Resisting the Gang of Six budget temptation
America needs to raise its debt ceiling, cut spending and implement wide-ranging tax reform. The Gang of Six plan claims to do all those things as it reduces debt by close to $4 trillion over a decade. If I could summarize my opposition in one sentence, it would be this one from Rep. Paul Ryan: “The plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care spending that is driving our debt problems.”
Not enough? Well, Keith Hennessey, head of the National Economic Council under President George W. Bush, offers a detailed dismantling of the G6 proposal.
I strongly oppose the Gang of Six plan. I think it is absolutely terrible fiscal policy.
First I’ll flag a few things I like in the plan.
- I support making a technical correction to CPI, even though it would result in higher revenues.
- Repeal of the CLASS Act is great.
- It’s good they included medical malpractice reform.
That’s it. Others right-of-center are salivating at the low marginal income tax rates described in the plan, both for individuals and corporations. I think those low rates never materialize, for both arithmetic and legislative reasons, and explain why below.
Read the whole thing but are some key points:
1. It provides no discretionary spending totals.
2. It cuts defense spending while hiding the ball on nondefense spending.
3. The promised deficit reduction is both overstated and less than is needed.
Their $3.7 trillion of claimed deficit reduction is bogus. It includes an unspecified amount of savings from a future legislative fast-track process that would require further Congressional and Presidential action if health spending growth exceeds a certain target.
The Gang’s plan also uses at least three different baselines in different parts of the document. Combine that with the absence of discretionary spending totals and I have no confidence in their $3.7 trillion deficit reduction number.
4. It is a huge net tax increase.
The Gang of Six plan would increase taxes by $2.3 trillion over the next 10 years relative to current policy. That’s roughly a 6.5 percent increase in total taxation. Put another way, the Gang of Six plan raises taxes $830 B more than would President Obama’s February budget. To those who like the promise of low statutory tax rates – the benefits of low marginal rates are far outweighed by the increase in average effective rates. This is a massive hidden tax increase.
5. It’s a far worse trade than Bowles-Simpson.
The fundamental trade of the Bowles-Simpson group was higher net taxation in exchange for (huge long-term spending reduction, especially in entitlements + fundamental structural entitlement reform + pro-growth tax reform).
The Gang of Six plan drops the first two elements of that trade, the huge long-term spending reductions and the structural entitlement reforms. It instead purports to offer pro-growth tax reform in exchange for much higher net tax levels. It offers trivial spending cuts, no flattening of long-term entitlement spending trends, and no structural reform to the Big 3 entitlements.
6. It trades a permanent tax increase for only a temporary respite on spending.
The plan proposes permanent increases in net taxation levels in exchange for a temporary slowdown in spending. The entitlement spending line would be shifted ever so slightly downward – there would be no long-term “flattening of the spending curve
The consequence of this would be kicking the can down the road. Deficits would be smaller for the next 5-10 years while the higher tax levels offset entitlement spending growth. But since the plan does nothing to flatten the curve of Social Security, Medicare, or Medicaid spending, 5-10 years from now we will be right back where we are now, but with higher levels of taxation. We will again face huge and growing future deficits, driven by unsustainable entitlement spending growth.
7. It’s an unfair deal on CPI.
8. It precludes structural reforms to Medicare and Medicaid.
The Plan says “while maintaining the basic structure of [Medicare and Medicaid].” That language precludes needed fundamental reforms to these programs, as contemplated in Bowles-Simpson, Rivlin-Ryan, or the House-passed budget resolution.
9. It does almost nothing to slow health spending growth, and even the $115 B of additional health savings are bracketed.
10. It leaves the core trillion dollar ObamaCare health entitlement in place.
11. It makes it harder to do Social Security reform, drops the specific Social Security reforms of Bowles-Simpson and increases Social Security spending.
12. It sets the wrong bar for Social Security reform and tilts reform toward tax increases.
13. It locks in the net tax increase, then hopes to deliver on the stated tax reform policies.
If you are tempted by the promised details of tax reform, remember that those details would be negotiated after the Senate had already committed to a $2.3 trillion tax increase.
Even if I could swallow a $2.3 trillion tax increase, which I can’t, I don’t trust the tax reform process enough to take that risk. The plan offers no procedural guarantees to prevent the tax policies described within it from being ignored by the Senate Finance Committee.
14. It undoes most of the benefits of last December’s tax policy battle.
15. It sets up a tradeoff between marginal income rate cuts and capital tax rates.
The tax reform described in the Gang’s plan is silent on capital taxation. Side conversations suggest the Gang agreed to but did not put on paper a 20% rate for capital gains and dividends. From a pro-growth perspective, lowering marginal income tax rates by raising capital taxation rates is a bad trade. And both the numbers and politics suggest that much of the higher revenues raised from “eliminating tax breaks” would come from higher tax rates on capital rather than scaling back even more popular tax preferences for homeownership, charity, and health insurance.
Lowering the corporate income tax rate is nice, but you get more growth bang for the buck by allowing immediate expensing of investment. If depreciation is treated as a tax expenditure and the lower corporate rates are paid for in part by lengthening depreciation schedules, that will slow growth, not accelerate it.
16. The rate cuts are overpromised because the Gang overestimated the revenue that would be raised from reducing tax expenditures.
I strongly support scaling back or even eliminating most if not all tax preferences. I’d go much further than I could ever get support for from elected Members of Congress. But I want to use the revenue raised from eliminating those tax expenditures to cut rates, not to make spending cuts smaller as the Gang’s plan does.
The Joint Tax Committee warns us that the revenue raised by eliminating a tax preference is less than the measured “tax expenditure,” and often far less, because of the incentive effects. It appears the Gang far overestimated the revenues that would be raised from eliminating tax preferences, and therefore are promising marginal rates they cannot deliver. Those who are attracted by the low promised rates for individual and corporate income should understand that if the revenue raised from eliminating other tax preferences is insufficient, the actual rates in reform will be higher. And that’s assuming you trust a Senate Democratic majority process to deliver the unenforceable tax policy promises described in the Gang’s plan.
Tax experts I trust tell me they can’t see how you could design a tax reform that hits the revenue targets promised (even with a +$2.3T revenue increase) and get statutory rates as low as promised. The revenue raised from “reforming” these preferences won’t be enough to lower rates that much, and repeal the AMT, and move to a territorial system, and reduce deficits.
17. The plan proposes a deficit trigger mechanism that might include automatic tax increases.