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Posts Tagged ‘Simpson-Bowles’

I wrote last September that the budget plan put forward by Erskine Bowles and Alan Simpson was fatally flawed.

There were some positive features in the plan, to be sure, such as lower marginal tax rates. And I suppose it’s worth noting that the burden of government spending didn’t climb as fast under their proposal as it did in Obama’s budget, though that’s hardly an accomplishment.

Cartoon Fiscal Cliff 7But there were lots of fatal flaws in the Bowles-Simpson plan. It included a big tax increase, even though America’s fiscal problem is entirely the result of too much spending.

Moreover, the so-called entitlement reform in Bowles-Simpson wasn’t reform. It was basically a random package of means testing and price controls, and we have lots of experience showing that this approach doesn’t yield sustainable savings.

Well, Bowles and Simpson now have a new plan. Have they learned from their past mistakes? Have they responded to earlier criticisms? Have they made a more serious effort to restrain spending? To genuinely reform entitlements? To shut down useless agencies, programs, and department?

Not that you’ll be surprised, but the answer to all those questions is a big fat NO. Ryan Ellis of Americans for Tax Reform has a short analysis of the plan’s shortcomings and here are some of the highlights (though lowlights might be a better word).

The Simpson-Bowles plan headline report says it only raises taxes by $585 billion over a decade by eliminating or limiting tax deductions and credits (beyond what is needed to lower rates). …However, the plan also calls for “Chained CPI,” which the President’s FY 2014 budget says raises taxes by another $100 billion over the decade, and this plan’s Figure 21 (buried deep in the appendix) says will raise taxes by $124 billion. …There’s a third hidden tax increase, again only to be found buried in Figure 21.  This is “program integrity,” which is a polite euphemism for creating a fishing expedition audit slush fund for the IRS.  This is expected to raise another $30 billion by 2023. Put it all together, and the plan raises taxes by $739 billion over the next decade. …All of the tax hikes described above are just the first stage of new tax hikes in the Simpson-Bowles plan.  There’s also a shadowy “Step Four” which calls for even deeper tax increases to “fix” the entitlement crisis.

In other words, the plan is taxes, then more taxes, followed by additional taxes, topped off by a promise of even more taxes.

Ryan also notes that the plan doesn’t do anything about the fiscal disaster of Obamacare and that it also exacerbates the tax code’s punitive bias by increasing double taxation of income that is saved and invested.

Gee, what’s not to love about such a proposal?

Nonetheless, a lot of people feel compelled to say nice things about Bowles-Simpson. I don’t know whether it’s because they blindly assume a “bipartisan” plan must be good.

Or perhaps they think that a plan needs to be “balanced” between tax increases and spending cuts.

I don’t have any objection to bipartisanship, assuming politicians are proposing good ideas, but let’s take a closer look at this notion of “balance.”

  1. Why should we raise taxes when the current fiscal mess is the result of the excessive spending of the Bush-Obama years?
  2. Why should we raise taxes when the long-run fiscal mess is the result of rising spending caused by poorly designed entitlement programs?
  3. Why should we raise taxes when the “spending cuts” we get in exchange are based on dishonest Washington budget math?
  4. Why should we raise taxes when bitter experience teaches us that politicians will simply raise spending?

Let’s close by elaborating on this final question. A couple of years ago, a columnist at the New York Times complained that Republicans used to be much more susceptible to getting seduced by these “balanced” budget deals.

But the reporter inadvertently showed that tax-hike deals are a mistake. It turns out that the only budget deal which actually worked was the one in 1997 that lowered taxes instead!

I’m not making an argument for the Laffer Curve, by the way. The fiscal success of the late 1990s was a result of genuine spending restraint, as explained in this video. The lower taxes were simply a bit of icing on the cake.

My main point is that genuine fiscal restraint is far less likely to happen if tax hikes are on the table. After all, why would politicians have any incentive to do the right thing if there’s a possibility of simply siphoning more money from the economy’s productive sector?

We see the same pattern in other nations. When governments such as Canada and New Zealand actually imposed genuine limits on the growth of government spending, good things happened.

But when governments supposedly try to deal with fiscal problems by raising taxes, you get dismal results. Just look at mess in Europe, where tax increases have been nine times larger than spending cuts.

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President Obama supports higher taxes, but he usually claims he only wants higher tax rates on evil rich people as part of his class-warfare agenda. Heck, he promised back in 2008 that, “no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

I guess we’re supposed to forget the higher tax burdens that were imposed on the middle class by Obamacare in 2010 and the SCHIP legislation in 2009.

Obama’s other rhetorical trick is to claim he wants a “balanced approach.” Translated from Washington-speak to English, that means he wants more of our money. But it’s a soothing way to demand more money. After all, who’s against “balance”?

I actually agree with Obama – but only if one uses honest math. Needless to say, Obama wants to use Washington math, where spending increases get redefined as spending cuts if the burden of government spending doesn’t rise as fast as was projected in some artificial baseline.

This is why the budget deals put together by politicians almost always are awful. In order to protect the goodies they hand out to various special interests, the politicians use fake numbers to pretend they’re restraining spending, but when the dust settles, it turns out that the only real result is that taxpayers are forking over more of their hard-earned cash to the clowns in Washington.

Actually, that statement is incomplete. We need to remember that taxpayers in other nations also get screwed by the political elite. Take a look at this stunning chart that was shown at yesterday’s Cato Institute conference on “Europe’s Crisis and the Welfare State.” Put together by Veronique de Rugy of the Mercatus Center, it shows that politicians across the Atlantic have imposed nine euro of higher taxes for every one euro of spending cuts.

And keep in mind, as Veronique noted in her comments, that many of these so-called spending cuts were merely reductions in planned increases!

This matters because I’m getting increasingly worried that gullible Republicans will get seduced into some sort of budget summit designed to trick them into supporting the Simpson-Bowles tax-hike package.

As I’ve previously explained, this would be a terrible idea. It means a big tax hike with, particularly an increase in the double taxation of income that is saved and invested. It also relies on gimmicks rather than real entitlement reform.

I don’t like higher taxes, but I wouldn’t be completely upset if at least we got some permanent reforms to control the growth of government. But that’s definitely not the case with Simpson-Bowles. And, as Veronique showed, it’s not the case in Europe either.

P.S. It’s rather ironic that the New York Times inadvertently revealed that the only budget deal that worked was the one in 1997 that cut taxes rather than raising taxes.

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Many people want to believe in Unicorns, the Loch Ness Monster, and Bigfoot. I think those people are rational and reasonable compared to the folks in Washington that spend their days dreaming of “bipartisan” and “balanced” plans to fix the budget mess.

Here are the two things you should understand. First, you need to grab your Washingtonese-to-English dictionary so you can learn that “bipartisan” and “balanced” are almost always code words for “higher taxes.” Second, budget deals with higher taxes (as the New York Times accidentally admitted) don’t “fix” anything.

The Simpson-Bowles budget plan is a good example of why taxpayers should be quite skeptical. Put together by a former Republican Senator from Wyoming and Bill Clinton’s former Chief of Staff as part of President Obama’s Fiscal Commission, the Simpson-Bowles proposal is viewed by the inside-the-beltway crowd as fiscal Nirvana.

Unsurprisingly, Simpson and Bowles are quite fond of their plan. Here’s their key assertion from a column they recently wrote for USA Today.

The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.

Gee, sounds nice, but let’s look at the details, all of which can be seen by downloading their report.

A main problem is that Simpson and Bowles misdiagnose the problem. I think it’s fair to say that their focus, as they explicitly state in their report, is to “…stabilize and then reduce the national debt.” But as I explain in this video, the real problem is a federal government that is too big and spending too much. Red ink is just a symptom of that problem.

Moreover, the report even includes Keynesian policy, stating that “…budget cuts should start gradually so they don’t interfere with the ongoing economic recovery.”

But let’s set aside rhetorical sins and grade the plan.

Restraining Spending: C+

But the components of the plan make me think they won’t even achieve the plan’s anemic targets.

Eliminating Departments and Programs: D

  • The Simpson-Bowles plan does not call for shutting down a single program, agency, or department. Not even cesspools of waste and inefficiency such as the Department of Education or Department of Housing and Urban Development.

Reforming Entitlements: C-

Reducing Bureaucratic Bloat: B

  • In terms of controlling spending, this is the part of the report that is most admirable. It calls for a three-year freeze on excessive compensation and urges reductions in bureaucratic bloat – albeit only through attrition.

Controlling the Tax Burden and Reforming the Tax Code: C-

The best policy, needless to say, is getting rid of the corrupt tax system and replacing it with a simple and fair flat tax. That obviously wasn’t what Simpson and Bowles decided to propose, but the flat tax is a benchmark that allows us to judge the components of their plan.

They basically get two policies right and two policies wrong. If they were major league baseball players, a .500 average would make them superstars. In Dan Mitchell’s policy world, they’re below average.

Lowering Tax Rates: A-

  • This is the best feature of all the revenue provisions. The Simpson-Bowles report proposes a top tax rate of between 23 percent-28 percent, significantly below the current top rate of 35 percent (and well below the 39.6 percent top rate that is part of President Obama’s class-warfare proposal). The corporate tax rate also would be reduced.

Reducing Double Taxation: D

  • The plan would increase the double taxation of dividends and capital gains. The U.S. already has a very anti-competitive system and this would be a step in the wrong direction (though ameliorated by a lower corporate tax rate).

Limiting the Tax Burden: D-

  • The plan assumes that laws should be changed to increase the federal tax burden to 21 percent of GDP from the long-run average of 18 percent of economic output. That’s unfortunate, but it’s even worse than it seems since the tax burden already is scheduled to rise to record levels because of what’s called “real bracket creep.” The Simpson-Bowles tax hikes would be an additional burden on taxpayers.

Eliminating Corrupt Loopholes: B

  • The good news is that some deductions are curtailed and a few are eliminated. The best components are the repeal of the deduction for state and local income and property taxes. So no more indirect preferences that reward profligate states such as California and Illinois. The healthcare exclusion also is capped, which would be a nice step on the long – but important – task of dealing with the third-party payer crisis in the healthcare sector.

I’m not a fan of the Simpson-Bowles plan, but I do give them credit. They decided to focus on the wrong variable and they have some bad policies, but at least it’s a real proposal.

It’s not anywhere close to the Ryan budget, but it’s a heck of a lot better than what the Senate Democrats have produced (nothing) and what the President has proposed (kicking the can down the road).

But doing a better job than the remedial students is damning with faint praise. Just in case you’re tempted to grade them on a curve, just remember that balancing the budget without tax increases doesn’t require any heavy lifting. All policymakers have to do is limit the growth of spending so it grows by an average of 2.5 percent annually over the next decade.

Other nations, such as New Zealand and Canada, got great results when imposing multi-year periods of fiscal restraint. Certainly it’s not asking too much to expect American lawmakers to exercise similar levels of prudence?

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I feel like a pendulum this election season. Something will happen that makes me want to eviscerate Obama’s statist policies and I’ll write a foaming-at-the-mouth post warning that the President is turning America into Greece.

But then Romney will do something odious and I’ll sound the warning sign with a we-don’t-need-another-big-spender-like-Bush post.

Today, it’s Obama’s turn on the chopping block. I went on Neil Cavuto’s Fox Business News program and commented on the fact that the President doesn’t have a fiscal plan.

We started by discussing the President’s failure to embrace the findings of his own Fiscal Commission and then shifted to the big-picture issue of whether the American people have become ensnared by the dependency mindset and are willing to vote for Greek-style fiscal policy.

One thing I should have added is that Obama actually does have a fiscal plan. He’s just not willing to be as honest as the leftists who have admitted that you need to screw the middle class with higher taxes to fund big government.

My own personal guess is that he would impose a value-added tax if he thought it was politically feasible. Not that I’m showing any great insight. After all, Obama already has made the ridiculous statement that a VAT is “something that has worked for other countries.”

But because he’s running for reelection, he’d rather just demagogue the Ryan plan rather than show his own cards.

P.S. Even the cartoonist for the Washington Post doesn’t think the VAT is something that is working for other countries. This cartoon is a classic and definitely worth sharing. And you can enjoy other VAT cartoons here and here.

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I’m baffled by stupid Republicans (sorry to be redundant).

Some GOPers have agreed to put taxes on the table. Not surprisingly, Democrats are praising them for this preemptive surrender, patting these Republicans on the head for being good little lapdogs.

(The Democrats are also high-fiving each other since they openly admit that tricking Republicans into a tax hike has been their top political goal, but that’s an issue for another day.)

And what are Republicans getting in exchange for violating their no-tax promises? As you might suspect, they’re getting nothing. For all intents and purposes, the left is saying “that’s a good start” and waiting for GOPers to make further concessions.

Needless to say, this is very irritating. And I’m not the only person who is upset. Here is a column that I co-authored along with Grover Norquist, Mike Needham, Phil Kerpen, Al Cardenas, and Duane Parde. We explain why higher taxes are a bad idea.

Some are now suggesting that instead of addressing the real problems our nation faces — by reducing government spending — the supercommittee should recommend tax increases to meet its deficit reduction targets. Tax increases are what politicians always do when they are not willing to govern—that is, to cut and reform government spending. The problem, of course, is that tax hikes crowd out and displace spending reform. …Advocates of…raising taxes…have put forward several unserious arguments. First, they say, “let’s compromise.” Let’s be balanced, they insist, and promise to cut some spending and raise some taxes. Having pushed spending way up, they now want to pretend this spending is normal or, at least, inevitable. It isn’t. …Why should anyone be asked to pay more taxes just so Washington can continue to overspend? …What’s more, there are good reasons to be wary – we’ve been down this road before. In 1982, President Ronald Reagan was promised three dollars of spending cuts for every dollar of tax hikes. The tax hikes were real. But spending — in real dollar terms — went up, not down. In 1990, the same trick was played out — this time at the expense of President George H.W. Bush and the American people. A two-to-one promise brought higher taxes and higher spending. When tax hikes are on the table, the talk about spending cuts evaporates. Oddly enough, the tax hikes remain. The second argument is: “We won’t raise tax rates – we will just reduce deductions and credits.” Nonsense. Closing tax loopholes is all well and good. But doing so to raise revenues is just as much a tax hike as raising tax rates. The tax hike crowd is trying to confuse tax hikes with tax reform. In fact, closing tax loopholes to raise revenue is ultimately antithetical to tax reform — there would then be less revenue available to use to cut tax rates.

As a long-time advocate of the flat tax, I think the second point is very powerful. If you want tax reform, the last thing you should do is let the politicians take away loopholes without using the revenue to finance lower tax rates.

But the most important argument is the first one. Simply stated, higher taxes mean higher spending. Period. End of argument.

If taxes increase $300 billion, that means $300 billion more spending. If taxes increase $600 billion, that means $600 billion more spending.

And since America’s fiscal problem is too much spending, why should we let politicians have more money so they can make government even more bloated and wasteful?

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There’s been a lot of heated discussion about various preferences, deductions, credits, shelters, and other loopholes in the tax code. Some of this debate has revolved around whether it is legitimate to refer to these provisions as “tax expenditures” or “subsidies.”

My Cato colleague Michael Cannon vociferously argues that subsidies and expenditures only occur when the government takes money from person A and gives it to person B. On the other side of the debate are people like Josh Barro of the Manhattan Institute, who argues that tax preferences are akin to subsidies or expenditures since they can be just as damaging as government spending programs when looking at whether resources are efficiently allocated.

Since I’m a can’t-we-all-get-along, uniter-not-divider kind of person, allow me to suggest that this debate should be set aside. After all, we all agree that tax preferences can lead to inefficient outcomes. So let’s call them “tax distortions” and focus on the real issue, which is how best to eliminate them.

This is an important issue because both the Domenici-Rivlin Task Force and the Chairmen of the Simpson-Bowles Commission have unveiled plans that would reduce or eliminate many of these tax distortions and also lower marginal tax rates. That’s the good news.

The bad news is that their plans result in more revenue going to Washington. In other words, the tax increase resulting from fewer tax distortions is larger than the tax decrease resulting from lower tax rates. To put it bluntly, the plans would increase the overall tax burden.

Some argue that this is an acceptable price to pay. They point out, quite correctly, that lower tax rates will help the economy by improving incentives for productive behavior. And they also are right in arguing that fewer tax distortions will help the economy by improving efficiency. Seems like a win-win situation. What’s not to like?

The problem is on the spending side of the fiscal ledger. The Simpson-Bowles Commission and the Domenici-Rivlin Task Force were charged with figuring out how to reduce red ink. We already know from Congressional Budget Office data, however, that we can balance the budget fairly quickly by limiting the growth of government spending. As the chart illustrates, the deficit disappears by 2016-2017 with a hard freeze and goes away by 2019-2020 if spending increases by two percent each year (and this assumes all the 2001 and 2003 tax cuts are made permanent).

If tax revenue is increased, that simply means that the budget gets balanced at a higher level of spending. And since government spending, at current levels and composition, hinders economic growth by diverting labor and capital to less productive (or unproductive) uses, any proposal that enables higher levels of government spending will further undermine economic performance.

It goes without saying (but I’ll say it anyhow) that this analysis is overly optimistic since it assumes that politicians actually will balance the budget. In all likelihood, as explained in today’s Wall Street Journal, any tax increase would probably be followed by even more spending. So if politicians raise the tax burden, we might still have a deficit of $685 billion in 2020 (CBO’s most-recent estimate assuming  all programs are left on auto-pilot), but the overall levels of both spending and taxes would be higher. This modified cartoon captures this real-world effect.

This is why revenue-neutral tax reform, like the flat tax, is the only pro-growth way of eliminating tax distortions.

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