The Agenda

The Co-Chairs’ of the Fiscal Commission Seem to Get It

Like most observers, I didn’t expect the president’s bipartisan fiscal commission to present a compelling set of solutions for dealing with our various fiscal policy woes. The co-chairs’ proposal — which, I should stress, is only a starting point for the broader commission — comes as a pleasant surprise. Brad DeLong is profoundly unimpressed, and Megan Carpentier of TPMDC describes the recommendations from Erskine Bowles and former-Sen. Alan Simpson as “eye-popping“:

Their recommendations are more or less a list of the third-rail issues of American politics, including cuts in the number of federal workers; increasing the costs of participating in veterans and military health care systems; increasing the age of Social Security eligibility; and major cuts in defense and foreign policy spending. They also encompass a range of tax system reforms that have been floated by many in Washington for years to little effect, including reducing tax rates by eliminating many beloved credits and deductions.

This is exactly what I like to hear. It’s worth noting that the co-chairs’ proposal actually goes beyond achieving primary fiscal balance by 2015, and that the plan is focused on spending. The action on the revenue side comes from deep cuts to tax expenditures.

Carpentier of TPMDC has done an able and fair job of describing the core tax recommendations, so allow me to piggyback on her work to discuss some of the recommendations. I hope to discuss the entitlement proposals later today. 

Tax reform:

* The co-chairs suggest capping both government expenditures and revenue at 21% of GDP eventually.

Brad DeLong is not a fan of this cap:

It probably means nothing–it all depends on what “revenue” means. But if it means something it is going to be a disaster as health care costs rise. You cannot implement PPACA’s health-insurance exchanges without a subsidy pool. And if the money to pay for that subsidy pool has to fit under a 21% of GDP revenue cap, it simply does not work.

I agree that PPACA’s health-insurance exchanges can’t work if we keep revenue at 21% of GDP. But I also think that if we don’t achieve permanent full employment, revenue will have to reach levels that are burdensome. My Economics 21 colleague Chris Papagianis wrote about federal tax revenue back in August:

The progressivity of the current tax system means revenue grows faster than the economy over the long term. From 1946-2008, revenues averaged 17.8% of GDP.

Under CBO’s extended baseline scenario, federal tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 (assuming current law remains in place). In other words, if no tax relief is enacted, taxation will increase by more than 30% as a share of the economy (compared to the historical average) in less than 25 years. If you look at the change relative to today’s very low share (14.9%), the jump is more than 50%.

That is, the fiscal commission is committing to a cap that is well above the postwar average. Though I understand Brad’s concern, I don’t think 21% is an unreasonable cap. Rather, I think PPACA is far more expensive than it needs to be to deliver adequate protection against health-related income shocks, which, in my view, should be the goal of the health safety net.

* In their first plan, called “The Zero Plan,” they suggest reducing the tax brackets to three personal brackets and one corporate rate while eliminating all credits and deductions. Without any credits or deductions (including the ETIC and mortgage interest deductions), the 3 tax rates would be 8, 14 and 23 percent.

It should go without saying that this is profoundly politically unrealistic. I want to emphasize this point: “The Zero Plan” is meant to demonstrate to the engaged public what we can accomplish if we can end tax expenditures that are, as Bowles explained, spending masked as real tax reductions. 

Suffice it to say, “The Zero Plan” strikes me as an extremely attractive vision of tax reform, though I might prefer a two-rate to a three-rate structure and a tax on consumption rather than income. You can find a chart describing the plan in broad outline on page 24 of the 50 page document [PDF]. The option that preserves EITC and the child tax credit has obvious virtues. My favorite feature of “The Zero Plan” is that it eliminates the particularly pernicious state and local and mortgage interest tax deductions. Alas, the housing lobby, including a large and vocal slice of those living in owner-occupied housing, will fight this tooth and nail.

* All their proposals limit Congress to collecting taxes on income made within the United States, reducing or eliminating taxes on American expats and revenues companies earn abroad.

This strikes me as an important and valuable reform that will put the U.S. in line with our trading partners, and will greatly lighten the administrative burdens on Americans living and working overseas. 

* They also suggest raising the federal gas tax to 15 cents per gallon in 2013.

Josh Barro of the Manhattan Institute argued that an “ad valorem” gas tax makes more sense in a RealClearMarkets column published late last month, and I agree with them. 

Depressingly, I sense that the forces of Gucci Gulch are gearing up to kill the infant child in its crib. But if conservatives and progressives can keep an open mind, something might come of the fiscal commission yet.  

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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