force, co-chaired by former Senator Pete Domenici and our Brookings colleague Alice Rivlin—has many similarities to the earlier report from the co-chairs of President Obama’s fiscal commission. Both reports emphasize the dangers of allowing the national debt to explode, the sheer size of the problem, and the need to curb tax deductions, slowly reduce health care and retirement benefits, and strictly limit both defense and nondefense spending.
The two plans also differ in some interesting ways. The Domenici-Rivlin plan puts more emphasis on job creation in the short-run, calling for a payroll tax holiday that experts believe is one of the best ways to accelerate a lagging recovery. They also recommend a close to 50-50 split between spending cuts and revenue hikes in contrast to the 70-30 split in the Simpson-Bowles plan. (Higher revenues in Domenici-Rivlin come in part from a new “Debt Reduction Sales Tax”.) Finally, Domenici and Rivlin do not set an explicit target for the size of government while Bowles and Simpson argue for keeping the federal government at 21 percent of GDP—a goal that will be difficult to achieve given the aging of the population and rapidly rising health care costs. Domenici and Rivlin do, however, suggest that we put health care spending on a predictable budget instead of leaving it as an open-ended entitlement, a controversial proposal that, in my view, is critical to achieving the goals of both commissions.
These differences are worth discussing. But critics from both the left and the right should not lose sight of the bigger picture. As both commissions emphasize, a rapidly escalating debt is subjecting the nation to an unacceptable level of economic risk. Put very simply, that is what should unite us.
What’s Next for Deficit Reduction?
Ron Haskins, Senior Fellow, Economic Studies
Comprehensive deficit reduction plans are now on the table from multiple sources: the Bipartisan Policy Center’s Debt Reduction Task Force, co-chaired by former Senator Pete Domenici and Alice Rivlin (the Domenici-Rivlin commission); the joint plan from the National Research Council and National Academy of Public Administration; a “Road Map” from Rep. Paul Ryan (R-Wis.); and a chairmen’s mark from Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform. There is also a thoughtful plan from Brookings Senior Fellow Bill Galston and Maya MacGuineas of the Committee for a Responsible Federal Budget, as well as a series of recommendations from the Peterson-Pew Commission on Budget Reform co-chaired by our colleague Bill Frenzel. Even if the president’s deficit commission fails to reach consensus, the chairmen’s proposal has already shown what is possible.
Federal policymakers in both the legislative and executive branches now have everything they need to mount an attack on the deficit. They have an array of fine principles, many of which (like fairness) are bipartisan, and they have lots of good ideas for generating revenue and reducing spending. We do not lack for either the principles or the component parts from which a comprehensive deficit plan could be constructed.
But here’s a notable fact. With the exception of Rep. Paul Ryan and now Rep. Jan Schakowsky (D-Ill.), both members of the president’s deficit commission, no one who votes has put down a plan. That’s the next step: comprehensive plans from people who vote and from the president. Let’s assume that Ryan escapes the control of his House leadership and puts forward a plan at the beginning of the next congress. He’s the incoming chair of the House Budget Committee, the perfect platform from which to launch an assault on the deficit. Aided and abetted by newly-elected Republicans who have promised to make government smaller, Ryan’s plan would have a good chance of passing the House. At that point, his plan would become a powerful force for eliciting a plan from Democrats.
Thus, Senator Majority Leader Harry Reid (D-Nev.), or Senator Kent Conrad (D-N.D.), the respected chair of the Senate Budget Committee, might respond to Ryan with their own plan. Perhaps they could even negotiate with their president and come up with something that could be called the “Democratic plan.”
Now Congress is in familiar territory. There’s a House Republican plan and a Senate Democratic plan. Republicans might be able to stop the Senate Democratic plan through a filibuster, but that would be risky and would reinforce the already familiar refrain that Republicans are the party of no. A Reid-Conrad Democratic plan would pass the Senate and immediately jump to a House-Senate conference and a serious attempt to produce a compromise bill that both the Senate and House would support. If the House and Senate did reach a deal, President Obama would have to sign it.
Like all fairy tales, this one seems to fall apart under the light of day. But consider the new factors now bearing on lawmakers: opinion polls say Americans want action on spending and the deficit; newly-elected members of Congress say they intend to downsize Washington; and both the House and Senate Budget Committees are headed by lawmakers who are respected budget hawks. Solid principles and proposals for increased revenue and reduced spending abound.
When the new Congress opens in January, Rep. Ryan could start a conflagration that could not be stopped. President Obama: Give Paul a call.
Social Security Should Be Removed from the Deficit Debate
Henry Aaron, Senior Fellow, Economic Studies
“Social Security proposals are intensely controversial on both the right and the left. We would be better off if they were removed from the debate about deficit reduction and they were given to a group, perhaps appointed by the president in a way similar to this one, that would deal with specifically how to reformulate Social Security benefits.”
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Budget Plans Say “Put Your Fiscal House in Order”
Bill Frenzel, Guest Scholar, Economic Studies
Following last week’s release of the Bowles-Simpson chairmen’s mark of President Obama’s National Commission on Fiscal Responsibility and Reform, the Debt Reduction Task Force, co-chaired by Alice Rivlin and former Senator Pete Domenici, of the Bipartisan Policy Center released a report similar in scope, but somewhat different in detail.
Republican Rep. Paul Ryan’s “Road Map” has carried the same message without new taxes. And Rep. Jan Schakowsky, a liberal member of the president’s commission, has offered another version featuring mostly higher taxes.
These different plans have a similar message for America: Put your fiscal house in order now or suffer dire consequences.
All of the individuals involved are veteran observers and participants of the Washington budget wars. Their common theme is that, if the United States does not make prompt, radical changes in its budget direction, the market will make them for us in much more abrupt and painful ways.
These necessarily bold plans are universally disliked because they rain on everybody’s picnic. The changes needed are so different from current policy that nearly every federal program will be affected. However painful, some sort of legislative compromise is necessary.
Liberals are not going to go away and leave the Republicans a tax-free future. Nor will conservatives allow the Democrats to continue to spend at current rates. Everything in the budget will have to be on the table. The grand compromise will have be the result of intense political negotiation. Everyone will find something unpleasant in the budget solution.
So the message of the past week to policymakers is to quit criticizing and begin making the unpleasant arrangements. The result will cause some hurt, but delay or inaction will bring substantially more pain.
The Fiscal “Camp David” Accord
Jonathan Rauch, Guest Scholar, Governance Studies
I’m going to leave it to my better-informed Brookings colleagues to do the detailed comparison of the two recent deficit plans—one from Erskine Bowles and Alan Simpson, the co-chairs of a presidential fiscal commission, the other by a Bipartisan Policy Center task force, led by Brookings’s own Alice Rivlin and former Republican Sen. Pete Domenici. The reports have plenty of minor-to-midsized differences.
Instead, I’ll focus on the fact that, in broad outline, the two reports are strikingly similar, and they tend to confirm that, on fiscal policy, the country has a problem not unlike the situation in the Middle East: Israelis and Palestinians both know what a final deal looks like, they just don’t know how to get there.
Judging from these plans, here’s what we know about the contours of a fiscal settlement:
- We can’t expect to balance the budget any time soon, but we can, if we work hard, reduce the deficit enough to stabilize the national debt at about 60 percent of GDP in this decade. That isn’t perfect, but it will stop us from becoming Greece.
- There are going to be tax increases. Period. We can’t possibly get enough out of spending cuts alone in the time available.
- There are going to be more spending cuts than tax increases. Showing that every dollar of new taxes “buys” you more than a dollar in spending reductions—so you can say the package is tougher on government than on taxpayers—is the price of credibility among everyone who is not left of center.
- What with the baby boom generation retiring and all that, government is going to get a notch bigger than we’ve been accustomed to for the past 40 years. Taxes and spending both need to rise anywhere from one to three percentage points of GDP above their post-1970 norms. That’s significant, but it’s far from socialism.
- Social Security gets nicked but not fundamentally changed. The program can be stabilized without a big, politically hairy debate about private accounts.
- Tax increases only happen in the context of tax reform that simplifies the code, lowers rates and eliminates loopholes. Lower rates and a cleaner tax code get you some efficiency gains even as you raise taxes overall. And the current, miserably creaky and complicated tax system just can’t meet the demands that will be placed on it.
- We can’t exempt defense. We can’t exempt entitlements. We can’t exempt anything. Not even farmers!
- The lesson of the 1990s: spending and deficit caps made a difference. The lesson of the 2000s: removing them was a fiscal disaster. The lesson for today: spending caps and other procedural reforms aren’t sufficient, but they sure are necessary.
So that’s the fiscal Camp David accord. In the Middle East, a majority of both publics, Israeli and Palestinian, is ready for the compromise whose outlines have been clear for at least ten years. But substantial minorities on both sides threaten to depose any leadership that goes there.
Not so different, really, from Washington.
Commentary
Around the Halls: Analyzing the Plans to Solve the Budget Crisis
November 19, 2010