What’s Old is New Again: Tax Reform

April 12, 2013
Joseph Minarik
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As you may know, an early but active debate on tax reform is underway.  My 1987 article, HOW TAX REFORM CAME ABOUT, provides a useful perspective from the time of the last successful attempt at tax reform. The situation in 1986 was different from today in many important respects – in particular, the overall budget situation was bad, but better than it is now. Still, the “1986 model” remains relevant, because many key tradeoffs – between total revenues and tax rates, among groups that enjoy tax preferences, among income groups – are inherent in any quantum change in tax policy.

Perhaps most important is the political dynamic.  Tax reform in 1986 required the cooperation of the Congress with a President whose party controlled the Senate, but did not control the House.  Still, leaders of the two parties communicated with each other, and found common ground. Policymakers came to realize that the serious faults in the then-current system gave them the potential to achieve important steps forward for many taxpayers and for the economy.

And as policymakers studied the issues, they learned that there were important advantages to a tax system with a broader, more-neutral base and lower tax rates.

The article is made available with the permission of Tax Notes, which is the original publisher.

That Bad Treasury Bond is Turning Up Again

April 5, 2013
Joseph Minarik
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***An abbreviated version of this blog post appeared in The Hill’s Congress Blog on April 4. This version takes a deeper dive than is possible with 750 words.***

The temporary “suspension” of the nation’s debt limit expires on May 19, 2013.  On that date, the limit will become the amount of debt already incurred (see here).  The Treasury is prohibited from “borrowing ahead” to build up a cash balance, which makes the determination of the precise amount of the limit as of that date quite complex.

But the concept is clear enough.  On May 19, the debt limit will be (approximately) what the debt actually is as of that moment.  So the Secretary of the Treasury will need immediately to revert to the use of his “extraordinary measures” – highly technical authorities granted to him by law or custom, which over the last two decades or so have become unfortunately all too ordinary – to keep the debt subject to limit below the statutory ceiling.  As always, the public is not privy to the Treasury’s own internal estimates, and the future is always uncertain; but the best analysis available suggests that the Secretary will have run out of tricks by some time in this coming August.

Therefore, with the temporary tax cut expirations resolved, with appropriations for the federal agencies finally completed for the ongoing fiscal year, and the next fiscal year not beginning until September 30, 2013 (and with that appropriations process sure to be procrastinated down to the wire), it is likely that a collision with the debt limit will be the next budget-process bottleneck that the Congress and the White House will have to traverse.

Institutional memories are short in Washington, and history often is revised before it is written.  Somehow, a decent interval after the fact, 100 percent of the players on both sides of each Washington contest believe that they won the game.  So it is likely that the lessons of August, 2011 – and of the last several debt-limit standoffs – have not been learned as they should.  Thus, it is worth taking the opportunity of the waning days of the Easter/Passover congressional break to review just why going to the brink over the nation’s debt limit is such a bad idea.

This should not be a partisan issue.  The points below would apply regardless of who is in control of the White House, the Senate, or the House of Representatives.  Today’s situation is unique in detail, as is every day in Washington; but the amount of the stakes on this issue is always the same: approximately everything we’ve got.  So both current and future Congresses and Administrations should consider the following:

A fight over the debt limit is prone to disaster.  Even though the stakes on the debt limit are monumental, Members of Congress will always be inclined to grasp any opportunity to extract concessions from a President with different views.  Still, over time, standards of behavior on this front have deteriorated.  As they push a President further and further toward the brink, Members today should consider the precedent they risk setting.

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Making Taxes Fair, and Good for the Economy

March 29, 2013
Joseph Minarik
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  • There is considerable debate – but arguably somewhat less understanding – about what constitutes a “fair” tax system.
  • There is no simple numerical rule that defines fairness.  It is, instead, a collective political judgment.
  • There are arguably reasonable conditions for making a sound collective judgment – but they are not met in the real world.
  • If the nation can agree on opportunity as an objective, we are left with a choice:  Will we direct our resources to reward the few spectacular successes, as an incentive to others; or will we instead use those resources to limit the tax burden on many ongoing businesses, to facilitate effort?  This blog argues for the latter, on both economic and fairness grounds.

With recent changes in tax rates as part of the year-end “fiscal cliff” deal have come renewed discussion of the most fundamental question of tax policy:  What is “fair?”

A frequent form of this question is a lament that “the 1 percent of taxpayers with the highest incomes pay 22.3 percent of the taxes” (typically using the figures published for some time now by the Congressional Budget Office (CBO); the number I quote here is from their latest estimate, using 2009 data, available here).  A possible subtext, never articulated, is that because 22.3 percent is greater than 1 percent the tax system is excessively progressive.  To interpret that subtext we need a conceptual marker.  If the top 1 percent of taxpayers paid 1 percent of the taxes (and the same for every other 1 percent ranked by income), then we would have the numerical equivalent of a head tax – both Warren Buffett and the proverbial elderly widow in the walk-up cold-water flat would write a check (if the widow had a checking account) to the Treasury for the same number of dollars.  That probably would not strike too many people as a “fair” tax system.

Sometimes the lament is a bit more sophisticated.  With a one-layer-deeper dive into the data, it can be worded as “the 1 percent of taxpayers with the highest incomes earn 13.4 percent of the income, but pay 22.3 percent of the taxes.”  Again, the unstated subtext can be read that 22.3 percent of the taxes, being greater than 13.4 percent of the income, is too high.  But the implied standard that those with 13.4 percent of the income should pay 13.4 percent of the taxes is the numerical equivalent of a single-rate income tax with no exemption or deduction.  Both Warren Buffett and the proverbial elderly widow would pay the same 13.4 percent of their income in taxes – and not the marginal rate (on their last dollar of income), but the average rate (the percentage of all of their income that they actually paid).  Most Americans probably would question whether that was a fair outcome, either.

(Footnote:  The numbers quoted above are for total federal taxes paid – income taxes, payroll taxes, excise taxes, and everything else.  This yields a different perspective than looking at income taxes alone.  The differences between the two are debated with an almost religious fervor, and are a topic for another, very long, day.  Also note that the sum of those different taxes is more a patchwork quilt than a “system.”  But we must persevere, because that is the tax “system” with which we must live.)

So if the 1 percent of Americans with the highest incomes earn 13.4 percent of the total income in the country, how much of the taxes should they pay?  Probably more than 13.4 percent; but how much more?  In truth, there is no simple numerical answer – as the very basic review of the tag lines above suggested.  This question can be answered only by the American people themselves, through the political process.

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Post-Mortem on the Budget Resolution Debate

March 26, 2013
Joseph Minarik
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This is just to tie up any remaining loose ends for you on the weekend’s legislative action on a congressional budget resolution for fiscal year 2014.

As you heard, the Senate passed its version of a budget resolution, to provide the opposite bookend – on a very, very long shelf – to the House version.  Some have argued that the House resolution “jump-started” the budget process, and that the Senate version “set the stage” for a hard and contentious conference.  Neither did any such thing.  The greatest likelihood, though admittedly not a certainty, is that you already have seen the sum and total of meaningful action on a budget resolution for next year – hence a “post-mortem” is fully in order.

There may be an initial meeting of a conference committee on the resolution, but it most likely will be what in the trade is called a “photo-op” meeting.  That is, Members from the two chambers gather, and the press is invited to take pictures.  The Members read their opening statements.  Then the meeting is adjourned, and the Members leave subject to the call of the chair – a call that never comes.  There is no rule that different bills that pass the two chambers must be reconciled and enacted; history is replete with bills that passed the two chambers in different versions and went no further.  This instance seems a prime candidate to enter that gallery.

The Budget Act requires that the Congress pass a budget resolution, but it also provides a procedure in case it does not.  And no one ever has gone to Budget Jail for failing to pass one; Budget Jail was grossly (indeed totally) understaffed even before the recent spending sequester.  You will recall that the recent “no-budget, no-pay” law is satisfied by each individual chamber passing its own budget; there is no requirement that the Congress reconcile the two and pass a single, final budget resolution.  So any motivation from that provision has been fully sated.

The passage of the Senate resolution did provide good theater.  The Senate normally allows unlimited debate (which is what a filibuster is), but a primary motivation of the creation of the current budget process was to prevent the budget from being talked to death.  The compromise that was struck was to allow Senate floor consideration, even after the statutorily limited time for debate has expired, of any and all amendments filed before a deadline.  This yields the notorious “vote-a-rama,” during which amendments are voted on even though they cannot be debated.  The process ends only when all of the filed amendments are voted upon (typically many are withdrawn without a vote) or the Senators give up in exhaustion, whichever occurs first.  This year’s marathon extended almost until dawn on Saturday morning.

But all of those undebated votes have no real significance.  The budget resolution is only a concurrent resolution, and cannot become law.  Any amendments to the resolution – some mentioned prominently in the press this year relate to the Keystone XL pipeline, sales taxation of Internet transactions, and the 2010 healthcare law’s provisions for a tax on medical devices and a reduction of the maximum contribution to flexible spending accounts for out-of-pocket medical bills – are purely advisory.  The recent push for a budget resolution in the Senate was thought by some to be a necessary first step toward meaningful negotiations.  That might be, but a more cynical interpretation is that the vote-a-rama provided an unlimited opportunity to force votes on artfully worded amendments for purposes of attack ads for future election campaigns.

Even the most charitable interpretation of the intent of all those amendment votes must include that they do not predetermine any subsequent votes actually to change the law.  If a real bill comes along, Senators can find ways to prevent its ever coming to a vote.  And there always are details in actual legislation to justify a Senator’s vote that is seemingly contradictory to an earlier vote on an amendment to the budget resolution.  A Senator could point to some other provision of a later bill as requiring a contrary vote.  The later bill might have an unacceptable budgetary offset to the bill’s cost, or it might have no offset at all.  So one should not leap to the conclusion that a vote on an amendment to a budget resolution is a harbinger of future action to the same effect.

It is certainly better to have action on a budget resolution than not.  (And if you have a strong position on a particular issue, it is better to have a favorable vote on a budget resolution amendment than not.)  To say that a budget resolution is a necessary condition for serious action on our budget problem probably goes too far, though one might make a case that a full and fair debate on a resolution would facilitate success.  But it unquestionably would be way off the mark to say that a budget resolution is a sufficient condition for solving our deep-seated problem.

Senate Majority Leader Harry Reid (D-NV) was reported in the press to have expressed skepticism at the prospect for a budget resolution conference.  Whether you agree with Senator Reid on the issues or not, he has a good sense of the politics of the Senate – and he has the authority to make the key decisions.  To paraphrase an old Washington friend of mine, the House and Senate passage of their budget resolutions plus $2.50 will buy you a day-old cheese sandwich – and not a very good one at that.

Understanding the Demographic Challenge

March 22, 2013
Joseph Minarik
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Demography is destiny.
Widely attributed to Auguste Comte,
                                                                     19th century French philosopher

Prediction is very difficult, especially if it is about the future.
Widely attributed to Yogi Berra,
                                                  Hall of Fame Catcher;
                                                         Actually said by Nils Bohr,
                                                               Noble Prize winning physicist

Just about everyone makes reference to the looming demographic challenge to the U.S. economy and the federal government’s finances.  Many people seem to be unaware of some of the subtleties that surround our demographics.  Here is a brief discussion to explain just what we are up against.

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No Steps Forward- Any Steps Back?

March 13, 2013
Joseph Minarik
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One can enunciate any number of criteria by which to judge this week’s budget resolution drafts from the House and Senate Budget Committees.  But they all boil down to one:  Do they help to solve the nation’s long-term budget problem?

And that is not to ask whether, if enacted, they would solve the problem.  It is, rather, whether they move us toward enactment of a budget plan that will solve the problem.

By that simple, meaningful standard, the answer thus far is no; there is no reason to expect any positive movement resulting from the release of the two resolution drafts.  (The House Budget Committee resolution draft was announced on Tuesday, though what was made public was a backup document, not the resolution itself.  The resolution, with plenty of blanks for numbers not yet determined, came today.  The Senate Budget Committee has not yet released its version; but by all accounts, the Senate resolution draft will not move us forward either.)

In fact, the lingering question is whether the net effect of all of the new paper might actually be retrograde.  In this implicit, slow-moving negotiation, these two resolutions definitely are first offers, not at all best-and-final submissions.  And they might even have a little of the air of insult first offers – where two sides who are obligated to negotiate for purposes of appearance go through the motions and put knowingly unacceptable gestures on the table to justify an end to the charade.

In sum, neither side will see anything that they have not seen already; and what they have seen already has not closed a deal.  There is no reason to expect anything new or different going forward, barring some unexpected development.

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The Discretionary Wild Card

March 8, 2013
Joseph Minarik
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Two weeks ago, we talked about the onset of the sequester – which applies almost exclusively to “discretionary” spending, that is, annual appropriations for federal agencies – and what it implies for both the macroeconomy and the performance of government functions.

Next week, a further development will pull that issue back on stage:  House Budget Committee Chairman Paul Ryan (R-WI) will release his budget resolution for next year.  As part of the deal struck within the House Republican caucus to pass the fiscal cliff bill at the turn of the calendar year, that resolution will claim to achieve a balanced budget – a deficit of zero – in the tenth year from now (that is, in fiscal year 2023).  To reach budget balance that quickly – last year’s House resolution was estimated to achieve balance in 2040 – will require greater savings, and some of those additional savings likely will come from a lower path for discretionary spending than is set under current law – that is, even with the sequester.

Then, to avoid a government shutdown (that is, a lapse of appropriations for federal agencies), the Congress will need to replace the current continuing resolution before its expiration on March 27.  That will highlight once more the implications of the level of annual appropriations (although its effect will be restricted to the current fiscal year – fiscal year 2013, which ends on September 30, 2013 – more on that point later).

And at some time in March or April, the President will submit his fiscal year 2014 budget.  Many people will rush to see how the budget proposals compare with the House budget resolution, and in particular its FY 2023 budget balance.  The President’s proposed future-year levels for discretionary spending will be an important element in determining how that comparison will look.  So for yet a third time in just a few weeks, proposals for levels of discretionary spending will get at least a little air time – even though we do not yet have specialty cable channels that focus on the federal budget.

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