The Manhattan Institute’s Josh Barro has put up a long post criticizing Americans for Tax Reform’s balanced-budget plan. The plan in question rolls back all discretionary and mandatory spending (excluding Social Security and Medicare) to 2008 levels and then freezes spending indefinitely. The mandatory programs (including Medicaid) are block-granted to the states. The result is a balanced budget in the middle of this decade, and large and growing surpluses after that. The plan not only raises no taxes, it avoids all scheduled tax hikes, repeals the taxes in Obamacare, and calls for revenue-neutral corporate-income-tax reform.
Barro’s critique falls into several main areas that I will deal with individually.
First, Barro believes that the ATR balanced-budget plan understates the amount that interest on the national debt will cost even after substantial deficit reduction. This is Barro’s most substantial point, which says a lot about how solid the plan is, since this point amounts to little more than a nitpick or a rounding error. Even if interest on the national debt comes in at the levels Barro recalculates, it simply moves the year of budget balance from 2015 to about 2017. Instead of a five-year balanced-budget plan that raises no taxes, ATR may have instead produced a seven-year balanced-budget plan that raises no taxes. Instead of a balanced budget in 2015, there might instead be a meaningless deficit equal to 1 percent of GDP. In short, this is not a serious concern with the plan’s structure, and doesn’t substantially alter anything. Besides, there’s every chance Barro (and CBO) is being too pessimistic about the path of interest rates. Time will tell.
Second, Barro believes that the “dynamic score” revenue-feedback effects assumed in the plan are too optimistic. The plan proceeds from CBO’s baseline, which has projected a certain level of real GDP growth. CBO has done this having baked into the cake trillions of dollars in current-law tax hikes. Our plan not only backs all of those tax hikes out of the equation, we also call for a revenue-neutral corporate-income-tax reform with a target tax rate of 15 percent (down from 35 percent today), which would make the U.S. one of the most corporate-tax-competitive nations in the developed world. We preserve small-business capital expensing at current levels. Importantly, we keep 50 percent “bonus depreciation” in place permanently. The capital gains and dividends tax doesn’t rise — it stays at 15 percent. Instead of the small-business tax rate rising to nearly 40 percent, it stays at 35. The death tax remains dead.
Given all this, we feel comfortable assuming an average real GDP growth rate 1 percentage point higher than CBO’s current projection. CBO has a rule of thumb they published in the January 2011 “Economic and Budget Outlook” which said that every 0.1 percentage point in higher real GDP growth results in $250 billion in higher tax revenues over the decade. Thus, we assume a perfectly reasonable $2.5 trillion in higher decade-long tax revenues due to anticipated increases in real GDP growth.
Third, Barro faults the plan for not dealing with the bad deal Social Security and Medicare is for younger workers. As Josh well knows, ATR has endorsed the Social Security and Medicare reforms in Rep. Paul Ryan’s (R., Wis.) “American Roadmap” plan. We simply didn’t mention it here because the goal of this project was to balance the budget in this decade without raising taxes. In response to confusion here and elsewhere, we’ve added an addendum to our plan that makes clear that Social Security and Medicare need to be reformed along the lines of the American Roadmap, even if that conversation is beyond the scope of this particular initiative.
The final area of Josh Barro’s analysis is the lengthiest and the most troubling. Time and again, he calls our spending cut-and-freeze plan unrealistic or even economically harmful. Consider:
But this savings strategy [the 2008 discretionary spending freeze] doesn’t work indefinitely—once you’ve pulled out of Iraq and Afghanistan, you can’t save more money by pulling out again. And a pay freeze and attrition program can’t go on forever—eventually, federal pay and benefits would become uncompetitively low and the workforce too small to effectively perform federal functions…
Ellis’s plan is unsustainable for Medicaid because of both cyclical and long-term trends. Long-term, the Medicaid-eligible population can be expected to grow about 1 percent a year and medical inflation to run at 6 percent. Holding the long-term rate of Medicaid growth below 7 percent therefore requires tightening Medicaid eligibility or providing fewer services to enrollees. This could be a good idea for a time, if Medicaid is wasteful or the eligibility requirements too loose. But eventually you reach a point where a freeze keeps Medicaid spending below a desirable level. After a seven-year freeze, assuming similar economic conditions at the beginning and end of the period, Medicaid would have the same budget in nominal dollars but would have to provide 38 percent fewer services per capita. The cyclical problems are even greater. Unlike Medicare, the trendline for the Medicaid population is not basically straight; instead, enrollment swells in recessions because people lose their jobs or otherwise fall below Medicaid eligibility thresholds. In order to make a Medicaid freeze work in a recession, states would have to tighten Medicaid eligibility at exactly the times when more people need it. Alternatively, they could direct more state tax dollars into Medicaid, but this would require destimulative moves such as raising taxes or cutting other spending…
The cornerstone of Ellis’s plan to control mandatory spending, basically, is the elimination of all automatic stabilizers in American fiscal policy. If this policy were enacted, instead of talking about whether to extend unemployment benefits, states would be looking at shortening them in recession in order to stay within the frozen UI budget while the number of claimants rises—or, alternatively, jacking up taxes to pay for them. This is a very bad idea.
I was frankly surprised to see this perspective from Josh, who (I believe) is a self-described libertarian and works at a free-market think tank. I was even more surprised to see this perspective given a platform in National Review Online, which is ostensibly a conservative publication.
One sees terms like “uncompetitive federal pay and benefits,” “effectively perform federal functions,” “desirable level of Medicaid spending,” “destimulative moves like cutting spending,” and “automatic stabilizers in American fiscal policy” in liberal criticisms of conservative fiscal plans, but not usually libertarian or conservative criticisms of those plans.
I really don’t know how to answer Barro on this one, except to say that we have a fundamental difference of opinion on the size, scope, and role of government. At Americans for Tax Reform, we believe that spending and taxes are too high, and both need to be reduced. We’re not particularly concerned about federal employees getting paid enough, or the Medicaid population being at a “desirable level” (in fact, we believe that level is zero enrollees). If states chose to make these block-granted programs smaller and smaller every year, that would be an excellent policy outcome from our perspective. We think the government should be much smaller than it is today.
The ATR balanced budget plan is the only one that actually fits the mood of voters on Election Day. Voters sent a very clear message — cut spending and get us out of debt. Washington does not have an under-taxing problem; rather, it has an over-spending problem. The ATR plan is the only one that hears that message.
— Ryan Ellis is director of tax policy at Americans for Tax Reform.