Remember the deficit-shrinking plans?
[Editor's note: This blog is being released out-of-sequence: It was written before the Obama-GOP deal had been publicized, so the text does not refer to that plan in any way.]
By now we鈥檝e seen a number of proposals for fiscal sustainability from groups with very different perspectives鈥搃ncluding groups that say that the deficit is not a problem and even talking about it as such is what鈥檚 really dangerous and even evil, and yet offer up their way to solve it anyway(!). Some of these harshest critics of the bipartisan deficit-reduction panels are liberal-leaning groups that argue that , as well as those of the and the , leaned too heavy toward the conservative side and proposed packages that were too heavy on spending cuts and too insistent on keeping taxes (too) low. (I may agree that I would have preferred more revenue increases in the overall mix than the President鈥檚 commission proposed, but I don鈥檛 think that should lead me to declare the overall proposal 鈥渄ead on arrival鈥� or to reject the the individual policies contained within it.)
I鈥檝e seen two sets of policy proposals coming from the liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced鈥搊ne by the (whose members include Dean Baker, Robert Borosage, Robert Kuttner, and Robert Reich) and another by the , a partnership of Demos, the Economic Policy Institute, and the Century Foundation. I actually like a lot of the policy substance in these more liberal-leaning packages when I muster up my 鈥渓oving kindness鈥�/yogi heart and am able to see past the deficit-hawk hatred and character assassination that these groups or the individuals in these groups鈥損articularly those involved in the 鈥淐itizens鈥� Commission鈥濃�搊ften shroud their proposals in.
Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see or anything that . Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions鈥� proposals) that keeps taxes as a share of the economy low enough鈥揵elow 19 percent鈥搕o please these conservative groups and his party鈥檚 caucus.
With all the screaming coming from both extremes, you鈥檇 think the competing visions out there must be so vastly different that there couldn鈥檛 possibly be such a thing as a truly 鈥渂ipartisan鈥� way to reduce the deficit. But when I look at the bipartisan plans accused of being too conservative and compare them with the plans that came from the two liberal-leaning groups levying this criticism, I actually see a decent amount of 鈥渞ough鈥� common ground. I see it as 鈥渞ough鈥� in two ways: (i) it鈥檚 a terrain full of tough choices, so maneuvering through it will be 鈥渞ough,鈥� and (ii) the similarities across plans are in their 鈥渞ough鈥� general principles and strategies rather than in the specific parameters of the policies.
Compare the liberal groups鈥� plans with the bipartisan plans (from the President鈥檚 commission, the Bipartisan Policy Center, and MacGuineas-Galston), and you鈥檒l find they all include:
- cuts to discretionary spending, including (or especially) substantial cuts to defense spending;
- reforms to Social Security and Medicare which improve the balances in these programs in a progressive manner (whether through the taxes collected or the benefits given through these programs);
- tax reform which raises revenue/GDP relative to current policy by reducing tax expenditures in a progressive manner (through capping the deduction rate and/or converting exclusions and deductions into credits, and by taxing capital gains and dividend income at same rate as labor income);*
- additional deficit-financed, but more effective, stimulus over the next couple years (whether spending or tax cuts).*
In the case of #1, the liberal groups concentrate the spending reductions on defense spending, while the bipartisan groups have a more equal mix of domestic and security-related spending cuts. (All proposals note they鈥檙e open to cutting farm subsidies.) In the case of #2 and #4, the disagreement is mainly over the pieces involving Social Security: respectively, whether Social Security benefits should be cut at all (even if only for the rich), and whether a payroll tax holiday funded out of general revenues (not harming trust fund balances) would still somehow undermine the program and is viewed as 鈥渏ust another tax cut鈥� in a stimulus strategy that has already been too tax-cut-heavy.
It鈥檚 in #3, the strategy of raising revenue by broadening the income tax base, and reducing tax expenditures in a progressive way, where I see the greatest agreement鈥揺ven when you look at the details of the competing proposals. Yet the rhetorical fighting from both the conservative and liberal sides over tax policy in general, and over the tax policies included in these deficit reduction plans in particular, continues, with both sides arguing that the tax proposals are not 鈥渂ipartisan enough.鈥� On the left, the liberal critics of these tax proposals oppose the fact that marginal tax rates would come down鈥搘hich sounds too much like a Republican goal. They forget that these proposals collect more tax revenue in a progressive (as well as more efficient) way鈥搒uch that average tax rates (and tax burdens) would rise more for the rich than for the poor. On the right, the conservative critics of these tax proposals oppose the fact that average tax rates, overall (鈥漮n average鈥�), come up. They forget that these proposals would reduce marginal tax rates and the distortions that the tax system places on economic decisions, a crucial feature of 鈥減ro-growth鈥� tax policy.
As I see it, the 鈥渂right line鈥� that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other from their respective sides, is the question of how high federal revenues as a share of our economy have to rise. Republicans have become pretty entrenched into their party-line position that revenues/GDP should stay around where it鈥檚 been in decades past鈥揳t around 18-19 percent. (No matter that we know that future spending, despite our best efforts, is sure to be substantially higher than it鈥檚 been in the past, which was already higher than 18-19 percent.) Democrats think that number is too low and that the right number is somewhere in the 20s, but they鈥檝e become so used to either being defensive about this opinion (鈥漬o, we鈥檙e not proposing the largest tax increase in American history鈥�) and/or proposing that all additional revenue come from just rich people and evil corporations (which doesn鈥檛 exactly make the Republicans鈥� hearts patter).
That鈥檚 why I think the general tax reform strategy contained in the variety of deficit-reduction proposals we鈥檝e seen鈥搕he strategy of broadening the base which raises the average tax rate without raising (or even allowing decreases in) the marginal tax rate鈥揾as such promise to get Republicans to cross that 鈥渂right line鈥� of 18-19 percent of GDP in revenues, with the 鈥渓ure鈥� of the kind of tax reform they should love if they only stopped shouting 鈥渘o鈥� long enough to give it a good look. It seems to me this holds the greatest promise for the kind of deficit reduction that both Republicans and Democrats could support. It is a rare example of potential 鈥渂ipartisan compromise鈥� where both sides get something they want: for conservatives, low marginal tax rates and a tax system more conducive to economic growth; and for liberals, higher tax burdens on the rich and an increase in the overall progressivity of the federal income tax鈥揳nd yet the deficit would be reduced instead of increased.
It鈥檚 a 鈥渞ough鈥� common ground right now, but I think we鈥檝e got to keep clearing away the partisan 鈥渂rush鈥� over the next year, well before the next installment of the then-Bush-soon-to-be-Obama tax cuts expires.
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*NOTE: The MacGuineas-Galston plan is not as specific as the other plans about how they would reduce tax expenditures; they propose a 10% overall cut in tax expenditures (via a 鈥渢ax expenditure budget鈥�) but suggest, for example, that the employer-provided health exclusion could be converted into a credit (which has the effect of making the dollar benefit of the tax preference the same for everyone no matter their income level). The M-G plan also does not suggest an immediate fiscal stimulus option, but emphasizes that any deficit reduction policies 鈥渟hould be back-loaded to synchronize with the economic recovery and allow people sufficient time to adjust.鈥�
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