Ross Douthat and Reihan Salam have both lauded the fiscal-cliff compromise that Sen. Bob Corker (R., Tenn.) has proposed. There is much to commend in it. What follows is not an overall evaluation but some comments I haven’t seen elsewhere about aspects of it.
1) The Medicare proposal looks a lot like the latest version of the Ryan Medicare plan. Like that plan, it preserves the traditional fee-for-service Medicare program as an option for seniors. That plan, however, caps the growth of Medicare spending in case competition does not drive costs down. The Congressional Budget Office is skeptical that competition will have this effect but credulous about caps, so a cap helps proposals look generate large savings when they’re scored. Caps have their opponents, though, and (as Yuval Levin has argued in this space) it is hard to believe Congress would allow one to take effect if it meant service reductions. So Corker dispenses with the cap.
Corker would also gradually raise the retirement age. I can’t tell from the materials I’ve been given whether Corker’s plan incorporates a promising suggestion by John Cogan of the Hoover Institution. He says Medicare could save a lot of money by raising co-pays even if it simultaneously cuts premiums so much that seniors come out even. (The difference would be fewer doctor visits as a result of changed incentives.)
2) The Social Security proposal is tax-heavy. Overall Corker’s plan has a 3.6 to 1 ratio of spending restraint to tax increases, but the Social Security changes alone have a 12.7 to 1 ratio the other way. That may just be–probably is–a function of the timeframe for which the savings are estimated.
3) Corker saves money for the federal government by changing the way Social Security benefits and tax brackets are indexed for inflation. Most (though not all) economists think the existing measure overestimates inflation. Taxes are indexed to inflation so that nobody pays a higher rate just because inflation has made his income look as though it were rising. Overindexing means that over time the same real income is taxed at a lower rate.
I don’t think changing the inflation index is a good policy as an ideal matter. It’s not that I disagree with the economists who say a lower measure would be more accurate; that’s above my pay grade. I just don’t think either taxes or Social Security benefits should be indexed to inflation. Social Security beneficiaries should get an increase above inflation every year, so that an 85-year-old Social Security recipient gets a larger real benefit than a 70-year-old. Tax brackets should be indexed to nominal wages. That way the government would not take a rising share of the economy in revenue automatically, just because the economy grew. The Corker proposal on inflation indexing isn’t the worst way in the world for the government to improve its financial position–far from it–but I don’t particularly like it either.
4) Like a lot of other tax reformers these days, Corker would cap the total value of all itemized deductions a filer could take–in his case, at $50,000 a year. Again, it’s not the worst policy in the world, but again I don’t much like it. It’s bound to hit charities pretty hard, for one thing. It seems to be motivated by a similar impulse to the one that brought us the alternative minimum tax: We can’t impose any rational structure on existing tax breaks so we’ll just add another layer of complexity to the system to deal with their effects.
If you want to raise money from high earners without raising the top tax rate, a much cleaner option–oddly underexplored in the recent discussions–is to lower the thresholds at which the top tax rates apply.
5) I think it is a mistake for Republican tax reformers not to take a run at the deduction for state and local taxes. It should be capped if not eliminated.
UPDATE: A spokeswoman for Senator Corker confirms that I was right about point 2: Over a ten-year time frame the taxes generate revenue faster than the savings from benefit-level changes accumulate. She also notes that if the effect of inflation indexing provision is counted as a Social Security spending cut, the ratio of spending cuts to revenues for the program is closer to 1-1.