July 13 (Bloomberg) -- Want to keep abreast of the status of debt-limit talks between President Barack Obama and congressional leaders from both parties? These three quotes tell you all you need to know:
“We’re not for increasing revenue.” -- House Majority Leader Eric Cantor, July 6
“No benefit cuts in Medicare and Social Security.” -- House Minority Leader Nancy Pelosi, July 8
“Everything is on the table.” -- President Obama, July 7
There you have it. Everything is on the table -- except revenue raisers, which is not synonymous with tax increases, and changes in entitlement benefits, the source of the U.S.’s long-term deficit problem. No wonder the talks are meandering toward the Aug. 2 drop-dead date for raising the debt limit.
While Cantor and Pelosi are substituting politics for policy, their short-sightedness should be obvious to open-minded folks of all political persuasions.
Why wouldn’t everyone want increased revenue, especially if it’s the result of stronger economic growth? The U.S. suffers from a tax revenue, not tax rate, problem.
It would be one thing if Cantor were protesting an increase in revenue as a share of gross domestic product, which has averaged 18 percent over the past 60 years. It seems to matter very little whether the top marginal tax rate in the U.S. is 91 percent (1950s), 70 percent (1970s) or 39.6 percent (1990s). Uncle Sam’s share stays pretty much the same. Which makes you wonder why the federal government can’t grasp the concept and give up trying to confiscate additional revenue by fiddling with marginal rates.
The 2007-2009 recession and its aftermath were particularly punishing to government coffers. In fiscal years 2009 and 2010, revenue as a share of GDP plummeted to a 60-year low of 14.9 percent.
Cantor isn’t talking about revenue as a share of GDP. He wants any trade-off -- the elimination of behavior-distorting tax preferences in exchange for lower rates across the board -- to be revenue, or dollar, neutral.
The last I heard, the party of Reagan was still interested in increasing the size of the pie so that the government’s relatively static share of GDP produced more dollars. That should be the goal of tax reform or any deficit-reduction initiative.
Tweak and Save
Loopholes and preferences distort incentives. Big corporations have huge tax-accounting departments working to minimize their tax liability. Imagine if these bright folks were freed of the daily drudgery of devising ways to shift income and avoid taxes and encouraged instead to find ways to innovate and produce. Higher unemployment for lawyers and accountants in the short run is a small price to pay for long-term economic efficiency.
As far as Pelosi is concerned, there can be no change to Social Security or Medicare benefits. That rules out any tweak to the calculation of those benefits, which Obama has added to his smorgasbord of options.
Many federal benefits are adjusted annually for cost-of-living increases. If inflation is rising at 3 percent, retirees are insulated from higher prices by bigger benefits.
Currently the consumer price index is the standard measure for calculating Social Security and veterans’ benefits as well as for indexing parts of the tax code. Statisticians claim that the CPI overstates inflation because it uses a fixed basket of goods and services that doesn’t allow for substitution bias: the tendency of consumers to buy oranges, for example, when the price of apples goes up. An index known as the chained CPI better captures this change between categories.
In the past decade, the chained CPI has increased 0.3 percent per year less on average than the CPI. That doesn’t amount to much in the short run. Over a 75-year horizon with millions of baby boomers retiring, it amounts to a big saving.
A shift to the chained CPI for Social Security cost-of-living adjustments would reduce outlays, increase revenue and lower budget deficits by an estimated $90 billion over 10 years, according to calculations by Congress’ Joint Committee on Taxation.
If seniors are being overcompensated for inflation, then it makes sense to adopt a truer cost-of-living index, which would require a statutory change.
Obama has said he’s willing to take heat from his party for entertaining changes to entitlement programs, be it through COLAs, eligibility age or means testing. Why he had this epiphany in July when his Commission on Fiscal Responsibility and Reform proposed many of these changes in its “Moment of Truth” report in December is unclear.
In addition to a variety of proposed fixes for Medicare, Medicaid and Social Security, the Simpson-Bowles Commission, so-named for co-chairmen Alan Simpson, a Republican, and Erskine Bowles, a Democrat, advocated using the chained CPI to calculate COLAs for Social Security recipients. (See Recommendation 5.7.)
The commission offered a comprehensive plan for putting the U.S. on sound fiscal footing. The recommendations, including discretionary spending cuts, tax reform and simplification, and the elimination of tax breaks and loopholes, would achieve $4 trillion in deficit reduction and ensure the solvency of Social Security.
A big deal? If this sounds hopelessly familiar, it is.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
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