A Tax Cut Both Parties Should Love -- But Don't

Tax cuts and rebate checks to stimulate the economy have been discussed frequently in the media. However, some economists are now suggesting that a payroll tax holiday would be more effective. Even the nonpartisan Congressional Budget Office agrees that a payroll tax holiday would be more likely to increase consumer spending.

CNNMoney.com reports

The payroll tax is the amount paid by both employers and employees to fund Social Security. Each pay 6.2% of a worker's salary, up to the first $106,800 of income.

Because of that limit, the tax is one of the most regressive in place today, hitting the working poor and middle class much harder than the wealthy.

The nonpartisan Congressional Budget Office estimated earlier this year that eliminating payroll taxes was roughly two to four times more effective in spurring economic activity than a reduction in income taxes, the policy option that's getting most of the attention in Congress.

"This is a better tax cut than a general income tax cut," said Roberton Williams, senior fellow with the Tax Policy Center. He said getting more money to workers who earn less increases the chance that it will be spent rather than saved, a concept popular among Democrats.

Read more here

CBO Reports U.S. 2010 Deficit to Exceed $1.3 Trillion

From C-Span.org:

The Congressional Budget Office (CBO) released a report this morning that estimates that the federal budget deficit for 2010 "will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010."

CBO Director Doug Elmendorf updates reporters today on the latest federal budget and economic numbers compiled by his office. In late July, the CBO released a report warning about a looming fiscal crisis if nothing is done about U.S. debt levels.

In June, the CBO indicated that the national debt will reach 62 percent of gross domestic product (GDP) by the end of 2010. The office also reported that the debt could reach its highest percentage since the end of World War II. The causes of the increase is driven by higher federal spending and lower tax revenues in the recent economic downturn.

How to Fix US Deficit: Stick to the Law

According to the Christian Science Monitor, projections from the Congressional Budget Office on deficit assumptions show that if we stick to the current tax law, federal revenues should pay for spending over the next few decades. Check out the following opinion article by guest blogger Diane Lim Rogers explaining why the current tax law is in fact fiscally responsible.

I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts highlighting the difference between CBO’s current-law baseline, and their “alternative fiscal scenario” which is more of a “policy-extended” baseline – similar to how the Obama Administration gauges their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues. That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”– because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

Continue reading at CSMonitor.com…

House to Vote on Tax Bill as Net Cost Drops to $60.5 Billion

From the Wall Street Journal:

The latest version of House legislation to extend tax cuts and unemployment benefits would add $60.5 billion to the deficit over the next 10 years, the Congressional Budget Office said Friday.

The House took the first step toward passing the package. On a 221-199 vote, the House approved a rule setting up two votes later Friday. The House will vote on the jobless and tax package, then vote separately on a provision to postpone scheduled cuts in Medicare payments to doctors.

The new cost estimate from CBO appeared to give Democrats the needed confidence to move ahead, after lacking the votes all week.

The estimate reflects changes House leaders made to the package including eliminating spending programs created by the 2009 stimulus bill, expanded Cobra health insurance subsidies and increased federal Medicaid payments to states.

Those and other changes shaved the net cost of the package to $60.5 billion from $140 billion earlier in the week.

The total cost of spending and tax cuts in the package is roughly $116 billion. About $56 billion of that is offset by targeted tax increases on business, including the fund manager tax rate increase and changes in the way overseas income of U.S.-based multinationals is taxed.

Jobs and Tax Bill to Cost $134 Billion

According to this new article on CNN Money.com, Congress is scheduled to consider a new bill this week that is expected to increase the federal deficit by $134 billion over the next decade.

The bill, which is likely to become a flash point in the debate over the federal debt, would raise $40 billion worth in additional revenue, according to estimates by the Congressional Budget Office and the Joint Committee on Taxation.

But that's not enough to fully offset the $174 billion in additional federal outlays that would occur as a result under the bill. CBO released its cost estimate late Friday.

The legislation would extend a host of tax breaks, give continued relief to the unemployed, delay cuts to doctors' Medicare reimbursements, provide support for job growth and fund disaster relief, among other things.

The bill, a melded version of proposal passed earlier by the House and Senate, won't be free of opposition on either side of the aisle. There is pressure to pay for more of the bill's provisions, and there is strong disagreement over some of the pay-fors that are included.

Continue reading at CNN Money.com…

Will a fix to Social Security cure our country’s long-term fiscal problems?

Social Security reform has been a hot topic for some time now. Many people are worried that there won’t be any money in Social Security retirement benefits by the time they are old enough to retire. Health care reform passed, great. Will the issue of Social Security be next on the Obama agenda?

According to CNN Money, a March report from the Congressional Budget Office estimated that starting this year, Social Security will, for the first time; take in less revenue than it has to pay out in benefits. However, when the Social Security system gets strained by the large baby-boomer population all hitting retirement age, then Social Security will be taking in less than it has promised to pay out, and the government will need to make up the difference. How? By paying back the surplus revenue that has been paid into Social Security over the years. That surplus revenue, including the interest owed will allow the system to continue paying out 100% of benefits promised until around 2037. After that, the program would only be able to pay out 76% of promised benefits …if we don’t do something. Experts agree Social Security reform will be less painful if it is implemented gradually.

Here are the options according to CNNMoney.com:

Increase the retirement age: One option that gets a lot of buy-in from policy experts is a slow increase in the retirement age at which one may collect full Social Security benefits. Today, it's 66, and it is scheduled to increase to 67 by 2027.

But Social Security experts say that won't keep pace with increases in life expectancy, meaning retirees are likely to be collecting benefits for longer than the system can support.
Increasing the retirement age by just one month every two years starting in the 2020s could fix 20% of the program's shortfall, said Ron Gebhardtsbauer, who teaches actuarial science at Pennsylvania State University and is on the board of the American Academy of Actuaries. It could cure 30% of the shortfall if, in addition, the retirement age were accelerated to 67 over the next six years, he added.

Reducing growth in benefit levels: Another measure that has gotten a lot of attention is "progressive indexing." Such a measure would not affect the promised benefits for lower income workers but would lower future benefits for middle- and high- income workers relative to what is currently promised.

Under progressive indexing, the Social Security benefits of higher-income workers would be indexed to inflation rather than to wages, as is currently the case. That would have the effect of reducing benefits from their current promised levels because inflation tends to grow more slowly than wages.

Raising the payroll tax: There is also the option of increasing the Social Security payroll tax rate on wages or raising the cap on how much of wages is subject to the payroll tax (currently it's the first $106,800).

More than likely, a combination of these measures would be proposed.

While answers have long been listed on the Social Security quiz sheet, the political will to implement them has been missing, Bixby said. "Everyone knows what needs to be done, but no one wants to do it."

Yet faced with mounting challenges on the federal balance sheet and a dicey debt environment, that all may change soon enough.

National Debt to be Higher than White House Forecast

According to the Congressional Budget Office, Obama’s proposed budget would add over $9.7 trillion to the national debt over the next ten yeas. They made the announcement on Friday, and claim that the President’s tax cuts for the middle class are the main reason for the shortfall.

The 10-year outlook released by the nonpartisan Congressional Budget Office is somewhat gloomier than White House projections, which found that Obama's budget request would produce deficits that would add about $8.5 trillion to the national debt by 2020.

The CBO and the White House are in relative agreement about the short-term budget picture, with both predicting a deficit of about $1.5 trillion this year -- a post-World War II record at 10.3 percent of the overall economy -- and $1.3 trillion in 2011. But the CBO is considerably less optimistic about future years, predicting that deficits would never fall below 4 percent of the economy under Obama's policies and would begin to grow rapidly after 2015.

Deficits of that magnitude would force the Treasury to continue borrowing at prodigious rates, sending the national debt soaring to 90 percent of the economy by 2020, the CBO said. Interest payments on the debt would also skyrocket by $800 billion over the same period.

Continue Reading at WashingtonPost.com…

Changes in Federal Revenues and Tax Rates on Capital Gains

A few days ago, The Congressional Budget Office published a letter on recent changes in federal revenue and the tax rates on capital gains. I have included a small quote from the letter courtesy of the Tax Prof, but you can download the full PDF letter by clicking here.

As a result of the economic downturn, CBO expects revenues from individual and corporate income taxes in 2009 to account for about 50% of total revenue, below the average of about 57% over the past five years. ... CBO expects that when complete information for the year is available, it will show that receipts from corporate income taxes fell substantially in 2009, to about 1.0% of GDP, less than half of the 2.1% of GDP in 2008. The decline stems from a sharp drop in taxable corporate profits.

In answering your questions about how the pending changes in the taxation of capital gains tax will affect revenues and behavior, it is useful to consider how the pending increase compares with previous changes. The top tax rate on most long-term gains was reduced from around 35% to 28% in 1978 and 1979, and was reduced to 20% in 1981. It was raised to 28% in 1987, reduced to 20% again in 1997, and reduced to 15% in 2003. The increase pending in 2011 is to 18% for some gains held over five years and to 20% for most other long-term gains. Thus, the pending tax change is well within the range of changes experienced in the last 30 years, and we have incorporated the impacts from those historical changes into our modeling of the effects of the upcoming law change.

Health Bills To Increase Federal Costs

From CQ Politics:

The health care overhauls released to date would increase, not reduce, the burgeoning long-term health costs facing the government, Congressional Budget Office Director Douglas Elmendorf said Thursday.

That is not a message likely to sit well with congressional Democrats or the Obama administration, and House Speaker Nancy Pelosi, D-Calif., said Thursday she thinks lawmakers can find ways to wring more costs out of the health system as they continue work on their bills.

The chairman of the Senate Finance Committee, Democrat Max Baucus of Montana, who has not yet released a bill, said his panel is acutely aware of the long-term cost concern. “Clearly our committee will do what it can,” he said. “We are very seriously concerned about that issue. We very much want to come up with a bill that bends the cost curve.”

But Baucus suggested the White House is making the task difficult with opposition to one cost-cutting approach Elmendorf cited — limiting or even ending the tax exclusion for employer-provided health benefits.

The Democrats and President Obama have cited two goals in their overhaul proposals — expanding coverage to the estimated 47 million Americans who currently lack it and bringing down long-term costs because the growth in Medicare and Medicaid spending threatens to swamp the federal budget in coming years.

How About a Payroll Tax Stimulus?

From The Wall Street Journal:

Congress and the Obama administration seem near to deciding the details of an economic stimulus package. Unlike the efforts of President Ronald Reagan and President George W. Bush, who also inherited declining stock markets and shrinking economies, this package is heavily weighted toward direct government spending, transfers to state and local governments, and tax changes that have virtually no effect on marginal tax rates.

Today the Reagan tax cuts are widely viewed as successful. Opinions on the longer-term effects of the Bush tax cuts are more diverse, but the short-term effects of the 2001 and 2003 cuts are generally credited as having been well-timed.

And what of the plan being put forward now? As crafted, it is unlikely to produce the desired results. For a similar amount of money, the government could essentially cut the payroll tax in half, taking three points off the rate for both the employer and the employee. This would put $1,500 into the pocket of a typical worker making $50,000, with a similar amount going to his or her employer. It would provide a powerful stimulus to the spending stream, as well as a significant, six percentage point reduction in the tax burden of employment for people making less than $100,000. The effects would be immediate.

By contrast, the stimulus now under consideration would suffer from the usual problems of government spending. The Congressional Budget Office and the Joint Committee on Taxation have calculated that only $170 billion, or about one-fifth of the $816 billion package will be spent in fiscal 2009. An additional $356 billion will be spent in 2010. That leaves $290 billion to be spent when even the most pessimistic forecasters think the economy will be in recovery mode.

Earmarks a Gateway Drug?

As any one who watched the debate will know, Senator McCain boldly stated that earmark spending was a “gateway drug.” However, although he made the claim he did not really back the claim up with any data. Below is a video clip from the debate where McCain discusses the topic.

McCain’s attacks got dozens of members in the blogging community riled up, with people arguing both sides of McCain’s statements. Below is quote from Volokh Conspiracy where a member attempts to better explain McCain’s statement that earmarks are a gateway drug.

“Let me give it a shot. Let's say Congressman X is an idealistic young Congressman. Some constituents in his rural district ask him to get federal funding for a new emergency room in a local hospital, because the nearest emergency room is 100 miles away. Congressman X is skeptical of earmarks, but this particular one both seems like a good idea and a way to help ensure his reelection--he won his first term with only 52% of the vote. He manages to slip the hospital funding into an appropriations bill.

Soon thereafter, Congressman X becomes aware of a new $5 billion initiative that is a complete and utter boondoggle, but will benefit the districts of several influential congressmen. He starts sending out press releases opposing the initiative, and threatens to a force a vote on an amendment removing the initiative from the bill to which it is attached.

The senior Congressmen who support the initiative schedule a meeting with Congressman X. Like mafia thugs, they tell the Congressman, "It would be a real shame if anything was to happen to your hospital funding--and any future funding for your district, for that matter." The message is clear; if Congressman X wants any hope of bringing federal money into his district, he had better stop opposing wasteful spending supported by his colleagues. He drops his opposition to the $5 billion project, gets the hospital funding, is reelected easily, and never again shows any "spending hawk" tendencies. Soon, in fact, he is rather senior himself, and finds himself meeting with a junior Congressman, telling him "It would be a real shame if anything was to happen to your hospital funding--and any future funding for your district, for that matter."

So, even though earmarks are a small percentage of the federal budget, they are a very important part of a broader system of corruption that leads to out-of-control federal spending.”

New Congressional Budget Office Report

Last week the Congressional Budget Office released a new study on the long-term effects of indexing the alternative minimum tax and extending the tax reductions of 2001 and 2003. You can read a PDF of the study by clicking here, or you can learn more about the Congressional Budget Office by checking out their website.