We at Wonkblog love working papers, and we usually feel they deserve the love and affection that only a dedicated blog post can give a think tank report. But sometimes think tanks unload interesting reports in such volume that we need to group these things together. It’s like kids born on Christmas getting fewer presents. The last time this happened was with Brookings’ Papers on Economic Activity in September, and Brookings has struck again, with its Hamilton Project arm releasing 15 reports on ways to “rethink the federal budget.” Here are a few of the more interesting ones.
Authors: Michael Chernow (Harvard) and Dana Goldman (USC).
What it proposes: Currently, Medicare compensates doctors per service provided. Chernow and Goldman would change that and have it establish a budget for each provider, with which those providers can care for Medicare beneficiaries. This would reduce provider incentives to provide unnecessary treatment and save $100 billion over 10 years.
Best point: “The budget effects of a global payment model depend on the global payment rates. Setting the global payment is a political decision. We advocate, as a default, that the payment be set to match the current law, per beneficiary Medicare spending, and that it rise at the rate of the current law per beneficiary spending trajectory.”
Author: Jonathan Gruber (MIT).
What it proposes: Gruber, the designer of the Massachusetts health care plan and a major influence on Obamacare, calls for Medicare to implement a limit that starts at less than $2,000 for low-income people to close to $6,000 for the richest recipients. To pay for it, he would tax supplemental insurance plans, which mask the cost of health care for seniors and encourage overtreatment. Update: Should have talked to Sarah Kliff about Medicare’s out of pocket policy before posting this; she knows everything. An erroneous statement has been corrected. Apologies.
Best point: “A well-known problem with supplemental coverage is the fiscal externality on the Medicare program. This arises because supplemental coverage increases medical utilization (by lowering the price faced by consumers), and the burden of that higher utilization is borne largely by Medicare (through the majority of spending that occurs after cost sharing). This significantly raises overall Medicare spending.”
Authors: William Gale (Brookings) and Benjamin Harris (Urban).
What it proposes: Gale and Harris propose a 5 percent VAT with a $450 per adult, $200 per child annual refund (which is equivalent to the spending of a family making $26,000). This would raise about $160 billion a year, or 1 percent of GDP.
Best point: ”A common concern with raising taxes is that taxes will distort behavior, favoring certain goods or activities at the expense of others. A broad-based VAT that is levied uniformly on all goods and services would not distort relative prices among consumption goods. Similarly, a VAT with a constant tax rate over time would not distort household saving choices, nor would it distort choices businesses make regarding new investments, financing instruments, or organizational form. Like the income or payroll tax, however, the VAT would distort household choices between work and leisure.”
Authors: Pia Orrenius (Dallas Fed), Giovanni Peri (UC Davis) and Madeline Zavodny (Agnes Scott).
What it proposes: Orrenius, Peri, and Zavodny propose replacing temporary work visas for immigrants with a permit auction system, in which employers bid to buy permits allowing them to hire foreign workers. This would raise between $675 million and $1.35 billion annually.
Best point: “A permit auction, by ensuring that the most highly valued workers gain entry, would likely cause a shift toward temporary foreign workers who are relatively highly compensated, particularly in the H-1B visa category. An increase in average salaries paid to temporary foreign workers would increase federal income and payroll tax revenue. A more efficient, more transparent, and more flexible immigration system would help firms expand, contribute to more job creation in the United States, and slow the movement of operations abroad. Enabling companies to hire foreign workers when they are unable to find U.S. workers would help firms expand, creating and preserving other jobs in the United States. This would boost employment and tax revenues in the long run.”
Author: Adele C. Morris (Brookings).
What it proposes: Morris wants a $16 per ton tax on carbon, with the per-ton rate increasing at the rate of inflation plus 4 percent until 2050. She proposes that 15 percent of the revenue be used to expand the Earned Income Tax Credit and other programs for the poor, most of the rest to cut the corporate tax rate from 35 percent to 28 percent, and the remaining money to effect $199 billion in deficit reduction in the next decade (and $616 billion the decade after that).
Best point: “Initial effects on households are likely to be modest. Mathur and Morris (2012) analyze an analogous tax and find that if the tax is passed fully to households, then retail prices of electricity, gasoline, and home heating oil would rise in the short run by 5 to 6 percent. Natural gas prices to households would rise somewhat more, by about 19 percent, at the outset of the policy. Mathur and Morris (2012) estimate that 11 percent of the revenue would be necessary to hold the bottom 20 percent of households by income harmless, and 18 percent would be enough to protect the bottom three deciles. This proposal recommends that policymakers reserve about 15 percent of the revenue (about $161 billion in the first decade and $405 billion over twenty years) to protect households with income below about 150 percent of the poverty level.”
Author: Diane Lim (Pew Charitable Trusts).
What it proposes: Lim surveys a number of options for cutting tax expenditures to raise revenue. One option is converting all existing deductions to credits, so the system is more progressive (that raises $2.7 trillion over 10 years) and an across-the-board 39 percent cut to all expenditures (that raises $2.4 trillion).
Best point: “If keeping the current level of tax incentives for charitable giving is a concern, policymakers can allow charitable contributions above a certain dollar amount or percentage of adjusted gross income to remain deductible at the taxpayer’s marginal tax rate. This would allow policymakers to keep these higher subsidies for higher-income households who make the largest charitable donations.”
Author: Alan Viard (AEI).
What it proposes: Viard calls for replacing the mortgage interest deduction with a tax credit worth 15 percent of annual interest payments on the first $300,000 of a mortgage (that is, families with houses worth more than that will get the same benefits as a family with a $300,000 house).
Best point: “There may be good economic grounds, and there is certainly strong political support, for promoting homeownership, but there is no case for subsidizing bigger or more-expensive homes. Yet, the current tax treatment is more geared toward the latter objective, offering the largest benefits to taxpayers in the highest brackets and providing more-generous treatment to taxpayers who itemize than to those who claim the standard deductions. Indeed, the current tax policy may actually impede homeownership for taxpayers of more modest means because the preferences for high-bracket itemizers drive up the demand for homes and boost home prices.”
Authors: Jack Basso (American Association of State Highway and Transportation Officials) and Tyler Duvall (McKinsey).
What it proposes: Basso and Duvall explain the benefits of congestion pricing and other approaches that both reduce the usage of transportation infrastructure and fund its improvement. Most intriguingly, they consider the viability of a GPS-base miles-driven tax.
Best point: “The Surface Transportation Financing Commission estimated that a $0.09 per mile charge under a mileage-based system would yield revenue levels equivalent to the existing unsustainable gas or diesel tax model (National Surface Transportation Infrastructure Financing Commission 2009). A major potential advantage of a mileage-based charging system over traditional taxes is the flexibility to design into such a system the ability to incorporate differential pricing based on time of day, type of vehicle, and so on. In fact, leaders in Wisconsin recently proposed a shift away from the gas tax to an odometer reading at the time of annual registration—a crude form of tax on vehicle miles traveled. Privacy concerns remain a major issue for systems with tracking that is more direct, even if technical advances have eliminated most risks of improper information disclosure.”
Paper: “Making Defense Affordable”
Author: Cindy Williams (MIT)
What it proposes: Williams argues that we can maintain a solid military presence globally while reducing the defense budget by 10 percent (rapidly instituted) or 16 percent (instituted more gradually).
Best point: “The [16% cut] option results in a military significantly smaller than today’s, but one that is shaped more in keeping with the missions currently envisioned by the DoD. Forces under the option are deliberately less ready to undertake a long counterinsurgency war. This military should not be called upon routinely to settle problems around the globe that are not directly tied to U.S. vital interests. If it is, there is a risk that it will not be ready to fight and win the major wars for which it is shaped.”
Author: Joseph Aldy (Harvard).
What it proposes: Exactly what the title says. Aldy argues that eliminating fossil fuel subsidies in the tax code would raise $41.4 billion over 10 years and mildly, if not dramatically, reduce emissions.
Best point: “Whereas the United States subsidizes fossil fuel production, most fossil fuel subsidies in the developing world support consumption by lowering prices below competitive market levels. The fossil fuel consumption subsidies in the developing world, approximately $500 billion per year, significantly exceed fossil fuel production subsidies, which are on the order of $100 billion, and fossil fuel subsidies globally result in increased consumption and hence higher prices. Eliminating global fossil fuel subsidies would yield significant economic, energy, and environmental benefits.”
Author: Karen Dynan (Brookings).
What it proposes: Dynan proposes establishing an automatic IRA program for all taxpayers, so they don’t have to opt in, and making the saver’s tax credit refundable. To pay for it, she limits other deductions for retirement savings for high earners. Put together, the proposal saves $4 billion.
Best point: “The majority of benefits from savings tax preferences go to upper-income households, not only because they simply have more income to potentially save, but also because, on the margin, households in higher tax brackets achieve greater reductions in their tax liabilities for each tax-deductible dollar. At the extreme other end of the income distribution, households with income so low that they have no federal income tax liability receive no benefit at all from the deductibility of their contributions.”