TOPIC A What's best in the deficit reform plans?

What works in the deficit reform proposals

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Sunday, November 28, 2010

The Post asked experts to highlight the most exciting ideas in the deficit reform plans circulating in Washington. Below are responses from Diane Lim Rogers, Mark Zandi, Maya MacGuineas, Douglas Holtz-Eakin and Robert Reischauer.

DIANE LIM ROGERS

Chief economist at the Concord Coalition and blogger at EconomistMom.com

Of all the pieces of the various deficit reduction proposals, the one I find most intriguing and (surprisingly) "fiscally responsible" is one that actually increases the deficit - at least in the short term. This is the payroll tax holiday in the Alice Rivlin-Pete Domenici-Bipartisan Policy Center plan - a "shock and awe" preemptive strike against critics who automatically dismiss fiscal consolidation proposals as out of touch with the reality of the currently fragile economy. It demonstrates how "fiscal responsibility" need not mean deficit reduction now but should mean getting the most out of every dollar of deficit spending we do and avoiding the unnecessary deficit financing of longer-term spending or tax cuts.

Relative to such a large (but highly effective) deficit-financed stimulus, the Bush tax cuts look both really wimpy as stimulus and irresponsible in terms of longer-term cost. This should get policymakers to ask themselves: Why do we need to extend the Bush tax cuts, even temporarily? The one-year full payroll tax holiday might be "overkill" (at a cost of nearly $700 billion) - but it sure can't be accused of being bad for the short-term economy or of being unaffordable permanent tax policy only disguised as effective stimulus.

If this payroll tax holiday idea could get policymakers (including President Obama) to snap out of their preoccupation over the Bush tax cuts and consider smarter alternatives, it could, ironically, become the proposal that does the most to reduce the deficit over the longer term.

MARK ZANDI

Chief economist at Moody's Economy.com

The latest proposals to address the nation's long-term fiscal challenges have put tax expenditures in the cross hairs. Let's hope policymakers pull the trigger. Exclusions, exemptions, deductions and credits that riddle the tax code cost the federal government more than $1 trillion each year. The mortgage interest deduction alone costs well over $100 billion annually. But there are hundreds more, indirectly funding student expenses, health insurance, child-care costs, local property taxes and on and on.

Tax expenditures are more properly thought of as government spending rather than tax cuts. A deduction for local property taxes, for example, is no different from the federal government sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax expenditures - which are really tax breaks targeted for specific purposes - is analogous to eliminating congressional earmarks.

Most tax expenditures are also inefficient and regressive. The mortgage interest deduction does nothing to improve housing affordability, its ostensible goal. Any tax benefit is simply "capitalized" into house prices, which rise as the deduction fuels demand. And the benefits flow to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.


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