Sunday, November 27, 2011

The Not So Super Committee

Last week the so called Super Committee of the US Congress, composed of six Republicans and six Democrats, failed to come to any agreement on deficit reduction.  If an agreement had been achieved it would have been subject to an up or down vote in each chamber of Congress requiring only a simple majority to pass.   It could not have been filibustered or otherwise side-tracked.

At the same time that this Super Committee failed in achieving its mandate, the European financial system was on the verge of collapse under the pressure of unsustainable debt burdens of many or most European Union countries.  The Super Committee had within its power to signal that the United States was not going to go down the same path as Europe, and help right the US financial ship of state – not just by achieving the minimum 1.2 trillion dollar ten year deficit reduction but going much further and recommending a 4 trillion dollar deficit reduction program.

The saddest part of this failure was that there was a deal to be had.  All parties recognize that the long term fiscal problem is being driven by the uncontrolled growth of the entitlement programs, and that structural changes in these programs must be implemented.  I have previously posted on how I think how our health care system, which represents the greatest entitlement reform challenge, needs to be restructured.

On the revenue side, the Democrats wanted the deficit reduction package to include the wealthy paying more taxes. The Republicans wanted to prevent the top marginal tax rates reverting to the Clinton era levels when the Bush tax cuts expire at the end of 2012.  The Republicans in fact wanted the marginal rates to be reduced further.   The aims of both parties could have been achieved.  This could have been accomplished by eliminating or greatly reducing income tax deductions and loop-holes in both the personal and corporate income taxes while at the same time reducing the top marginal rates.  These deductions and loop-holes benefit primarily the wealthy.  Thus top marginal rates could be reduced but total tax revenue paid by the wealthy increased. 

The loop-holes and deductions have been inserted into our tremendously complicated tax code as a result of the lobbying efforts of special interest groups.  As a result of these deductions and loop-holes, individuals and corporations legally evade taxation and guide their activities to behaviors which take advantage of these deductions and loop-holes in order to reduce their level of taxation.  This results in a less efficient economic system.  A restructuring of the tax system to eliminate deductions and loop-holes would provide a tremendous economic stimulus.  The activities of individuals and corporations would now be directed to activities that make economic sense rather than activities upon which the government bestows tax favors.

To his credit, Senator Toomey of Pennsylvania proffered a proposal that breached the doctrinal Republican position promulgated by the lobbyist Grover Norquist that no Republican will ever agree to any increase in tax revenue.  Senator Toomey offered to reduce deductions and loop-holes in exchange for a reduction in marginal tax rates.  The Democrats rejected this proposal – they claim because the proposal did not go far enough.  However, I suspect that in fact the Democrats were more attached to their doctrinal position of not reducing marginal tax rates. 

In the end, despite Senator Toomey’s initiative, both the Republicans and Democrats had greater allegiance to their parties’ doctrinal positions than to solving one of the greatest challenges that faces the United States and the developed world.  The retort of both sides is that this issue will now be settled in next year’s election.  However, as we have seen in Europe, financial markets may decide not to wait while politicians prevaricate, demagogue and electioneer.

1 comment:

  1. The idea that an agreement could be had on tax reform is prevalent in newspaper editorials, but is farcical. As a liberal, I'm pleased about this for a variety of reasons.

    First, it's a bad play for democrats. Tax deductions are favored tool for the promotion of desired behavior. You can disagree about the wisdom of such tools as the student loan interest deduction, the home mortgage interest deduction, or rebates for clean vehicles... but I think everyone can agree that it is a potent arrow in the Democratic quiver.

    Second, the idea that revenue enhancement is on the table is an illusion. There is a progressive tool for raising revenue - raising top marginal rates or imposing a new top rate (say at 10 million). A complicated reformulation is just smoke and mirrors from which (shockingly) a deal that favors the upper end of the income bracket is likely to emerge.

    Why is that? Well, tax deductions are "complicated" due in large part to the fact that they phase out once your AGI is too high. Congress added these phaseouts in 1990. Not only does the mortgage interest deduction phaseout, but so do most deductions. Thus, eliminating deductions harms almost exclusively the "bottom" end of the income scale. Admittedly, the phaseout is around $166,800 in AGI, but still.

    The simplest way to raise revenue, and share sacrifice in a progressive way, is to allow the Bush tax cuts to expire.

    Third, and last, while the Beltway may "recognize that the long term fiscal problem is being driven by the uncontrolled growth of the entitlement programs", this is not really true. Medicaid/Medicare is the issue, not social security. Of course, Obamacare contains numerous mechanisms for dealing with health care cost growth... so fiscally "serious" people shouldn't want to repeal it, right?