What works in the deficit reform proposals

Sunday, November 28, 2010; A19

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.


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.


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.

No one is arguing that these tax breaks should be eliminated today or even next year. But if policymakers do not scale them back over the next 10 years, our fiscal morass will only deepen.


President of the Committee for a Responsible Federal Budget

There's so much to like in all these new plans. It is extremely encouraging that the co-chairs of the president's fiscal commission, Erskine Bowles and Alan Simpson, would both fix Social Security (you can't have a credible budget plan that doesn't) and put government health care on an actual budget. Right now, federal spending on health care is open-ended and unsustainable. We need to limit the growth, and a great approach is a voucher-like system as Paul Ryan, Alice Rivlin and the Debt Reduction Task Force have proposed. Limits on spending, market forces and consumer price incentives would help keep health from squeezing out the other important areas of the budget.

The Bowles-Simpson proposal for not just a temporary freeze in discretionary spending but actual cuts is also excellent. There are outdated and inefficient programs throughout the budget, and small cuts (there is room for more than their report suggests) will put pressure on agencies and experts to ferret out the less important spending so we can preserve what works best.

The excellent framework for tax expenditure reform put forth by Bowles and Simpson should be the starting point for fundamental tax reform, and I continue to like an idea Bill Galston and I suggested of a war surtax if operations continue. While budget analysts shouldn't decide security policy, it certainly makes sense that if the wars are worth fighting, they are worth paying for.

Tough measures? Yes. But beware those favoring just the tax cuts and spending increases in the various plans - since those parts don't fix the budget. Tough measures are exactly what the U.S. budget needs to get back on track.


President of the American Action Forum; former director of the Congressional Budget Office; senior economic adviser to Sen. John McCain's presidential campaign

The most exciting Bowles-Simpson proposal calls for changing the corporate tax system. The current U.S. corporate tax is anti-growth and anti-competitiveness. The rate - 35 percent - has become the highest among developed countries, as our competitors have realized the value of a low rate and broad base. Lowering the rate to 26 percent, as Bowles-Simpson suggests, gets the United States back to the middle of the pack.

Having the highest rate is merely disastrous. Even worse, the United States clings illogically to an outmoded system of "worldwide taxation" that every other country has abandoned. The stakes are enormous. Under a worldwide system our firms competing in, say, Brazil are liable for Brazilian and U.S. taxes. A German or Chinese competitor is subject to only the "territory's" taxes - in this case, Brazil's - giving the competitor an advantage over U.S. firms in international competition for 95 percent of the world's consumers. Under the Bowles-Simpson territorial approach, U.S. firms will compete on a level playing field in every market around the globe.

Last but not least, moving to a territorial system will stop the loss of headquarters for large multinational firms. The global competitive disadvantage of a worldwide approach forces firms to move their headquarters abroad. Research facilities and manufacturing operations often follow in short order.

Growth and competitiveness are essential to balance the budget. The Bowles-Simpson corporate tax reform recognizes that.


President of the Urban Institute; director of the Congressional Budget Office from 1989 to 1995

As both the Bowles-Simpson and Domenici-Rivlin deficit-reduction proposals have suggested, it's time to phase out the special tax treatment afforded employer-paid health premiums and even the tax-sheltered premiums paid by employees through mechanisms such as flexible spending accounts.

Tax subsidies for employer-sponsored health insurance (and policies purchased by the self-employed) undermine our effort to dampen the growth of health-care costs, which are the major reason the federal budget situation will become increasing unsustainable. The practice is expensive: It reduces income tax receipts by more than $150 billion a year; add in foregone Social Security and Medicare payroll taxes and state income tax receipts and that amount is well over $200 billion. It is inequitable: For someone in the 35 percent tax bracket, the exclusion on a $10,000 policy is worth $3,500; to someone paying the lowest tax rate, the benefit is worth only $1,000 for the same policy.

Aspects of the Affordable Care Act, with its individual mandate and income-related premium credits that will make policies more affordable, help render the existing tax subsidies unnecessary.

When workers see on their W-2s for the first time the full cost of their insurance, and realize they will be paying taxes on this compensation, they will begin to demand more cost-conscious insurance. This will give providers and innovators incentives to develop more cost-effective delivery systems and interventions. Federal revenue will increase and the rise in system-wide health-care costs will slow, moderating the growth of Medicare, Medicaid and other federal health spending.

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