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NRO’s domestic-policy blog, by Reihan Salam.

James Capretta on the Gang of Six and the Debt-Ceiling Endgame



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My NRO and Economics 21 colleague James Capretta has written a powerful case against the Gang of Six proposal, and it is well worth your time and attention. I agree with much of the piece, but there is some daylight between us. I will excerpt parts of his column below and offer commentary. But to get a full sense of his argument, I recommend that you read his post.

First, there’s a relatively small bill to supposedly save $500 billion immediately with a combination of discretionary spending caps through 2015, a move toward the chained CPI for indexing Social Security and the tax brackets, repeal of the CLASS Act, and other unspecified process provisions. Although unstated, presumably it is this bill that would carry a temporary debt-limit increase to get past August 2, and probably provide about six months of room before another debt-limit increase became necessary. 

Republicans must understand that even in this small, initial part of the package, the Democrats are insisting on a tax hike. The chained-CPI proposal will increase taxes along with slowing inflation increases in Social Security.

As I have argued in this space, I think that adopting the chained CPI is a good idea. Chris Edwards of Cato, however, shares Jim’s concerns about indexing tax brackets to chained CPI:

One idea being discussed is to raise revenue by reducing the indexing of parameters in the income tax code. Currently, tax brackets and other features of the tax code are indexed to the Consumer Price Index (CPI). It is widely recognized that the CPI overestimates inflation for various reasons, as discussed here.

The Bureau of Labor Statistics has developed a more accurate (and lower) measure of inflation, called chained CPI. If the tax code was indexed to chained CPI instead of CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. …

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes families into higher tax brackets over time, which is called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets since the tax code is indexed for inflation but not real growth.

Real growth also makes taxpayers collectively more affluent, and the logic of a progressive income tax is that people with a greater ability to pay should be subject to a higher rate of tax. This is, in my view, a strong case for lower, flatter taxes, not necessarily a case for using a less accurate measure of inflation. Indexing to real growth, as Edwards recommends, gives us an income tax that pays closer attention to where households stand in the pecking order rather than ability to pay per se. I can see why one might consider this a more sensible approach, but I don’t think it’s a no-brainer.

Back to Jim:

The second part of the Gang of Six package is far worse. It’s essentially a call for a budget “reconciliation” bill, with no specifics yet available. Senate committees with jurisdiction over taxes and entitlements would be tasked with achieving targeted amounts of savings or tax increases. For instance, the Finance Committee would be charged with reporting out a tax-reform plan that increases taxes by about $2.3 trillion over a decade. That committee would also be charged with finding savings in Medicare and Medicaid, but there’s absolutely no indication of how the savings will be achieved.

Republicans would be foolish to think this process will produce anything worthwhile. The Democrats control the Senate, and all of the committees. They will write the tax and entitlement changes, and look for Republican votes. It’s a recipe for another round of useless mishmash posing as “entitlement reform.” Remember, Finance Committee chairman Max Baucus is an architect of Obamacare. If his committee were to produce any real health-care savings at all, it would be with the same kind of price-setting and central planning that was written into Obamacare. There’s zero chance this process will lead to any meaningful movement away from the Obamacare model.

This strikes me as a fair assessment, though I wonder if Baucus might be amenable to something like the Domenici-Rivlin plan. Either he is not, and Jim is right to be pessimistic, or he is, in which case we should press the conversation forward. Federal health spending is the driver of our budget woes and a premium support plan that wins bipartisan support, perhaps by offering a somewhat more forgiving growth rate in the size of premium support credits, would be worth concessions in other domains. 

At the end of Jim’s column, he recommends a step forward for House Republicans:

 

Republicans must realize that being tactically nimble in this fight will be the difference between success and failure. The conservatives in the House who say they will never, ever vote to increase the debt limit need to realize they are handing all of the leverage to President Obama. To begin with, the budget they support — the Ryan budget that the House Republicans voted for nearly unanimously in April —requires a large debt-limit increase. Indeed, there’s no conceivable budget plan out there that doesn’t require one. Moreover, there is a strong chance that going past August 2 without an increase could completely backfire on the GOP. It’s hard to predict what will happen, but it could be quite chaotic and cause real damage to real investors and businesses. It will almost certainly trigger a very negative public reaction, which will then force Congress to raise the debt limit quickly, one way or another. It’s hard to see how such a confrontation will help Republicans get a better deal.

What conservatives should be doing is seizing the initiative in the House. They should move immediately to pass a small debt-limit increase, on the order of $500 billion, coupled with a reasonable set of spending cuts, including caps on discretionary spending. They should then send that to the Senate as the starting point for discussions. Doing this now would increase Speaker Boehner’s leverage immensely, as he would become the only person in the room who had shown by his actions that he doesn’t want a default. Moreover, at this late stage, there’s a very real chance it would become the vehicle for getting past August 2. [Emphasis added]

I’m eager to see if this approach gains traction, as it makes a great deal of sense. 



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