October 23, 2014

The Rough Common Ground

By now we've seen a number of proposals for fiscal sustainability from groups with very different perspectives. Some of the harshest critics of the bipartisan deficit-reduction panels are liberal-leaning groups that argue that the recommendations of the President's commission, as well as those of the Bipartisan Policy Center and the MacGuineas-Galston plan, leaned too heavily toward the conservative side and proposed packages that were too heavy on spending cuts and too insistent on keeping taxes (too) low. (I may agree that I would have preferred more revenue increases in the overall mix than the President's commission proposed, but I don't think that should lead me to declare the overall proposal "dead on arrival" or to reject the the individual policies contained within it.)

I've looked at two sets of policy proposals coming from these liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced--one by the Institute for America's Future's "Citizens' Commission" (whose members include Dean Baker, Robert Borosage, Robert Kuttner and Robert Reich) and another by the "Our Fiscal Security" project, a partnership of Demos, the Economic Policy Institute, and the Century Foundation. I actually like a lot of the policy substance in these more liberal-leaning packages when I am able to look past the seeming disdain some of these authors have toward those of us who call ourselves "fiscal hawks."

Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see this critique from the Heritage Foundation or anything that Grover Norquist (or his organization, Americans for Tax Reform) has said. Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions' proposals) his own fiscal sustainability plan that keeps taxes as a share of the economy low enough--below 19 percent--to please these conservative groups and his party's caucus.

With all the screaming coming from both extremes, you'd think the competing visions out there must be so vastly different that there couldn't possibly be such a thing as a truly "bipartisan" way to reduce the deficit. But when I look at the bipartisan plans accused of being too conservative and compare them with the plans that came from the two liberal-leaning groups levying this criticism, I actually see a decent amount of "rough" common ground. I see it as "rough" in two ways:  (i) it's a terrain full of tough choices, so maneuvering through it will be "rough," and (ii) the similarities across plans are in their "rough" general principles and strategies rather than in the specific parameters of the policies.

Compare the liberal groups' plans with the bipartisan plans (from the President's commission, the Bipartisan Policy Center, and MacGuineas-Galston), and you'll find they all include:

  1. cuts to discretionary spending, including (or especially) substantial cuts to defense spending;
  2. reforms to Social Security and Medicare which improve the balances in these programs in a progressive manner (whether through the taxes collected or the benefits given through these programs);
  3. tax reform which raises revenue/GDP relative to current policy by reducing tax expenditures in a progressive manner (through capping the deduction rate and/or converting exclusions and deductions into credits, and by taxing capital gains and dividend income at the same rate as labor income);*
  4. additional deficit-financed, but more effective, stimulus over the next couple years (whether spending or tax cuts).*

In the case of #1, the liberal groups concentrate the spending reductions on defense spending, while the bipartisan groups have a more equal mix of domestic and security-related spending cuts. (All proposals note they're open to cutting farm subsidies.) In the case of #2 and #4, the disagreements are mainly over the pieces involving Social Security: respectively, whether Social Security benefits should be cut at all (even if only for the rich), and whether a payroll tax holiday funded out of general revenues (not harming trust fund balances) would still somehow undermine the program and is viewed as "just another tax cut" in a stimulus strategy that has already been too tax-cut-heavy.

It's in #3, the strategy of raising revenue by broadening the income tax base, and reducing tax expenditures in a progressive way, where I see the greatest agreement--even when you look at the details of the competing proposals. Yet the rhetorical fighting from both the conservative and liberal sides over tax policy in general, and over the tax policies included in these deficit-reduction plans in particular, continues, with both sides arguing that the tax proposals are not "bipartisan enough." On the left, the critics of these tax proposals oppose the fact that marginal tax rates would come down--which sounds too much like a Republican goal. They forget that these proposals collect more tax revenue in a progressive (as well as more efficient) way--such that average tax rates (and tax burdens) would rise more for the rich than for the poor. On the right, the critics of these tax proposals oppose the fact that average tax rates, overall ("on average"), come up. They forget that these proposals would reduce marginal tax rates and the distortions that the tax system places on economic decisions, a crucial feature of "pro-growth" tax policy.

As I see it, the "bright line" that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other, is the question of how high federal revenues as a share of our economy have to rise. Republicans have become pretty entrenched into their position that revenue, as a percentage of GDP, should stay around where it's been in decades past--around 18 to 19 percent. (No matter that we know that future spending, despite our best efforts, is sure to be higher than it's been in the past, which was already higher than 18 to 19 percent.) Democrats think that the right percentage is somewhere in the 20s, but they've become so used to either being defensive about this opinion ("no, we're not proposing the largest tax increase in American history") and/or proposing that all additional revenue come from just rich people and evil corporations (which doesn't exactly make the Republicans' hearts patter).

That's why I think the general tax reform strategy contained in the variety of deficit-reduction proposals we've seen--the strategy of broadening the base, which raises the average tax rate without raising the marginal tax rate--has such promise to get Republicans to cross that "bright line" of 18 to 19 percent of GDP in revenues, with the "lure" of the kind of tax reform they should love if they only stopped shouting "no" long enough to give it a good look.

It seems to me this holds the greatest promise for the kind of deficit reduction that both Republicans and Democrats could support. It is a rare example of potential "bipartisan compromise" where both sides get something they want: for conservatives, low marginal tax rates and a tax system more conducive to economic growth; and for liberals, higher tax burdens on the rich and an increase in the overall progressivity of the federal income tax.

It's a "rough" common ground right now, but I think we've got to keep clearing away the partisan "brush" over the next year, well before the next installment of the then-Bush-soon-to-be-Obama tax cuts expires.

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*NOTE: The MacGuineas-Galston plan is not as specific as the other plans about how they would reduce tax expenditures; they propose a 10% overall cut in tax expenditures (via a "tax expenditure budget") but suggest, for example, that the employer-provided health exclusion could be converted into a credit (which has the effect of making the dollar benefit of the tax preference the same for everyone no matter their income level). The M-G plan also does not suggest an immediate fiscal stimulus option, but emphasizes that any deficit reduction policies "should be back-loaded to synchronize with the economic recovery and allow people sufficient time to adjust."