Wonkbook: Democrats and Republicans both want to cut taxes. Deficit hawks don’t.
The conventional wisdom on the supercommittee is that Republicans and Democrats are bedeviled by their inability to agree on taxes. Republicans have proposed $300 billion in new revenues. Democrats have called for closer to a trillion. There's some confusion about the precise number of revenues in a quiet counteroffer Democrats made a few days ago, but whatever the final number was, it wasn't low enough for Republicans. Neither party seems willing to budge.
But the reality is that, on taxes, what Republicans and Democrats agree about is much more important than what they disagree about. Both parties are proposing to make the Bush tax cuts permanent. Compared to that $3.7 trillion hit to the budget, the tax increases they're putting on the table are small beer. Put the policies together and, on net, the two parties are saying we should cut taxes by somewhere between $3.4 trillion and $2.7 trillion over the next 10 years. If you want to find anyone willing to raise taxes in a serious way, you have to look beyond the two parties to a bipartisan, odd-bedfellows coalition of deficit hawks who favor allowing the Bush tax cuts to fully or mostly expire.
Former-Federal Reserve Chairman Alan Greenspan, whose support was crucial to getting the tax cuts passed in the first place, has perhaps been the highest profile advocate for letting them lapse. “This crisis is so imminent and so difficult that I think we have to allow the so-called Bush tax cuts all to expire," he told Meet the Press in April.
Mayor Michael Bloomberg, in a speech delivered at the Center for American Progress last week, joined him. “all of us should help carry the load,” he said, “and there is actually a very straightforward and achievable way to do that: Allow the Bush tax cuts to expire at the end of 2012, not just for high-income earners, as the President has proposed, but for all tax brackets.”
Peter Orszag, President Obama’s former budget director, has been making this case for well over a year now. Back in September 2010, when Congress was first considering whether to extend the Bush tax cuts, he wrote, “the best approach is a compromise: extend the tax cuts for two years and then end them altogether.”
The Bowles-Simpson Fiscal Commission, for its part, assumed we would let the tax cuts for income over $250,000 expire and then called for tax reform that would raise $1.2 trillion on top of that. That is to say, they called for $2 trillion in tax increases which, while less than what would be achieved by letting the Bush tax cuts expire, is more than President Obama or the Democrats have proposed. In the Senate, the Gang of Six's numbers were similar.
The Bipartisan Policy Center, which formed a debt-reduction commission under the leadership of ex-Senator Pete Domenici and ex-budget director Alice Rivlin, also recommended a tax-reform process that would raise significant revenues. In this case, more than $3 trillion.
There are good and bad ways to increase taxes, of course. It would be better to reform the tax system than to simply increase taxes in this system. It would be better to phase in tax increases -- and perhaps to delay their beginning until 2014 -- in order to give the economy more time to recover.
But however you structure it, pretty much everyone who has looked seriously at our budget and isn't either a rigid ideologue or a terrified politician has come to the same conclusion: we need new revenues, and quite a bit more of them than either party is currently willing to accept. Taxes, once an issue that split Democrats and Republicans, now unite them, even if they're not willing to admit it. It's the members of both parties who have been willing to break away into the center to try and solve the budget problem who are breaking from the tax-cut consensus.
This is something new. We're used to "tax-and-spend Democrats," though there aren't many of them around these days. We're even used to tax-cut-and-spend Republicans. But this is something new: tax-and-cut-spending centrists.
1) Supercommittee Democrats quietly offered Republicans another deal this week, reports the Associated Press: "Democrats signaled a willingness to cut spending by $876 billion, including $225 billion from Medicare and $50 billion from Medicaid, these officials said, and raise tax revenue by $400 billion, far less than they had earlier demanded. They also recommended using $700 billion in unspent funds from the wars in Iraq and Afghanistan for a $300 billion jobs program along the lines President Barack Obama wants, plus steps to protect the upper middle class from the alternative tax and extending financing for doctors who treat Medicare patients. Republicans acknowledged receiving the offer but shot back that Democrats had misrepresented it when leaking it to the media. Neither side released paperwork or additional detail, however. 'This particular conversation was a step backwards because it would lock in the largest tax hike in history — at least $800 billion — and then add an additional $400 billion in job-killing tax hikes without pro-growth tax reform, plus more than $300 billion in ‘stimulus’ spending,' said Michael Steel, spokesman for House Speaker John Boehner, R-Ohio."
2) The GOP is split on reducing tax expenditures, reports Peter Wallsten: "Growing Republican support for raising taxes to help reduce the deficit has prompted a GOP identity crisis, sparking a clash within the party over whether to abandon its bedrock anti-tax doctrine. Tensions have mounted in recent days as two of the GOP’s most fervent anti-tax stalwarts on Capitol Hill -- Sen. Patrick J. Toomey (Pa.) and Rep. Jeb Hensarling (Tex.) -- have lobbied party colleagues behind the scenes to forgo their old allegiances and even break campaign promises by embracing hundreds of billions of dollars in tax hikes...Rep. Patrick T. McHenry (N.C.)...on Wednesday gathered signatures from about 70 House Republican colleagues for a letter to the supercommittee leadership, calling any tax increase 'irresponsible and dangerous to the health of the United States.'"
3) Defusing the trigger won't be easy, reports Ezra Klein: "The trigger is law. It is part of the Budget Control Act of 2011, which passed in August. To change the law, the two parties would need to agree on how to change it. So it’s not enough for Republicans to say they would like to see the trigger “reconfigured.” It’s not even enough for Democrats to also want to see the trigger reconfigured. The two parties have to agree on how to reconfigure it. And that would be difficult for the same reason that passing a deficit-reduction deal is difficult. The two parties would like, in the abstract, to reduce the deficit, but have trouble agreeing on the specifics of how exactly to get there. The result is inaction. Similarly, the two parties would probably like, in the abstract, to defuse the trigger, but arguments over how best to do that could again lead to inaction. And inaction means the trigger goes off...to defuse the trigger, Congress will need to agree on a $1.2 trillion deficit-reduction plan they like better. And if they could do that, we wouldn’t be talking about the trigger in the first place."
4) The administration's smog rule reversal was made with reelection in mind, reports John Broder: "he summons from the president came without warning the Thursday before Labor Day. As she was driven the four blocks to the White House, Lisa P. Jackson, the administrator of the Environmental Protection Agency, suspected that the news would not be good. What she did not see coming was a rare public rebuke the president was about to deliver by rejecting her proposal to tighten the national standard for smog. The half-hour meeting in the Oval Office was not a negotiation; the president had decided against ratcheting up the ozone rule...He clearly understood the scientific, legal and political implications. He told Ms. Jackson that she would have an opportunity to revisit the Clean Air Act standard in 2013 -- if they were still in office."
5) A divide is emerging between France and Germany on how to handle the Euro crisis, report Anthony Faiola and Michael Birnbaum: "Even as Europe’s debt crisis sharply escalates, the region’s two largest economies, Germany and France, appear increasingly divided over how and whether to deploy large-scale financial firepower to calm nervous markets. As France, Europe’s second-largest economy, becomes swept up in the market turbulence, it is calling for more radical steps. But Germany, by far the region’s largest economy and still viewed as a safe haven for investors, is far more cautious. The growing gap between the euro zone’s two core powers has raised a question, particularly for the Germans: How far are they willing to go to save the euro? To date, every attempt by Europe’s leaders to quell their fiscal emergency has fallen flat, and the region may be running out of time."
1) Making more people campaign donors could make politics honest, writes Lawrence Lessig: "Almost every voter pays at least $50 in some form of federal taxes. So imagine a system that gave a rebate of that first $50 in the form of a 'democracy voucher.' That voucher could then be given to any candidate for Congress who agreed to one simple condition: the only money that candidate would accept to finance his or her campaign would be either 'democracy vouchers' or contributions from citizens capped at $100...Fifty dollars a voter is real money: more than $6 billion an election cycle. (The total raised in 2010: $1.86 billion.)..Because a campaign would have to raise its funds from the very many, it could weaken the power of the very few to demand costly kickbacks for their contributions."
2) The US is getting too good at missing opportunities, writes Ezra Klein: "Three years ago, Lehman Brothers Holdings Inc. fell. The ensuing financial crisis dwarfed anything seen since the Great Depression. But there was, for the U.S., one silver lining. In a world of risk, the markets deemed us dependable. The real yield on five and seven-year Treasuries is, even today, negative. Investors will literally pay us to keep their money safe. For a country with more than $2 trillion in unmet infrastructure needs, this is a remarkable opportunity. But it gets better. Weak global demand means raw materials are cheap. And the bursting of the housing bubble means unemployment in the construction sector is high. We can borrow at a bargain, buy at a bargain and ease the unemployment crisis in the hardest-hit sector of our economy, all while making desperately needed investment...So are we taking advantage of this opportunity? No."
3) Letting the supercommitte fail is the best option at this point, writes EJ Dionne: "Republicans decided they needed to look slightly flexible. So they came up with $300 billion in supposed revenue from a promised tax reform in a plan that also included a proposal to slash tax rates for the rich. There is a lot more tax-cutting here than revenue...Even Democrats inclined to capitulate know how shameful agreeing to such a deal would be...That’s where the do-nothing strategy comes in...The prospect of $7.1 trillion in tax increases and some cuts that would begin taking effect in January 2013 (thanks to Jim Horney of the Center on Budget and Policy Priorities for walking me through the math) should hearten every deficit foe now prepared to mourn a failure by the supercommittee."
4) The mortgage market needs to ease up, writes David Wessel: "Lenders are offering 30-year fixed-rate mortgages below 4%. Compared to typical family incomes, houses are more affordable than in decades. Yet home sales are languishing. A National Association of Realtors' survey found 15% of real estate agents said their last contract didn't close because the buyer couldn't get a loan...If some Americans can't get mortgages because they don't have steady jobs or down payments or agreed to pay for more than a house is reasonably worth, OK. But if the pendulum has swung so far that creditworthy borrowers are turned away, that does unnecessary harm to the economy...Everyone from real estate agents to top Fed officials has a list. Credit scores, depressed by the recession, may not be reliable predictors of borrowers' ability to make payments."
Riot grrl interlude: Sleater-Kinney play "One More Hour" live.
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Still to come: The Obama administration is amping up its pressure on Europe; the Supreme Court health care ruling could have major ramifications for Medicaid; a large group of lawmakers want a big supercommittee deal; Steven Chu is answering to Congress about Solyndra; and a lesson in the importance of choosing the right escalator.
The Obama administration wants Europe to get its act together, reports Sudeep Reddy: "The Obama administration is ratcheting up pressure on European leaders to craft concrete plans for solving their debt crisis and calming investors. President Barack Obama, speaking in Australia on Wednesday, said markets would remain in turmoil until they get a clear signal that Europe 'will do what it takes' to back the 17-nation currency. 'The problem right now is a problem of political will,' he said. 'It's not a technical problem.' Mr. Obama has been calling European officials almost weekly--in particular, German Chancellor Angela Merkel and French President Nicolas Sarkozy--to apply his own form of political persuasion and attempt to help euro-zone officials bridge their persistent political divides."
The investigation into MF Global is heating up, reports Devlin Barrett: "Federal prosecutors in Chicago and New York have issued subpoenas in the probe of the collapse of MF Global Holdings Ltd., people familiar with the case said, a sign of an intensifying Justice Department criminal investigation as authorities try to track down about $600 million in client funds. Chicago U.S. Attorney Patrick Fitzgerald and New York U.S. Attorney Preet Bharara, regarded as two of most aggressive and high-profile federal prosecutors in the country, are using subpoenas to gather company records, the people familiar with the matter said. The Justice Department and the FBI are conducting a criminal investigation of MF Global's collapse. Other federal regulators also are investigating."
Changes to the main mortgage relief program won't be as effective as planned, reports Shahien Nasiripour: "The US government’s revamp of a home mortgage refinancing initiative will probably not reach as many distressed borrowers as initially hoped after the changes prompted investors to bet that borrowers will continue to have difficulty getting new mortgages. Prices of mortgage bonds whose underlying loans carry high interest rates increased after US-controlled mortgage financiers Fannie Mae and Freddie Mac detailed their changes to the Home Affordable Refinance Programme, a reflection of investor sentiment that there will not be a wave of refinancings wiping out gains from securities trading above par. Analysts from Barclays to BNP Paribas said they were underwhelmed by the changes, which came about three weeks after the White House announced the Harp initiative would be retooled."
Obama and Elizabeth Warren never really clicked, writes Jason Zengerle: "Obama, as president, ultimately pushed for the creation of the CFPB--and tasked Warren with getting it up and running--but Warren was a bad fit for the administration from the start. She frequently found herself at odds with Geithner and Larry Summers, telling Charlie Rose in 2010 that 'they see the world from a top-down perspective.' Meanwhile, Warren was also out of step with behavioral-economics disciples like Cass Sunstein, who believe that government works best when it 'nudges' people’s decisions rather than mandates them. Warren favors far more traditional command-and-control regulatory approaches. 'Elizabeth is fine with a nudge,' says Adam Levitin, a Georgetown law professor and Warren protégé, 'but she also knows that sometimes you need a sharp elbow, and she’s not afraid of that.'"
Household debt is contributing to unemployment, write Atif Mian and Amir Sufi: "Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector...In areas that experienced strong increases in home values, debt skyrocketed from 2001 to 2007. However, there were many places that avoided the housing boom and experienced no significant house-price appreciation...In a study with Kamalesh Rao of MasterCard Advisors, we showed that areas of high debt experienced a severe shock to house prices and spending from 2007 to 2010...Where weak household balance sheets have led to reduced spending, local- economy jobs disappear."
Adorable animals surprising people interlude: A cat pounces on its owner from underneath the bed.
The Supreme Court's review of Medicaid expansion could have big ramifications, reports N.C. Aizenman: "While there was no surprise over the Supreme Court’s decision Monday to review the 2010 health-care act’s insurance mandate, supporters of the law are reeling over the justices’ announcement that they will also consider a long-shot challenge to what many consider an even more central provision of the statute. That provision is the extension of Medicaid to cover a greater number of the poor. Twenty-six states say the expansion amounts to an unconstitutional coercion of state governments, which provide part of Medicaid’s funding...The 26 Republican state attorneys general and governors who filed the challenge to Medicaid expansion contend that these changes unconstitutionally force them to increase their spending on the program."
A group of lawmakers want a "big" supercommittee deal, report William Branigin, Lori Montgomery, and Anne Kornblut: "A bipartisan group of lawmakers from both houses urged the deficit-reduction supercommittee Wednesday to 'go big' as it nears a deadline to avoid mandatory across-the-board cuts, telling the panel it has significant congressional support for a deal that would cut the deficit by about $4 trillion...Members of what has been dubbed the 'go-big coalition' said about 150 lawmakers in both houses support a compromise deficit-reduction plan that would include increases in revenue and cuts to entitlement programs. About 40 members of the group attended the news conference...Although several members of the coalition repeated that expression of support, they offered no specifics on how to reach a deficit-reduction deal in the range of $4 trillion."
Serving pizza in schools won't save much money, reports Dina ElBoghdady: "The legislative push to enable school cafeterias to keep serving pizza and french fries won’t save nearly as much money as some lawmakers have suggested -- if any, according to the Agriculture Department. This week, a group of House and Senate lawmakers crafted an agriculture spending bill that barred the USDA from adopting the Obama administration’s proposal to limit the amount of tomato paste and starchy vegetables in federally funded school meals. That proposal’s price tag -- including the financial burden it would impose on strapped school districts -- ranked as one of the top reasons for derailing it. But on Wednesday, USDA officials said that scrapping the plan to limit tomato paste and starchy vegetables such as potatoes would not reap huge cost savings, and certainly not $7 billion as suggested by the GOP-controlled House Appropriations Committee."
Sometimes it's good to look up from your phone interlude: A shopper goes up the wrong escalator, does not appear to notice.
Steven Chu is set to talk to Congress about Solyndra today, report Darren Goode and Alex Guillen: "Energy Secretary Steven Chu is being called to the House of Representatives on Thursday to talk about Solyndra. But he’s going to give lawmakers a lesson in renewable energy. Chu will double down on the message that China is doing more than the U.S. in flooding the solar and overall renewable energy market -- and that factor led to the bankruptcy of Solyndra despite the infusion of federal cash...Chu on Wednesday sent a letter to a group of Senate Democrats explaining the need for increased attention to solar and other renewable energy investments...Energy and Commerce ranking member Henry Waxman (D-Calif.) said he’s not sure what can be learned by questioning Chu and that the hearing and investigation are political theater."
A very similar pipeline to Keystone may be on its way, reports Steven Mufson: "Despite the Obama administration’s move to delay a decision over the Keystone XL pipeline permit, a swirl of activity continued Wednesday over new ways to circumvent or revive the controversial pipeline. Enbridge, a Canadian company, announced that it will purchase a half-interest in a U.S. crude oil pipeline that runs from the Gulf of Mexico coast to Cushing, Okla., and will reverse the flow to carry more oil from Canada’s oil sands and the U.S. Bakken field to refineries in Texas. The plan would do part of what the controversial Keystone XL pipeline would do, easing a bottleneck in Cushing, a hub where the New York Mercantile Exchange prices the benchmark West Texas Intermediate crude oil."
The administration has formally unveiled its new mileage rules, reports Andrew Restuccia: "The White House formally announced tighter fuel-economy standards for cars and small trucks Wednesday, regulations that the administration says will save consumers thousands of dollars at the pump. Under the proposed regulations -- which were jointly developed by the Environmental Protection Agency and the Transportation Department -- newer cars and light-duty trucks will need to achieve combined fuel-economy standards of 54.5 miles per gallon by 2025. The regulations apply to model year 2017 to 2025 vehicles. President Obama first announced the standards, which are the product of months of closed-door talks with the country’s major automakers, in July. The proposed regulations build on similar standards for 2012 to 2016 vehicles that were finalized last year."
Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.