Monthly Archives: March 2013

  • There is considerable debate – but arguably somewhat less understanding – about what constitutes a “fair” tax system.
  • There is no simple numerical rule that defines fairness.  It is, instead, a collective political judgment.
  • There are arguably reasonable conditions for making a sound collective judgment – but they are not met in the real world.
  • If the nation can agree on opportunity as an objective, we are left with a choice:  Will we direct our resources to reward the few spectacular successes, as an incentive to others; or will we instead use those resources to limit the tax burden on many ongoing businesses, to facilitate effort?  This blog argues for the latter, on both economic and fairness grounds.

With recent changes in tax rates as part of the year-end “fiscal cliff” deal have come renewed discussion of the most fundamental question of tax policy:  What is “fair?”

A frequent form of this question is a lament that “the 1 percent of taxpayers with the highest incomes pay 22.3 percent of the taxes” (typically using the figures published for some time now by the Congressional Budget Office (CBO); the number I quote here is from their latest estimate, using 2009 data, available here).  A possible subtext, never articulated, is that because 22.3 percent is greater than 1 percent the tax system is excessively progressive.  To interpret that subtext we need a conceptual marker.  If the top 1 percent of taxpayers paid 1 percent of the taxes (and the same for every other 1 percent ranked by income), then we would have the numerical equivalent of a head tax – both Warren Buffett and the proverbial elderly widow in the walk-up cold-water flat would write a check (if the widow had a checking account) to the Treasury for the same number of dollars.  That probably would not strike too many people as a “fair” tax system.

Sometimes the lament is a bit more sophisticated.  With a one-layer-deeper dive into the data, it can be worded as “the 1 percent of taxpayers with the highest incomes earn 13.4 percent of the income, but pay 22.3 percent of the taxes.”  Again, the unstated subtext can be read that 22.3 percent of the taxes, being greater than 13.4 percent of the income, is too high.  But the implied standard that those with 13.4 percent of the income should pay 13.4 percent of the taxes is the numerical equivalent of a single-rate income tax with no exemption or deduction.  Both Warren Buffett and the proverbial elderly widow would pay the same 13.4 percent of their income in taxes – and not the marginal rate (on their last dollar of income), but the average rate (the percentage of all of their income that they actually paid).  Most Americans probably would question whether that was a fair outcome, either.

(Footnote:  The numbers quoted above are for total federal taxes paid – income taxes, payroll taxes, excise taxes, and everything else.  This yields a different perspective than looking at income taxes alone.  The differences between the two are debated with an almost religious fervor, and are a topic for another, very long, day.  Also note that the sum of those different taxes is more a patchwork quilt than a “system.”  But we must persevere, because that is the tax “system” with which we must live.)

So if the 1 percent of Americans with the highest incomes earn 13.4 percent of the total income in the country, how much of the taxes should they pay?  Probably more than 13.4 percent; but how much more?  In truth, there is no simple numerical answer – as the very basic review of the tag lines above suggested.  This question can be answered only by the American people themselves, through the political process.

Read More

This is just to tie up any remaining loose ends for you on the weekend’s legislative action on a congressional budget resolution for fiscal year 2014.

As you heard, the Senate passed its version of a budget resolution, to provide the opposite bookend – on a very, very long shelf – to the House version.  Some have argued that the House resolution “jump-started” the budget process, and that the Senate version “set the stage” for a hard and contentious conference.  Neither did any such thing.  The greatest likelihood, though admittedly not a certainty, is that you already have seen the sum and total of meaningful action on a budget resolution for next year – hence a “post-mortem” is fully in order.

There may be an initial meeting of a conference committee on the resolution, but it most likely will be what in the trade is called a “photo-op” meeting.  That is, Members from the two chambers gather, and the press is invited to take pictures.  The Members read their opening statements.  Then the meeting is adjourned, and the Members leave subject to the call of the chair – a call that never comes.  There is no rule that different bills that pass the two chambers must be reconciled and enacted; history is replete with bills that passed the two chambers in different versions and went no further.  This instance seems a prime candidate to enter that gallery.

The Budget Act requires that the Congress pass a budget resolution, but it also provides a procedure in case it does not.  And no one ever has gone to Budget Jail for failing to pass one; Budget Jail was grossly (indeed totally) understaffed even before the recent spending sequester.  You will recall that the recent “no-budget, no-pay” law is satisfied by each individual chamber passing its own budget; there is no requirement that the Congress reconcile the two and pass a single, final budget resolution.  So any motivation from that provision has been fully sated.

The passage of the Senate resolution did provide good theater.  The Senate normally allows unlimited debate (which is what a filibuster is), but a primary motivation of the creation of the current budget process was to prevent the budget from being talked to death.  The compromise that was struck was to allow Senate floor consideration, even after the statutorily limited time for debate has expired, of any and all amendments filed before a deadline.  This yields the notorious “vote-a-rama,” during which amendments are voted on even though they cannot be debated.  The process ends only when all of the filed amendments are voted upon (typically many are withdrawn without a vote) or the Senators give up in exhaustion, whichever occurs first.  This year’s marathon extended almost until dawn on Saturday morning.

But all of those undebated votes have no real significance.  The budget resolution is only a concurrent resolution, and cannot become law.  Any amendments to the resolution – some mentioned prominently in the press this year relate to the Keystone XL pipeline, sales taxation of Internet transactions, and the 2010 healthcare law’s provisions for a tax on medical devices and a reduction of the maximum contribution to flexible spending accounts for out-of-pocket medical bills – are purely advisory.  The recent push for a budget resolution in the Senate was thought by some to be a necessary first step toward meaningful negotiations.  That might be, but a more cynical interpretation is that the vote-a-rama provided an unlimited opportunity to force votes on artfully worded amendments for purposes of attack ads for future election campaigns.

Even the most charitable interpretation of the intent of all those amendment votes must include that they do not predetermine any subsequent votes actually to change the law.  If a real bill comes along, Senators can find ways to prevent its ever coming to a vote.  And there always are details in actual legislation to justify a Senator’s vote that is seemingly contradictory to an earlier vote on an amendment to the budget resolution.  A Senator could point to some other provision of a later bill as requiring a contrary vote.  The later bill might have an unacceptable budgetary offset to the bill’s cost, or it might have no offset at all.  So one should not leap to the conclusion that a vote on an amendment to a budget resolution is a harbinger of future action to the same effect.

It is certainly better to have action on a budget resolution than not.  (And if you have a strong position on a particular issue, it is better to have a favorable vote on a budget resolution amendment than not.)  To say that a budget resolution is a necessary condition for serious action on our budget problem probably goes too far, though one might make a case that a full and fair debate on a resolution would facilitate success.  But it unquestionably would be way off the mark to say that a budget resolution is a sufficient condition for solving our deep-seated problem.

Senate Majority Leader Harry Reid (D-NV) was reported in the press to have expressed skepticism at the prospect for a budget resolution conference.  Whether you agree with Senator Reid on the issues or not, he has a good sense of the politics of the Senate – and he has the authority to make the key decisions.  To paraphrase an old Washington friend of mine, the House and Senate passage of their budget resolutions plus $2.50 will buy you a day-old cheese sandwich – and not a very good one at that.

Demography is destiny.
Widely attributed to Auguste Comte,
                                                                     19th century French philosopher

Prediction is very difficult, especially if it is about the future.
Widely attributed to Yogi Berra,
                                                  Hall of Fame Catcher;
                                                         Actually said by Nils Bohr,
                                                               Noble Prize winning physicist

Just about everyone makes reference to the looming demographic challenge to the U.S. economy and the federal government’s finances.  Many people seem to be unaware of some of the subtleties that surround our demographics.  Here is a brief discussion to explain just what we are up against.

Read More

One can enunciate any number of criteria by which to judge this week’s budget resolution drafts from the House and Senate Budget Committees.  But they all boil down to one:  Do they help to solve the nation’s long-term budget problem?

And that is not to ask whether, if enacted, they would solve the problem.  It is, rather, whether they move us toward enactment of a budget plan that will solve the problem.

By that simple, meaningful standard, the answer thus far is no; there is no reason to expect any positive movement resulting from the release of the two resolution drafts.  (The House Budget Committee resolution draft was announced on Tuesday, though what was made public was a backup document, not the resolution itself.  The resolution, with plenty of blanks for numbers not yet determined, came today.  The Senate Budget Committee has not yet released its version; but by all accounts, the Senate resolution draft will not move us forward either.)

In fact, the lingering question is whether the net effect of all of the new paper might actually be retrograde.  In this implicit, slow-moving negotiation, these two resolutions definitely are first offers, not at all best-and-final submissions.  And they might even have a little of the air of insult first offers – where two sides who are obligated to negotiate for purposes of appearance go through the motions and put knowingly unacceptable gestures on the table to justify an end to the charade.

In sum, neither side will see anything that they have not seen already; and what they have seen already has not closed a deal.  There is no reason to expect anything new or different going forward, barring some unexpected development.

Read More

Two weeks ago, we talked about the onset of the sequester – which applies almost exclusively to “discretionary” spending, that is, annual appropriations for federal agencies – and what it implies for both the macroeconomy and the performance of government functions.

Next week, a further development will pull that issue back on stage:  House Budget Committee Chairman Paul Ryan (R-WI) will release his budget resolution for next year.  As part of the deal struck within the House Republican caucus to pass the fiscal cliff bill at the turn of the calendar year, that resolution will claim to achieve a balanced budget – a deficit of zero – in the tenth year from now (that is, in fiscal year 2023).  To reach budget balance that quickly – last year’s House resolution was estimated to achieve balance in 2040 – will require greater savings, and some of those additional savings likely will come from a lower path for discretionary spending than is set under current law – that is, even with the sequester.

Then, to avoid a government shutdown (that is, a lapse of appropriations for federal agencies), the Congress will need to replace the current continuing resolution before its expiration on March 27.  That will highlight once more the implications of the level of annual appropriations (although its effect will be restricted to the current fiscal year – fiscal year 2013, which ends on September 30, 2013 – more on that point later).

And at some time in March or April, the President will submit his fiscal year 2014 budget.  Many people will rush to see how the budget proposals compare with the House budget resolution, and in particular its FY 2023 budget balance.  The President’s proposed future-year levels for discretionary spending will be an important element in determining how that comparison will look.  So for yet a third time in just a few weeks, proposals for levels of discretionary spending will get at least a little air time – even though we do not yet have specialty cable channels that focus on the federal budget.

Read More

If you want a friend in Washington, get a dog.  If you want to lose your friends in Washington, talk about Social Security or Medicare.

I feel free to write this post only because I have no friends left.

What’s right with Medicare:  Many (probably not all) people who believe that Medicare can be – in fact must be – improved are fully aware that the program has accomplished its major objective, and is essential.  They say so, clearly.  No one listens, and those who recommend any change are accused of heartlessness toward their own parents (and every other elderly American), or worse.  But after multiple attempts at even-handed discussion I have nothing left to lose, and completeness requires one more try at articulating the positive as well as the negative.  So here is what’s right:

If left to fend for themselves, far too many elderly could not obtain health-insurance coverage, and eventually would be impoverished by out-of-pocket costs – or possibly even left without care.  The Medicare guarantee changed that.  Terminating that guarantee is unthinkable.

So why even broach the subject?  The care that our elderly get from Medicare could be a lot better.  The rising cost of Medicare is the primary driver of our long-term budget problem.  A deal to fix the long-term problem is both unthinkable and impossible without reform of Medicare.  And on the basis of potentially misleading information, many have come to think that we can ignore the program’s rising costs – though procrastination might come back to haunt us later.

So what’s wrong with Medicare?

Read More