May 192011

By Bill Longbrake
Executive-in-Residence at the Center for Financial Policy

This is an excerpt of the May 2011 Longbrake Letter.  To read more, click here

There are three primary options on the table: President’s Fiscal Commission; Republican (Paul Ryan); President Obama’s budgetary framework.  There are other variants in play, including the yet to be released “Gang of Six” Senators proposal.

President’s Fiscal Commission

Spending.  The Fiscal Commission proposed reducing discretionary spending in 2012 to the level that prevailed in fiscal year 2010.  Then, discretionary spending would be reduced 1% each year for the next three fiscal years.  Between 2015 and 2020 discretionary spending would be indexed to inflation.  If these proposals were adopted, fiscal-year 2012 discretionary spending would be $1.094 billion.  By 2020 discretionary spending would be $267 billion less annually.  The proposal contains an illustration of where $100 billion in cuts could come from domestic spending programs.  $28 billion would come from cuts in federal employment and salaries; $18 billion from eliminating 250,000 federal contractors; $16 billion from eliminating all earmarks; and $37 billion from a variety of other sources.

Tax Expenditures, Tax Rates and Tax Base.  The Commission proposed reducing the number of tax brackets and reducing tax rates to even lower levels than exist currently.  This would be accomplished by either eliminating (Option 1 – The Zero Plan) tax expenditures or greatly diminishing tax expenditures (Option 2).  There is a third option which would limit itemized deductions while Congress determines how to structure broader-based tax reform.  The Commission’s proposal would also raise the gas tax by 15 cents per gallon gradually beginning in 2013.

Entitlements.  The Commission’s proposal would broaden the payroll tax base on a phased basis to capture 90% of wages by 2050 (86% of the base was covered in 2009 but that is projected to fall to 82.5% by 2020 under current law).  The Commission’s proposal focuses both on containing health care cost escalation and paying for the “Doc Fix”.  In the long-term, beginning in 2020, the proposal sets a goal of limiting health care cost growth to nominal GDP growth plus 1%.  This would be accomplished by establishing a process to evaluate cost growth and mandate that steps to taken to contain costs, if savings are not being realized as expected.

Republican – Paul Ryan

Republicans are adamant that tax rates should not be raised and that the entirety of deficit reduction needs to be achieved through spending cuts.  Significantly, however, Representative Paul Ryan’s 10-year budget proposal begins the necessary process of downsizing entitlement programs by focusing on restructuring.

Medicare and Medicaid.  Importantly, Ryan’s proposal does not touch Social Security.  As is well known by all, the developing U.S. sovereign debt problem cannot be brought under long-term control without dealing with entitlements. Unfortunately, the American public is in love with its entitlements.  Surveys reveal that Americans are concerned about the budget deficit and want it to be addressed but surveys also indicate that Americans do not want many federal programs to be cut and this applies emphatically to entitlement programs.  Democrats were quick to take advantage of this by savaging Ryan’s Medicare proposal.  Unfortunately, the Democrats political posturing resonated to the extent that the Republicans have back pedaled on this particular proposal, at least for the time being.

President Obama’s Budgetary Framework

President Obama at last long has entered the budget debate with his own proposal.  After studiously ignoring the work and recommendations of his own fiscal commission after it submitted its report last December and then subsequently submitting a budget proposal to Congress that in essence denied the severity of the long-term debt problem, the president has finally joined the debate.  Of course, the president’s proposal differs considerably from Paul Ryan’s, reflecting differing imperatives of each one’s political constituency.  Importantly, the president’s proposal also addresses the need to restructure entitlement programs, but the projected deficit reduction over ten years is much smaller than the number targeted by Ryan.

Spending.  About half of the president’s deficit reduction would come from spending cuts.

Tax Expenditures.  About a quarter of the president’s deficit reduction would come from curtailments in tax expenditures.  However, this is a concept that is not backed up with any specific proposals.

Tax Rates.  While the president’s framework does not address tax rates in general, it proposes that rate reductions for upper-income earners should be allowed to expire.

Entitlements.  The framework includes a number of reforms intended to reduce federal health care spending.  While there is no specifics pertaining to social security, the framework endorses that reforms should be adopted that maintain the long-term solvency of the program.

Budget Enforcement.  The framework includes a “Debt Failsafe” provision.  It would require that by 2014 the debt to GDP ratio must be projected to be on a stable or declining trend for the remainder of the decade and, if this case is not met, across the board spending cuts in some, but not all federal spending programs and tax expenditures would occur.  Exempted programs would include social security, Medicare and certain low-income programs.

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