[Vision2020] The Fiscal Delusion

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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November 12, 2012
The Fiscal Delusion By ROBERT E. RUBIN

NOW that the election is over, Washington’s attention is consumed by the
looming combination of automatic spending cuts and tax increases known as
“the fiscal cliff.” That combination poses risks, including economic
contraction and erosion of confidence in government. But it also offers a
chance to address our unsustainable and dangerous fiscal trajectory.

Much of the current energy around establishing sound fiscal conditions is
focused on plans that theoretically would both contribute revenue to
deficit reduction and significantly reduce individual income tax rates.
Though hugely appealing, that’s a tall order.

These plans rely on reducing or eliminating many tax deductions, exclusions
and the like, known collectively as tax expenditures. Reducing tax
expenditures to pay for both lower personal income tax rates and deficit
reduction may seem like a politically attractive alternative to raising tax
rates or cutting entitlements or other spending.

However, many of these tax expenditures are important and popular policy
programs on which people now rely. They include the deductibility of
mortgage interest, charitable contributions and the exclusion from income
of employer-provided health insurance. Some tax expenditures should be cut
back and reformed. But when the substantive effects and political realities
of large-scale reductions are examined, it becomes clear that there would
not be sufficient savings to reduce tax rates and also cut the deficit.

Not long ago, a former senior official involved in the federal budget
process told me that various senators used to meet with him periodically
and argue for reducing tax expenditures. He would say that was a good idea,
and then go down the list of large tax expenditures. At each one, the
senator would say, “Oh no, we can’t do that,” and at some point the senator
would repeat his proposition and the conversation would end.

The nonpartisan Congressional Research Service examined the full range of
existing tax expenditures and concluded that, “Given the barriers to
eliminating or reducing most tax expenditures, it may prove difficult to
gain more than $100 billion to $150 billion” a year. But most plans based
on reducing tax deductions and other expenditures project revenues of three
to four times that amount. And the 1986 Tax Reform Act, cited as an example
of lowering rates through tax expenditure reductions (called base
broadening), left all of the major individual tax expenditures largely
unchanged.

The plans that reduce both tax rates and deficits, like the impressive work
by the Simpson-Bowles commission, have served a great public service —
raising awareness of our fiscal risks, bringing Democrats and Republicans
together, providing a framework aimed at stabilizing debt at an acceptable
level, and recognizing the need for substantial revenue increases and
spending cuts.

However, these same plans also pose a serious risk to achieving the very
objective they seek. If we invest too much time and effort pursuing plans
that ultimately prove undesirable and unworkable, we may go down a road
that leads nowhere. Then we would be forced to search for a new solution
when it will almost surely be too late. In effect, we will have pursued the
policy equivalent of a wild-goose chase only to discover that, to mix
metaphors, the tax expenditure goose doesn’t have enough golden eggs.

Advocates of extensive tax expenditure reduction argue — correctly — that
all deficit reduction choices involve substantive costs and are politically
difficult. They then suggest that, when compared to other possibilities,
substantially more cuts may be doable than the Congressional research
numbers suggest.

Maybe, but I think that’s unlikely when compared to the alternative of
restoring the topmost tax brackets to their Clinton-era level.

*Raising tax rates for those with the highest incomes challenges the
supply-side proposition that even moderately higher rates would hurt
growth. President Bill Clinton’s 1993 deficit reduction plan increased
income tax rates for roughly the top 1.2 percent of incomes. Opponents said
this would lead to recession. Instead, we had enormous job creation and the
longest economic expansion in our history. *

A recent report by the Hamilton Project, an economic policy project on
whose advisory council I serve, reviewed 23 studies of the impact of
tax-rate changes on the propensity to work and found that most of them
concluded there was no meaningful effect. Tax expenditure reductions, on
the other hand, will not raise nearly the revenues needed for sufficient
deficit reduction without increasing taxes on the middle class
significantly and are likely to disrupt important social and economic
goals, though many economists don’t acknowledge that.

When you compare raising the marginal rates for roughly 2 million Americans
to phasing out health insurance exclusions that would affect 150 million
Americans — even if some reform should be done — I don’t think it’s a close
call substantively or politically.

We should let the Bush high-end tax cuts expire, with an achievable,
progressive reduction in tax expenditures. And we should have spending
cuts, including entitlement reforms, equally matched by revenue increases.
The entire program — including budgetary room for public investment and a
moderate upfront jobs package — could be enacted now and deferred for a
limited time with a serious mechanism to guarantee implementation.

For plans that both reduce deficits and lower rates, some suggest that,
instead of raising the top two brackets to Clinton-era levels, we can find
the same revenues by limiting tax expenditures for those groups. That would
have some meaningful negative policy impacts, unlike increasing the top
rate. The bigger problem is that such a step would yield only a fraction of
the necessary revenue, requiring higher taxes on the middle class.

The pressure of the fiscal cliff, the fact that doing nothing is not
viable, and the distance to the next election all combine to make this a
special opportunity to meet our fiscal imperative. We need an open,
cleareyed debate so we don’t squander it.

Robert E. Rubin was Treasury secretary from 1995 to 1999 and is a
co-chairman of the Council on Foreign Relations.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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