Monday, April 15, 2013

The Liberal Case for Entitlement Reform

(This is a belated repost of something I wrote on my Forbes blog last week.)
As expected, the President's Budget proposed modest cuts in Social Security benefits. Liberals were incensed. When the proposal was first leaked, Stephanie Taylor of the Progressive Change Campaign Committee expressed the left wing’s angst, and a threat:
‘You can’t call yourself a Democrat and support Social Security benefit cuts. The president is proposing to steal thousands of dollars from grandparents and veterans by cutting cost-of-living adjustments, and any congressional Democrat who votes for such a plan should be ready for a primary challenge.’
The specific proposal to “steal thousands of dollars from grandparents” would basically cut a few tenths of a percent off the annual adjustment to Social Security Benefits (and many other revenue and outlay programs) by replacing the standard inflation measure with an alternative called the “chain-weighted Consumer Price Index (CPI).” Unlike Classic CPI, the new measure accounts for the fact that when prices rise unevenly, consumers will substitute cheaper items for those whose prices rise. As a result, the real burden of inflation is less than measured by the static CPI market basket. Most economists think this version is a better overall measure of the true cost of living.
Former Obama Budget Director Peter Orszag argues that the adjustment is likely to be modest–amounting to about a two percent cut for an 85-year-old beneficiary (and less for younger recipients). For an average retiree, this would be less than $400 per year at current benefit levels. Others think the difference would be larger—as much as $1,100 (or 6.5 percent of benefits).
The proposal could create real hardship for poor elderly Social Security recipients, as the President acknowledges.  He promises other reforms to protect the most vulnerable. One option would be to increase the minimum benefit for older retirees.
Some argue that older people’s cost of living grows faster than the overall CPI because health care costs rise disproportionately with age. Thus, the chained CPI may be moving in the wrong direction.
But the troubling thing to me is the argument that Democrats should never support cuts in Social Security benefits. Progressives also have resisted major cuts to Medicare and Medicaid as a matter of principle. This is extremely short-sighted. As most people who follow the numbers understand, spending on federal health care programs and Social Security is on an unsustainable trajectory. Progressives might want to raise taxes on “the rich” to pay for all the benefits promised under the current system, but unless spending abates, tax hikes on the well-heeled are extremely unlikely to suffice.
Entitlement spending could increase by 5% of GDP over the next 25 years. (Source: CBO)
The Congressional Budget Office projects that spending on Social Security, Medicare, Medicaid, and Exchange Subsidies will grow by more than 5 percent of GDP over the next 25 years. That is more than half of income tax revenues in a good year (and about 70 percent of revenues in recent years). To raise that kind of revenue, we would need to tax more than just the rich. And given that historical tax receipts have varied in a narrow band, there is no evidence that voters would support tax increases anywhere near large enough to pay for rising entitlement spending.
So what happens if we can’t tax our way out of the problem? The answer, as former President Clinton might say, is “arithmetic.”  If entitlement spending increases by 5 percent of GDP (the equivalent of $800 billion per year at current levels), revenues increase only modestly, and we have tapped out our borrowing capacity, what then happens to all the other things that progressives care about, like education, the environment, social welfare programs, transportation, research, and infrastructure?
The knee-jerk answer is: cut defense. There’s certainly a lot of pork in the defense budget, but total defense spending is less than the projected increase in entitlement spending. We might be able to trim defense spending, but unless we can significantly cut entitlement spending, we are looking at an unprecedented squeeze in spending on other programs–one that will make the recent cuts due to the sequester and the fiscal cliff deal look like the good old days by comparison.
And if we continue to ignore the basic arithmetic and accumulate debt even after the economy has recovered, the resultant crisis could necessitate draconian cuts in public programs. This is an outcome that no progressive would wish for.
Another advantage of cutting entitlements is that the cuts would initially be very small and only grow over time. That means that such cuts would not threaten our fragile economic recovery—unlike the harsh sequester cuts that took effect in January.
If we want to protect a robust social safety net and other vital government services, we need to come up with sensible cuts to entitlement programs that protect the most vulnerable. The President’s proposal may not be the best approach, but he was right to start the conversation. Instead of lobbing hand grenades, Democrats should engage in the debate.
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The Tax Complexity Lobby

You might think that everyone hates tax complexity, but you’d be wrong.
Two factions like things just the way they are: tax software companies (especiallyIntuit, the maker of TurboTax) and government haters like Grover Norquist, president of the ironically named Americans for Tax Reform.
Both Intuit and Norquist were featured in a recent story in ProPublica and NPR titled “How the Maker of TurboTax Fought Free, Simple Tax Filing.”
Software makers like the status quo because they profit so handsomely from it. Intuit’s profit fell by 40% ($47 million) in the first quarter because the start of the tax season was delayed. Imagine what would happen if most filers could do their tax returns without help.
The second group has a more Machiavellian perspective. Grover Norquist is famous for saying that he wants to shrink the federal government so much that it will fit in a bathtub… and then he wants to drown it. A simpler, less onerous tax system would presumably make people feel better about the government, and that is the last thing Grover and his fellow travelers want.
The Obama Administration had proposed that government pre-fill your tax return with information it collects from employers, financial institutions, etc. The idea has gone nowhere, at least in part because of fierce opposition from the tax software industry. Intuit had also temporarily derailed a free file program in California and killed a simple online filing system in Virginia.
Grover portrays himself as the defender of “seniors, low-income and non-English speaking citizens” who might be intimidated into signing an erroneous tax return completed by the IRS. Maybe, but I’m pretty sure that Norquist’s main fear is that taxpayers would appreciate the simplicity.
Forbes investment editor, Janet Novack, has a smart essay about how the complexity of our current tax system makes any efforts at simplified filing problematic. One goal of tax reform should be to simplify things enough that the IRS could accurately prepare most people’s returns for them. Novack also invited commentary from law profs Joe Bankman and Dennis Ventry, strong advocates of California’s ReadyReturn system, and Arlene Holen, a critic.
Novack is surely right that our current tax system is needlessly complex, but Bankman responds that the IRS could still simplify matters by assembling data from information returns and providing it to us as a starting point. Holen argues that this would create an undue burden on small businesses. (Holen’sresearch institute is partially funded by Intuit.)
The burden could be lessened by extending the filing deadline to give companies time to get their info to the IRS. We tend to think of April 15 as a date set in stone, but the original filing deadline was in March. It could be pushed back again.
Tax reform obviously creates the possibility for much more sweeping simplification. Several proposals would banish “Tax Day” altogether.
Columbia law professor Michael Graetz proposed to replace the income tax with a VAT (a kind of national sales tax common in the rest of the world) for most households. Only upper-income households would have to file income tax returns. Refundable tax credits would offset the regressivity of the VAT for those with low incomes.
The Bipartisan Policy Center (BPC) proposed to simplify the income tax codeso much that half of households would no longer need to file. (Joe Minarik and I designed this proposal.) The income tax would be a flat 15% for most households; thus, tax withholding at a flat 15% rate would exactly match liability. Like Graetz’s proposal, there would be refundable credits tied to employment and children that would offset the regressivity of the flat income tax rate. Tax subsidies for mortgage interest, IRAs, and charity would be delivered directly to financial institutions and charities, obviating the need for tax deductions or filing. For example, if you gave $100 to your favorite charity, they’d claim a matching $18 on your behalf from the IRS. The UK uses this system, called Gift Aid, to promote charitable contributions without requiring tax filing.
The BPC plan would discourage the creation of new complexifying tax credits and deductions, which might make tax reform more durable than in its last incarnation.
Supreme Court Justice Oliver Wendell Holmes once said that taxes are the price we pay for civilized society.
But needless tax complexity is the price we pay for Washington’s dysfunction, aided and abetted by the complexity lobby. We should just say no.
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Len Burman and Joel Slemrod wrote Taxes in America:  What Everyone Needs to Know

Monday, April 1, 2013

Obamacare Bans April Fool’s Day!

Another basic right falls
victim to Obamacare

A little known provision of the Patient Protection and Affordable Care Act, commonly known as “Obamacare,” will levy hefty penalties on perpetrators of “hoaxes, pranks, scams, and other kinds of mischief on the first of April” starting in 2014.

The Obama Administration claims the provision is necessary because “April Fool’s jokes result in thousands of emergency room admissions that drive up everyone’s health care costs.” Pranksters will receive warnings from the Office of Health Systems Supervision (OHSS) this year, but next year they could be subject to penalties of up to $1,000.

OHSS commissioner George Wellor said in a news conference that “April Fool’s jokes may seem like harmless fun, but they are not.  Yes, a well-crafted joke can provide a welcome dose of levity, but many jokes are poorly executed.  They can cause real distress, provoking asthma attacks, hypertension, and even cardiac arrest.  Perpetrators themselves can and often do suffer grievous bodily injuries and death.  Even a good joke can go bad, as when a driver doubled over with laughter lost control of his vehicle on interstate 94 starting an 18-car pile-up on April 1, 2003.  Our health care system simply can’t afford to waste millions of dollars for a little fun.”

Congressional Republicans, who have been highly critical of the health reform law, are not amused.  Senate Majority Leader Mitch McConnell (R-KY) released a statement saying, “This is just another example of how Obamacare intrudes into every aspect of our daily life. April Fool’s Day is a proud tradition and part of the fabric of America.”

Senator Al Franken (D-MN), a former comedian, thought it ironic that the famously humor-challenged McConnell would stand up for the right to play pranks.  But then he reconsidered. “Hey, I’ll support my colleague from Kentucky if he says ‘April Fool!’ and admits that Republican policies for the past couple of decades have been a joke.”

House Budget Committee Chairman Paul Ryan (R-WI) said this is one reason why health reform must be repealed.  “This Administration thinks nothing of trampling on our basic freedoms.  Government bureaucrats shouldn’t be deciding when it’s okay to make jokes and when it’s not.  That’s why my Budget repeals Obamacare.”

To punctuate the point, Ryan renamed the House Budget “The April Fool’s Day Restoration Act of 2013.”

It is expected to come up for a vote in the House today.  The Senate is not expected to take up the measure.

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[If you don’t see the humor in this, sorry.  It’s an April Fool’s joke.]

Saturday, March 9, 2013

The Economy is Finally Showing Signs of Life: Don't Sabotage it!

Finally, the economy is showing strong signs that the six-year slump may be coming to an end.   236,000 people found work in February, far more than economists had expected, and the unemployment rate is 7.7%, the lowest level in four years.
Rising house prices and a booming stock market are driving up household net worth, which should boost spending.  The housing sector is  rebounding.  Corporations are sitting on a huge pile of cash, which means that there’s lots of room for investment and hiring once businesses are convinced that the recovery is for real.
With all this good news, why would Washington want to throw sand in the gears of the economy?  But it is, big time.
The deal to avert the fiscal cliff let payroll taxes rise by 2 percentage points, which cut household after-tax incomes and is depressing consumer spending.  The insane sequester will hurt the economy by reducing federal workers’ pay  and reducing employment as federal hiring comes to a standstill and contractors have to lay off workers (or cancel hiring plans).
There is a time to cut government spending, but it’s not now.
There is, however, a potential bipartisan path out of this morass. Republicans and Democrats are each right about some big things that seem to divide them.  Democrats are right that taxes will need to increase.  The retirement of the baby boomers means that there will be unprecedented demands on government.  The tax level that sort of worked for the past 30 years won’t be adequate to pay the Social Security, Medicare, and Medicaid (which covers half of nursing home care) that we’ve promised baby boomers, even under the most optimistic assumptions about cost controls.  And Republicans are right that we must slow the out-of-control growth of entitlement spending–especially for government healthcare programs.
The President has signaled willingness to take on entitlement reform, over objections of some of his caucus.  He should be able to win over a substantial number of Democrats with a simple argument:  if we do not control health care spending, it will crowd out everything else that government does.
The GOP has  dug their heels on additional tax revenues, but tax reform that curtailed tax expenditures, cut tax rates, and raised net revenues still seems like a possibility.  Republicans really should favor this.  Spending programs administered by the IRS do as much to increase the size and scope of government as direct spending programs, and deserve the same level of scrutiny.
Serious tax reform would take a couple of years, but that is a plus.  If the economy keeps recovering, modest revenue  increases starting in 2015 would be well timed.  Similarly, the effects of serious entitlement reform would take many years to have much effect on the budget, but they will solve the real budget problem, which is long term (and won’t hamper the economic recovery).
Congress should cancel the irrational sequester and instead enact policies that could help speed up the recovery.  Congress and the President should agree to pair tax reform with entitlement reform and get down to work on both.
Or law makers can  continue to sabotage the economy and hope the other side gets blamed for the resulting economic carnage.
I know the smart money is on the latter outcome, but I’m hoping that for once smart policy will prevail.
Len Burman is coauthor with Joel Slemrod of Taxes in America:  What Everyone Needs to Know.
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