This is the second installment in a series about the two keys – Medicare reform and tax reform – to a comprehensive agreement to solve the budget problem. These commentaries will explain the details of the two issues, and show where it is that each political party – the Democrats and the Republicans – must give ground to resolve this crucial issue.
Last week’s post started a series on Medicare reform and tax reform as the two key elements of a solution to the nation’s budget problem – as well as important contributors in their own right to our collective well being over the long haul. It so happens that this week there was a potentially important contribution to the debate over tax reform, which is worth a second installment in this series about these two critical issues.
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Let’s Make a Deal:
A New Series
There were a couple of developments on the budget this week, coming out of the House Republican camp (pardon the pun – as will be explained in a moment). First, House Speaker John Boehner (R-OH) announced that when the nation’s debt subject to limit (that’s the technical term) reaches its limit late this year or early next, he will again demand that any legislation to raise the limit be accompanied by spending cuts of at least the same amount as the increase. Democrats, including Treasury Secretary Timothy Geithner, the unfortunate keeper of the debt, decried this as the scheduling of Train Wreck II, following on the long-running debacle of last year. Though there is no particular technical connection between the amount of a debt limit increase and the amount of spending reduction going forward – the debt is history, and future spending is, well, the future – this line in the sand has caught on with some observers. Democrats question whether round after round of spending cuts with no revenue increases is sufficiently “balanced,” and question why Republicans demand more spending cuts at the same time as they argue to repeal the most recent round of spending cuts that they demanded for the last increase in the debt limit. With the nation’s financial standing on the line in a game of chicken over default, the next encounter with the debt limit could be at least as consequential as the last.
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Can we fix the budget deficit by cutting “other” spending?
This rather long post points out that recent budget-deficit-reduction plans tend to assume large amounts of savings from “other” spending – spending that does not include the most prominent and problematic programs of government. It presents numbers to provide a sense of the scale of this phenomenon, and then explains why simply assuming large savings from this nondescript “other” segment of the budget could prove quite dangerous.
The federal budget has clear trouble spots. In the long term, the projected growth of healthcare spending, primarily for Medicare and Medicaid, will far outstrip the growth of the GDP, and is therefore unsustainable. Revenues have been well south of their historical norm for several years. In fact, for the last three years, revenues have been more than 4 percent of GDP below the lowest level of any year in the last half century in which the budget has been balanced. (There were, admittedly, only five such years.) A deficit equal to that revenue shortfall, 4 percent of the GDP, is by itself enough to grow the public debt faster than the economy – which again is not sustainable. The Social Security system has not paid for itself since 2010, and it is not projected to do so ever again without significant changes of policy. The cost of the Middle East wars is a matter of controversy, but it has added at least $1 trillion, and possibly much more, to the public debt.
With all of these well defined and widely known problems, it might come as a surprise that the leading budget proposals from policymakers in Washington – President Obama’s budget, and House Budget Committee Chairman Paul Ryan’s budget resolution – achieve very large shares of their budget savings not in these problem areas, but rather from “other” – that is, not revenues, not Medicare, not Medicaid, not Social Security, and not defense (and of course not interest on the debt, which cannot be cut directly but rather only through savings elsewhere in the budget.) There is the old joke about the drunk who looks for his lost keys under the lamp post, not because he lost them there but because that is where there is light. But why should our nation seek a solution so far away from the problem?
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Two weeks ago, I wrote about a claim that increases in tax rates on capital gains reduce revenue (and vice versa). This week, I would like to put that question in the context of the potential for a budget agreement in Washington – which three weeks ago I wrote is not going to happen in 2012, either before or after the election.
So where will capital gains taxation – and tax reform generally – stand in any budget deliberations?
If either party sweeps the board in November, then that party may succeed in resolving the budget issue all by itself, and all in its own way, early in 2013. The House of Representatives can do anything that a bare but unified majority wants to do – essentially overnight. (The “overnight” part is why the staff burn out so quickly, whether their marriages survive or not.) And just about the only thing that a bare majority can do in the Senate is to pass a budget resolution that includes “reconciliation instructions,” which empower that same bare majority to pass a strictly budget-related “reconciliation bill” that is not subject to a filibuster (that is, endless debate – which can be terminated only with 60 votes). If a President of the same party is waiting to sign that reconciliation bill, then, bingo – enormous change can be achieved in a very short time.
It isn’t necessarily quite that simple.
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