Fiscal Policy By Dummies: Looking at the Deficit Plans from a Progressive Standpoint

Note: this is a cross-post from The Realignment Project. Follow us on Facebook!

 

Introduction:

Following the on-going drama of the Deficit Commission - which just adjourned without even voting on its own proposal, and which never came close to getting the necessary votes to trigger an up-or-down vote in the Senate - has been rather painful. Especially in light of the Republican takeover of the House and the ongoing dispute over extending the Bush tax cuts and raising the debt ceiling, the grip of austerity thinking seems paradoxically strong and weak at the same time, pervasive enough to be omnipresent within the media yet not actually persuasive enough to get anyone to vote for anything they dislike.

However, there is one point that needs to be cleared up - behind the banalities of "living within our means" and other balanced-budget platitudes, there is ideology at work. The budget is not just a technical issue, but a moral document - it is a choice between a high road or a low road to the future.

Evaluating the Plans:

The Simpson Plan:

The Simpson/Bowles plan, which has been given the exaggerated label of the "Final Report on the National Commission on Fiscal Responsibility and Reform" (although it was not formally adopted by said Commission), has garnered the bulk of media attention - and at least in the eyes of experts and the public alike has been negatively negatively received.

You can read in detail about the plan's shortcomings here and here, but in brief I'll focus on four aspects.

First, it sets arbitrary limits on the state through an overall revenue cap of 21% of GDP, and caps on discretionary spending; this is completely outside the scope of the commission and interferes with the democratic process by which the people decide - through their elected representatives - what the state should look like. Moreover, by establishing both a point of order and abatement procedure that would require 60 votes to pass any bill that would take us above the cuts, this proposal would further chain us to the anchor of supermajority.

Second, it's massively regressive. The plan calls for the elimination of all income tax expenditures including the EITC, one of the few forms of redistribution to the working poor that exists in this country in order to reduce the top rate of income to as low as 23% and no higher than 29%. Merely suggesting EITC's extension as one option is no excuse for a plan where, altogether, "the bottom 80 percent of families would pay higher taxes than they did in the Clinton years, while the top 20 percent — and especially the top 5 percent — would pay less." While the top .01% would take a hit on capital gains taxes, it's not enough to say that the richest take a hit and that makes it more progressive - tax progressivity has to go all the way up and all the way down.

Third, it's incredibly counter-productive. Far too much of the cuts are packed into the 2012-2015 period when our economy will be still struggling to dig itself out of the Great Recession. Freezing discretionary spending followed up by nominal cuts would pull about $200 billion a year out of the economy at a time when recovery, such that there is, is teetering on the precipice. Instead, the Chairman's proposal seems to truck in a kind of magical austerity thinking in which deflationary steps will produce business confidence and thus the even-higher growth we'll need to offset the lost spending.

Fourth, it would be disastrous to Social Security. As Paul Krugman points out, increasing the retirement age to 69 and requiring seniors to apply for a "hardship exemption" if their bodies can no longer work is the height of class prejudice. (Introducing a modern-day pauper's test into Social Security is its own separate category of moral blindness.) Increases in longevity have almost entirely accrued to the well-off, with working class folks living a grand total of a year longer on average than they used to; moreover, middle to upper class jobs are much less physically demanding than their working class peers. Middle to upper class folks are much less reliant on Social Security than the working class retirees who cannot delay their retirement to 69.

Really, the only good thing that can be said about it is that it doesn't shrink from calling for defense cuts or closing tax loopholes. But that's if that's the best thing you can say about this report, ecrasez l'infame.

Rivlin and the Centrists:

Passing onwards from the chairmen, we turn to the "Bipartisan Policy Center's" proposal to take the temperature of high Broderite centrism. Their plan, titled "Restoring America's Future," is at least a partial improvement over the Simpson plan. It actually recognizes the importance of economic growth by establishing a one-year payroll tax holiday and backloading the cuts to further out, so that the economy has more time to recover before they kick in. But much of it is a simply more moderate form of the irrational proposals of the Simpson plan - cap government at 23% of GDP instead of 21%, index the benefit formulas to life expectancy instead of raising the retirement age - in much the same way that proposing killing 5 puppies instead of 10 is theoretically moderate.

Much of it is even worse. Individual income tax rates would be dropped into two rates - 15% and 27% - corporate taxes would be dropped to 27%, and a national 6.5% VAT (in the form of a "Debt Reduction Sales Tax") would be imposed - which would not, their claims to the contrary, make the tax code more progressive. On the contrary, what it amounts to is that while we lose nearly $8 trillion in income taxes and and another $6 trillion in corporate income and AMT taxes on the rich between 2012 and 2040, that money would be made up for by a $17 trillion increase in sales tax revenue in the same period. The overwhelming balance of that $14 trillion lost is coming from the wealthy; the working class will pay a disproportionately higher share of the $17 trillion gained. This is class warfare, which will not be ameliorated by a moderate tax credit in exchange, and all in aid of the bogus philosophy that "high individual marginal tax rates...reduce incentives to save, work, and invest."

And so it goes, through higher premiums for Medicare retirees, and caps on Medicaid. Even the more moderate plan still rests on a foundation of austerity thinking that somehow manages to alchemically transmute tax cuts for the wealthy and tax hikes for everyone else into "shared sacrifice."

The Progressives (Schakowsky, OFS, Stern):

Luckily, there are some progressive voices out there that are screaming out in the wilderness. One of the few liberals on the Deficit Commission, Jan Schakowsky's plan is a refreshing beacon of sanity. She points out that "Social Security has nothing to do with the deficit," and points out that simply lifting the wage cap would extend full benefits for the next 75 years and provide a surplus for improving the modest level of benefits. Her plan would reduce the deficit by $441 a year billion in 2015, almost twice the goal recommended by President Obama, by cutting defense by $110 billion per year, eliminating $132 billion  per year in tax expenditures for corporates and the wealthy alone, adding $144 billion per year in revenues by taxing capital gains as income, taxing executive compensation, progressivizing the estate tax, and establishing a rebated cap-and trade system.

All this while establishing a Medicare-based public option, bulk purchase negotiations for Medicare Part D prescription drugs, and pumping $200 billion over two years into job creation measures to spur the economy. It is a sad sign of the power of conventional thinking that this proposal is barely given the time of day, whereas the Simpson proposal makes front-page headlines.

The "Our Fiscal Security" proposal, put together by a consortium of left-leaning think tanks, is also quite good. It back-loads cuts and tax increases a bit more than Schakowsky does, it likewise deals with Social Security by lifting the cap on earnings, it cuts about $96 billion a year in military spending, it pumps $450 billion over two years into the EITC, early childhood education, child care, infrastructure, public transit, rural broadband, and R&D. Most importantly, it argues that job creation should be the first priority and spending reductions delayed until unemployment hits 6%, and argues against policies that shift costs from the government to ordinary Americans.

Even Andy Stern, so oft of late a favorite bête noire for the left, is more reasonable than the Commission plan. While somewhat more to the right on discretionary cuts and taxes than Schakowsky or OFS, he concurs with the other progressives on defense cuts, protects Social Security by raising the cap, and establishes a $400 billion fund for infrastructure, education, broadband internet, a smart electrical grid, and so forth.

You can see here the first signs of a progressive consensus on fiscal policy and the differences between progressives and so-called moderates. The sad reality is that all three proposals will basically be ignored as "unserious."

Conclusion:

However, there's a consolation for progressives - as on the tax cuts, all we have to do is fight like hell against any regressive plan and run out the clock. Why? Because the Bush tax cuts will expire in less than a month. And look what happens to the budget deficit and the national debt when they do:

 

That light blue line, where debt rises eternally towards ever higher-levels, is what happens if the Bush tax cuts are fully extended. The dark blue line is what the Simpson plan calls for, notably seeking not merely to stabilize the situation but to push even further, and if they could, the Deficit Commission would love for you to ignore the red line and force a vote between light and dark blue, fiscal bankruptcy and fiscal austerity.

But the red line is what happens if the Bush tax cuts expire. The national debt stabilizes, the deficit shrinks. It gives us time to deal with a manageable and stable deficit during a time of economic recovery, not in the midst of a recession with an ever-more radical Republican House on the warpath. In such a climate, the voices of Schakowksy, OFS, and Stern will ring out louder than in the current tumult.

This isn't the health care fight, or the climate change fight; we have nothing we want that might be lost if a compromise doesn't happen. So fight like hell, because for once, time is on our side.

Meta: 

Comments

glad you brought this up

I haven't read the details but supposedly the deficit reduction commission made the corporate tax code worse, making it more financially advantageous to offshore outsource jobs.

You'll see a pattern here, from the IMF style bail outs of Greece, Ireland and assuredly soon Spain, to trash what is left of pensions, retirement and social security and hand it over to the banks and multinational corporations. Also demand "wages be lowered".

I take this a direct assault on the middle classes, pure class warfare. The New York Times had up an interactive graphic to reduce the deficit. I had it set to zero in no time by letting the Bush tax cuts expire, introduced a VAT, introduced a Wall Street transaction tax, didn't touch SS or Medicare. They must, absolutely must do something about corporations parking profits, encouraging investments abroad instead of this country and that's primarily through the corporate tax code. A VAT is NOT a flat tax folks, it's an at the border adjustment tax and can be used to help the trade deficit. They are considered legal by the WTO, every other nation has them and China uses them against the U.S. all of the time on trade. It is regressive, so you have to balance that out somehow, but doing something about capital flows out of the country, plus encouraging investment, hiring in this country (strings attached please!) is key critical to reduce the deficit.

Anybody notice also how these comissions ignore the fact if everyone was working they would be.....paying taxes and not be....needing UI/food stamps/Medicare?

Good opening salvo! What's more amazing is how no one in the press understands the details, so please let's dig into the specifics on posts....

there is nothing more confusing to people than taxes and in that confusion, there is nothing more confusing than the corporate tax code.

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Glad you liked it

I've been historically quite suspicious of a VAT, and I'm personally against a VAT that's just for revenue. As a trade mechanisism, I'm willing to support what I'm going to call in an upcoming piece a "double-rebated VAT."

But one thing that should be talked about here is capital controls. One of the reasons why Iceland has survived when Ireland didn't (despite the UK using anti-terrorism laws against them) was that they established strict capital controls which stopped capital flight quite effectively. I think it's especially necessary given the failure of international regulation and the real dangers of tax/regulatory arbitrage across countries (such as Ireland's government going to the wall to protect low corporate tax cuts while imposing minimum wage cuts).

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interesting

Right, that's the only reason I'm for it, as an export/import price control, used as EU and especially China do...against the U.S. and for their own domestic economies but regressivity is bad, bad, bad.

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another post on deficit myths

Was on Naked Capitalism, here.

What I see, in all seriousness, is about an 80 agenda to destroy whatever social safety nets were put into place during the New Deal. These cats love a crisis because it enables them to take it on.

It makes me sick their raw agenda to attack the U.S. middle class and labor force, but it's coming on all fronts.

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Clear choices

You lay out the key issues and factions regarding deficit reduction in a clear fashion. It starts with policy and values and proceeds to spending and debt. I would welcome a national debate on the merits of $700 bil in military spending that only detracts versus spending on education, health, and other social programs that have a measurable positive impact qualitatively and quantitatively.

I was surprised that the hand picked debt commission tanked, unceremoniously. Then I saw the planned payroll tax cuts and realized that the attack on Social Security was much more direct. In one strange move, Obama the deficit hawk gave away $600 of revenue bil in order to spend $50 bil on unemployment. We're through the looking glass, officially.

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$50B on unemployment

While I didn't check your numbers, I'll just assume they are correct but we're seeing report after report that job creation is being down offshore, i.e. offshore outsourcing. It's not all of the job losses but it's significant, I believe quantified over 3 million (each study is one a few industry sectors).

So, the fact this government will not address even the most basic elements to stop labor arbitrage is beyond me.

I'm all for helping the unemployed but the reality is people want and need jobs. They should be spending only when they are sure that means job creation in America instead of this absurdity.

Another point is they seem to refuse to recognize when people are employed, they pay taxes.

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