11 November 2010

Deficit Panel Proposals Dubious

The President's bipartisan deficit reduction panel's top Democrat and top Republican have given the panel a "starting point" for their recommendations due December 1 that are tired proposals that won't make a difference.

On Social Security

The plan's call to increase the Social Security retirement age, increase Social Security payroll tax cutoffs, and reduce cost of living increases attempts to continue the idea that Social Security should be subsidizing the general fund, despite the fact that the program itself is fiscally sound for more decades in the future than any forecast can predict with meaningful accuracy.

There is nothing wrong with adjusting benefits to provide equity in return between those who retire early, those who retire at "normal" retirement age, and those who retire late. But, particularly at a time when early retirements could open up jobs for younger workers and reduce unemployment, increasing the early retirement age makes no sense.

Cutting cost of living increases is simply a stealth reduction in benefits that squeezes the very old, who are the most likely to have exhausted private retirement savings, relative to the newly retired who can more realistically supplement their incomes with part-time work or not yet exhausted savings.

On Taxes

The plan rightly recognizes that tax increases are necessary for a sustainable federal budget, and that gas taxes have to be increased so that highways are paid for with rough justice user's fees rather than general funds. The plan also rightly notes that we would be better off with a wider tax base.

But, many of the proposals are ill chosen. Most importantly, the proposals makes significant bites into the disposable income of working class Americans, without expecting comparable sacrifices from upper income Americans who have benefitted richly from the Bush tax cuts. The proposal actually cuts the top marginal tax rate for the rich by a third, proposes cuts in the top corporate tax rate by a quarter, and ends all taxation of the overseas profits of U.S. based multinational corporations.

Yet, the proposal does not appear to directly address two of the biggest sources of tax driven systemic risk in our economy: (1) the debt-equity distinction in corporate taxation that creates a tax incentive for publicly held corporations to be overleveraged, or (2) strong tax incentives to pay senior executives in big businesses in the form of stock options that create heads I win, tails you lose incentives that favor undue risk taking and also unjustly taxes the highest income people in our entire economy at marginal rates lower than those paid by members of the working and middle class.

There is no doubt that the mortgage interest deduction, which they propose eliminating, is flawed. We shouldn't have a strong incentive in the tax code to borrow rather than save. It makes no sense whatsoever to create a tax incentive to buy vacation homes with borrowed money. And, the inclusion of home equity loans in the mortgage interest deduction encourages the kind of lending against paper gains in property values during a housing bubble that led to the financial crisis.

But, eliminating the mortgage interest deduction isn't a simple thing to do without creating harm to an economy where tens of millions of families have made decisions in reliance on it's existence, and it is the main provision of the tax code that recognizes that people in areas with high property values (mostly in Democratic party leaning Northeast and Pacific States) have less disposable income than those in areas with low property values (mostly in Republican leaning states). Middle ground would eliminate the second home mortgage interest deduction and the deduction for home equity loans, limit the mortgage interest deduction to 90% of the purchase price of a home (not its fair market value) so as not to encourage riskly low downpayment mortgages, and end the mortgage interest deduction for jumbo loans (a cap that is well under the $1,000,000 mortgage interest deduction). It would preserve the mortgage interest deduction in full, however, for any mortgages currently in place.

A proposals to limit or eliminate altogether the tax-free status of employer-provided health benefits, providing incentives for people to enroll in cost-conscious insurance plans, was carefully considered during the health care debate and rejected as counterproductive. We want health care to be provided to the extent possible through private health insurance, and given the low level of transparency that exists in medical billing, there is no reason to believe that individual consumers are in a better position to control health care costs than health insurance executives. There is also no reason to think that people aren't already doing everything that they can to find lower health insruance premiums.

There should be tax neutrality between buying health insurance and paying for it out of pocket, however, which can be more easily achieved by simply elminating the 7.5% of AGI floor on the itemized deduction for medical expenses -- a limitation that there are at least four ways to circumvent under the existing tax code (with (1) low deductible plans, (2) with flexible savings accounts, (3) with health savings accounts, and (4) with medical expense reimbursement plans).

Republicans despite campaigning on fiscal responsibility, are opposed to all tax increases, of course. So, these proposals may be dead on arrival anyway.

On Spending

The plan appropriately recognizes that any meaningful plan to control the deficit needs to reduce defense spending.

The plan inappropriately focuses on symbolically high profile, but economically insignificant line items like spending on Congressional and White House budgets, and spending on the Corporation for Public Broadcasting. Requiring earmarks to go through the usual budget process may be good governanc policy, but many of those proposals would have been appropriated in any case, and they make only a minor dent in the deficit.

Freezing pay for all federal employees, including the non-combat pay of active duty military personnel and cuts in spending for military families, in addition to being a bitter pill to offer up on Veteran's Day, fails to comprehend the issues that go into federal employee spending. Senior managerial and professional federal employees are greatly underpaid relative to their private sector counterparts.

Balancing the budget on the back of the quality of life of soldiers who have been asked to sacrifice more for their country than at any time since the Vietnam War, and at a time when military recruiting is having a challenging time recruiting the most qualified potential soldiers may be penny wise and pound foolish. We're better off spending a little more on military pay and a little less on high tech gear, than the other way around.

The notion that one can simply cut federal employment by ten percent across the board is also unrealistic, and not necessarily sensible economically. Unlike local governments, federal government spending isn't heavily driven by the cost of its own employees.

Most of the expensive things that the federal government does involves giving large chunks of money to other people, and the federal government employees are the ones charged with reducing fraud, waste and abuse. Cutting the federal employees whose job it is to make sure that recipients of funds from programs like Medicare, Medicaid, Defense contracts, health grants, education grants, and transportation projects are entitled to funds and are spending them properly would probably lead to more fraud, waste and abuse than it costs to hire those employees. Similarly, the only way to reduce the number of federal employees charged with collecting taxes in a cost effective way is for Congress to simplify the administrative cost intensive parts of the tax code like the Earned Income Tax Credit.

Across the board cuts directed at federal employees also fail to recognize that often it is cheaper to do federal government business in house, rather than through outside contractors. This is particularly true in the cost of Department of Defense and State Department. Hiring Marines to provide security abroad in places like Afghanistan and Iraq is cheaper, more accountable and more effective than hiring private security contractors to do the same thing. There is also good reason to think that outsourcing much of the defense industry research and development function for major weapons systems is an important factor that is driving outrageously high cost overruns on major weapons system purchases. Private industry can be more efficient at actually making things than government, but the case that it is more cost effective at designing things that government actually needs is far less obvious. When government is the sole consumer of something, it is frequently unhelpful to outsource that function. Outsourcing works best when government buys the same product that large numbers of other consumers buy as well, creating a genuine market economy for those goods or services.

In a humble example, Larimer County programed its trouble free vote center software in house for a tiny fraction of the price that outsiide contractors charged Denver for similar software that didn't work when it was used in an election.

There are some sensible medium sized spending cuts in the proposal. For example, a proposed $3 billion cut to farm subsidies is a good start, indeed probably too modest. Expecting commercial space flight to pay its own way makes sense, as does expecting hub airports to pay more of their own pay like any other commercial enterprise.

But, there isn't enough serious examination of which government spending provides more or less value for the taxpayer's dollars. On balance, the plan proposed is very light on serious consideration of the spending cuts that make sense, and given the strong political pressure from Republicans to make cuts from spending, and the real problems that can result from indiscriminate spending cuts, this part of the plan is really disappointing.

1 comment:

libhom said...

The Cat Food Commission is not a deficit commission. It pushes budget busting proposals like lowering taxes for the rich and for corporations. It also refuses to call for defunding the enormously expensive and counterproductive wars in Iraq and Afghanistan.

It's a wealth transfer commission, from the middle class and the poor to the rich.