I've read only the summaries (and here), not the report. Mankiw is happy, Krugman and DeLong are upset. The home mortgage interest deduction goes and income tax rates are 8, 14, and 23 percent. No one thinks this is the final deal. I would say evaluate this as you would a movie trailer: will it get people to take the next step of thinking about a ticket purchase? The top 23 percent tax rate is like the quickly cut scene with the rolling boulder, the skimpily clad girl, the grinning enemy, and the face of the star. "The Bowles-Simpson plan has a ratio of roughly $3 in spending reductions for every $1 in revenue increases…" It won't happen in real life. As a movie preview I judge this as "good enough." It basically declares that some major deductions have to be on the table and it gets us to the next step.
Ezra Klein comments.
A few left-wing blogs had deemed this the "Catfood Commission" and charged that it was cover for Obama's plan to revive the Bush social security privatization scheme. This should give some clue to how distrustful much of the left has gotten with Obama.
In fact, what these guys seem to have delivered is a progressive wet dream:
* Cut defense spending
* Remove social security reductions from accounting for the budget defecit
* Increase social security benefits for low income earners
* Don't raise the social security retirement age until 2050 -contrast what is happening in Europe
* Remove tax breaks that mainly benefit high income earners
* Remove the mortgage interest deduction (useless if you rent, and since it subsidizes high house prices not good for young people trying to buy their first house)
In exchange for lowering income tax rates -any thoughtful person on the left should take getting rid of deductions over the rates every time- these guys basically are recommending everything intellectuals on the left have been recommending for years (btw I don't identify "the left" with the Democatic Party establishment, I mean people actually interested in reducing inequality).
But as pointed out, its not the final deal, which is up to Congress.
In my mail today. The Coverdell ESA goes from $2,000 to $500 and expenses for pre-post-secondary education no longer approved.
23% top marginal rate ? *Facepalm*
Double facepalm at the idea that it would actually increase revenue.
Notoriously absent, also, are estate and capital gains taxes.
The option with the 23% top marginal rate treats capital gains and dividends as ordinary income. It also eliminates all "tax expenditures"– if this term was defined anywhere in the draft report, I didn't see it. I too wonder what they have in mind for the estate tax.
Here's ATR's analysis of the tax portion of this, with a link underneath:
* Today, President Obama’s Simpson-Bowles debt commission chairmen released a preliminary report. It confirms what everyone has known—this commission is merely an excuse to raise net taxes on the American people. Support for the commission chair plan would be a violation of the Taxpayer Protection Pledge which over 235 Congressmen and 41 Senators have made to their constituents.
* ATR President Grover Norquist submitted testimony to the commission over the summer. These spending cuts would have balanced the budget without raising taxes.
* By its own admission (page 11), the report calls for a ten-year net tax hike of $961 billion, nearly a $1 trillion tax increase over the decade.
* The stated goal of the report is to raise the long-standing historical level of federal revenues from its average of 18 percent of GDP to 21 percent of GDP. According to President Obama’s own Office of Management and Budget, federal revenues have never been this high, and their data pre-dates World War II.
* The report deceptively calls their net tax hikes “spending in the tax code.†There is no such thing, unless you assume the government has a right to all your money, and when they cut your taxes this is the same thing as “spending money on you.â€
* Additionally, the report calls for a tax hike “trigger†to take effect if Congress fails to enact comprehensive tax reform. This “trigger†would take the form of a 10 percent reduction in the mortgage interest deduction, charitable contribution deductions, the exclusion for employer-provided health insurance, and a host of other tax deductions and credits. This haircut would grow over time, eventually leading to untold trillions of dollars in tax hikes.
* The gas tax would be raised by $0.15 per gallon beginning in 2013. All this money would be spent on union-dominated “Davis Bacon†construction projects. An American family with a 15-gallon tank who fills up weekly would see a tax hike of $117 per year.
* There’s a stealth tax hike which involves slowing down how fast tax brackets adjust to inflation. Over time, American families would find themselves in higher tax brackets than they otherwise would. “Bracket creep†would begin to once again rear its ugly head.
* Not counted in the $1 trillion tax hike is an expansion of the Social Security taxable wage base. Under current law, only the first $106,800 in wages and net income from self-employment are taxable. The report calls for the Social Security taxable wage base to gradually increase to nearly $150,000 (in today’s dollars) by 2050. This increases the marginal tax rate on work by 12.4 percentage points for workers in this income range.
* Finally, the report calls for an automatic tax increase in any year that the budget is out of balance.
http://www.atr.org/obama-debt-commission-calls-fo…
In any case, if you're making your argument based on the 75 year window, then we had better be radically cutting the deficit now while Social Security still shows an actuarial surplus.
I supported the HW and Clinton budgets that reduced the deficit while SS was in surplus based on the need to reduce the Federal det burden before the boomers began retiring.
And guess what, hiking taxes did generate more revenue without cutting into growth in either incomes or employment, and the 90s deficit reduction promised significant cuts in not only the Federal debt burden, but also the absolute external Federal debt ahead of the need to tap into the SS trust that Reagan said we needed as a sacred trust in preserving SS.
It was a good thing we got the deficit under control in the 90s, wasn't it. And surely with fiscally responsible conservative Republicans in control of government, surely the Federal debt has been significantly reduced from what it was in 2000, so the current recession represents a minor bump in reducing the debt burden before the boomers retire.
Right??
Both Paul Krugman and Grover Norquist oppose it? The commission might really be on to something!
There's an old saying in DC. If both sides hate you, you must be doing something right.
If the MID goes then no interest expense, individual or corporate, should be deductible. A blog with a purportedly libertarian perspective shouldn't be supporting taxation of any personal interest. We should be striving for equitable treatment of corporate and individual use of capital.
Our proposal, the website link on my name, was submitted to the commission. We didn't hear back.
Otherwise: It looks like, as I'm sure many predicted, that the measures in this bowles-simpson plan are somewhat predictable, taxes and soc. security and medicare. Not that being predictable is bad, I was just not surprised by anything that I read.
The one highlight I see is the explicit reach into defense. Their budget alone is nearly the size of the social security spending. I think that the aims of the military could be realized with a few billion dollars less.
@ Ryan Ellis:
The gas tax hike scares me. As if we don't already pay enough money… It's not that 15 cents is a lot of money on it's own. It's more the cumulative effect, the $117 per year that you quoted, and the fact that 1. rates are already higher than where inflation should have them and, 2. they will continue to rise.
"Finally, the report calls for an automatic tax increase in any year that the budget is out of balance." Does this mean that rates will rise in any year the country has a deficit? If so, I fear that tax rates will be too high for anyone to manage before too long. If you are talking about this year's income vs. this year's spending, that perhaps is manageable. But honestly shouldn't equalizing spending vs. income be what we do already? Isn't "spend less than you make" basic economics?
By the way, is there anyone who believes assessed tax rates and taxes are higher today than at any point since about any time in the past half century?
Does anyone think the slow growing economy over the past decade, which is the worst for any decade if we look at actual employment and income growth for the "middle class" (those not in the top 10%), is the result of excessive tax hikes?
Why do so many people use the phrase "the past three decades…" in the context of some bad economic performance analysis? Did 1980 mark a turning point when taxes rates were increased?
Were the 90s a period of growht fueled by a spate of tax cuts at the beginning of the decade? For that matter, was the growth after 1982 a period of systematic tax cuts and spending cuts?
"The left is screaming bloody murder over a plan that would net increase government revenues (and fairly significantly)."
Not only does it increase net government revenues, its provisions seem to also reduce inequality (for example, taxing capital gains as ordinary income is huge). Sometimes I don't understand politics in this country.
If the MID goes away, I will start a corporation that will buy your house from you and lease it back. The corporation will borrow money to finance the purchase of your house, deduct the interest expense, and pass the savings on to you, keeping a little for our vig. At the end of the 30 year lease the house is yours. Net benefit to government of MID elimination approaches zero. Giving corporations another economic rent through exclusive access to interest deductions, priceless.
More like a movie trailer for a movie never to be made.
Could some of the Left's anger be due to the lack of a VAT?
I can't wrap my head around why the left should be supporting a VAT, an utterly un-progressive tax. The VAT in Europe was the dirtiest trick played by the right (occasionally posing as the left) on the people.
Prior to the tax reform of 1986, car loan interest used to be deductible along with credit card debt, etc. Obviously credit card procedures did not really change as a result of that. Was the growth in car leasing in any way an arbitrage move inspired by that change? I have no idea, since I have always seen leasing as suboptimal for my personal interests, and have thus never looked into its finer details.
Renters are (almost) equally subsidized by the tax deduction landlords can take on their mortgage interest. This is a not a renter vs. homeowner distinction, it is a personal vs. a business tax distinction. That's why the response is to change the form of ownership from personal to business.
Note that for houses, while businesses can deduct interest as an expense, they also have to book the rent as revenue. Since the revenue from rent will typically exceed the interest expense, shifting from a model of MID and zero rent to no MID with zero rent more or less levels the playing field with rental businesses.
@liberalarts, businesses book the rent as revenue but they deduct for maintenance, depreciation, salaries, etc. Homeowners can't. The appropriate taxable construct is imputed rental profit. If you are going to tax homeowners for imputed rental profit then you must allow them to deduct the expenses of homeownership.
Leaving aside the part on Social Security, this turkey would fly in my eye if they only added a couple more tax brackets. 32% for >= 250k and 45% for >= 1M.
"I can't wrap my head around why the left should be supporting a VAT, an utterly un-progressive tax. "
VAT with exclusions on clothing and food is not un-progressive. Does that help unwrap your head?
Almost total garbage.
People bought houses expecting a deduction. Wrenching it from them is not only unfair, it's political suicide. Removing it from future purchases is a great idea, but current homeowners will still bear some of the incidence.
Social Security is an insolvent Ponzi Scheme. Anything less than full privatization is bogus. We need ownership, not redistribution. We need savings, not empty promises. We need returns, not losses. We need full funding, not PayGo. Raising retirement age or raising the tax compounds the theft. Don't save the system, preserve the promise!
We already pay too much for gasoline taxes.
Putting revenues in the SS trust fund is exchanging one IOU for another IOU.
There is enough wasteful spending on private goods that we don't need to cut military spending, a public good.
A flat tax of 15% with an equal exemption for everyone would be great. The only deductions should be for retirement, health care, and education savings.
Entire federal departments can and should be eliminated. Whatever doesn't meet the market failure definition (public goods, externalities, asymmetric info, incomplete markets) without a decentralized solution should go. Fannie, Freddie: gone. HUD, Energy, Transportation, DHHS, Agriculture, Commerce, Education: gone. Keep essential public goods as separate bureaus.
Corporate income should be taxed once, either as corporate income or dividends, not both. Interest should be taxed as regular income and with capital gains.
You can't cut Medicare payment to doctors without doctors cutting off services. We just need to cut most or all of Medicare eventually and replace it with medical savings accounts. It's another unsustainable Ponzi Scheme.
Ban public sector unions, once and for all.
The era of big promises paid for by other people needs to be over.
By the same token as commenter "a" Social Security was sold at a much lower level of benefits with in some cases more limited coverage. Let's return to the benefit levels of the early 60s and remove all the subsequent indexations upwards. And let's adjust the age of retirement so that it matches modern life expectancies.
I am surprised at those quick to condemn the mortgage deduction when it is minor compared to the blatant misrepresentation of Social Security. Recall that its proponents (such as Samuelson or Tobin) often celebrated the fact that people mistakenly thought it was a standard pension rather than an intergenerational transfer that is unfunded in an actuarial sense.
People need to stop finding nitpicky little faults with this and start asking whether it is better than the status quo, which Is years of stagnation eventuating in default.
David N asked, "If we can't have reasonable expectations about such things, what happens to the general level of investment?" I think there will be an increase in doubts about long-term tax shelters, which would be all to the good. I don't think investment will decrease or decrease much, but the types of investment will change.
When asking if the MID "artificially inflates" housing costs, you need to add, "as compared to what?"
Compared to cars and consumer goods, yes. Because the interest deduction on most forms of personal interest including auto loans and credit card debt was eliminated in 1986. I think that's why it's now popular to let auto financing companies purchase the car and lease it to you. They can deduct the interest, you can't.
Compared to stock and bonds, no. After the MID is gone (i.e. when pigs fly) the only remaining personal interest deduction is margin interest. And because the history and origins of deductible interest is apparently unimportant, the "special" margin interest deduction will be labeled an unfair, dangerous subsidy, the cause of bubbles, a fancy loophole for fatcats, etc. And when that too is gone you'll see a boom in "leveraged funds." You'll still be able to avoid paying tax on interest, you'll just have to go through an agency to do so.
Though more of the outrage is on the Left, it is quite interesting that both sides are finding major faults with this outline of a plan. They have to be doing something right.
@a: VAT with exclusions on clothing and food is not un-progressive. Does that help unwrap your head?
Not really. This might make it more progressive at the bottom end, but regressive at the upper end (where income is mostly reinvested, not spent). This makes it a tax on the middle class. Which, added to the fact that it is "invisible", makes it very popular with govts, of course.
@David: The regular itemized deduction is mortgage interest, property and state taxes, and margin interest. The standard deduction, in lieu of itemized deductions, must be some minimum estimate of these. Renters don't have mortgage interest or property tax payments, so why do they get the standard deduction? Why is the tax code subsidizing renters?
Ah, right, those famous itemized deductions. This will have to go, too, at some point…. Just daydreaming, of course.
@6oz: Ok, where do I start….
Social Security is an insolvent Ponzi Scheme.
BS
Anything less than full privatization is bogus. We need ownership, not redistribution. We need savings, not empty promises. We need returns, not losses. We need full funding, not PayGo. Raising retirement age or raising the tax compounds the theft. Don't save the system, preserve the promise!
So you want everybody to rely on their 401(XXX)'s ? Such a great, safe, reliable way to invest.
We already pay too much for gasoline taxes.
Lowest in the OECD…. Don't get me started about the externalities of an oil-reliant economy.
Putting revenues in the SS trust fund is exchanging one IOU for another IOU.
Wha ?
There is enough wasteful spending on private goods that we don't need to cut military spending, a public good.
So the war in Iraq is a greater public good than well-maintained highways and schools ? Gimme a f***ing BREAK !
A flat tax of 15% with an equal exemption for everyone would be great. The only deductions should be for retirement, health care, and education savings.
Talk about taxing the middle class.
Entire federal departments can and should be eliminated. Whatever doesn't meet the market failure definition (public goods, externalities, asymmetric info, incomplete markets) without a decentralized solution should go. Fannie, Freddie: gone. HUD, Energy, Transportation, DHHS, Agriculture, Commerce, Education: gone. Keep essential public goods as separate bureaus.
Welcome to the third world !
Corporate income should be taxed once, either as corporate income or dividends, not both. Interest should be taxed as regular income and with capital gains.
I agrree to that. And make the rate 35% or something.
You can't cut Medicare payment to doctors without doctors cutting off services. We just need to cut most or all of Medicare eventually and replace it with medical savings accounts.
I just love the idea of dedicated savings accounts. In other words, let people pay themselves. Defeats the whole notion of insurance.
It's another unsustainable Ponzi Scheme.
You might want to consult for that irrational obsession.
Ban public sector unions, once and for all.
So much for having a free country.
The era of big promises paid for by other people needs to be over.
You mean, like the promise of easy money once you get wealthy enough, subsidized by the middle class ? I agree to that.
@BPO
"Iraq has nothing to do with the broad issue of defense cuts."
Well, it does.
For years people have been saying that the military only costs us 4$ of GDP, a mere pittance. But it turned out they were not counting the spending for the wars, which were kept off the budget. Another two and a quarter percent of GDP, vanishing into thin air.
Get out of the wars and we could save perhaps 2% of GDP right there, in reduced military costs. But if we'd done that in 2007 it would not have improved the federal budget at all, the budget would have looked the same.
2%+ of GDP swept under the carpet, ignored. People saying military spending was only 4% of GDP because they ignored more than a third of military spending. Just ignored it. But then we don't know what the black budget is, it isn't just left off the budget, they don't say anywhere how much we pay for it.
I guess in a way military spending cuts would not make any difference except for propaganda — the more of the military spending we do in secret with no accountability, the more we can say we cut the budget. Whoopee.
BPO, just getting out of two losing wars that are not doing us any good would slash military spending by about a third. You say that doesn't matter? And it wouldn't hurt readiness at all. It would much improve military readiness.
Of course those off-budget expenditures weren't black programs. I have estimates for how much we're spending on them so they can't be black programs. I have no official estimates for the cost of the black programs. I don't know how much they cost or how much could be cut from them. If we were for example to cut the F-35 program and then fund it as a black project, how would that help anything?
If we think we're cutting military spending, how do we know whether we're cutting military spending when we don't know how much we're increasing the secret spending?
The public has little influence on military spending. Congress as a whole has little influence, right? Only a few key congressmen get told in secret what the real budget is, and how would they find out whether they're being told the truth? Not to be a conspiracy theorist, but it's true, isn't it? Congress does not know how much military spending there is, except for a few congressmen who keep the secret about what they have been told.
So does it really even make sense to argue about the US military budget? We might do better to argue about the chinese military budget. The CIA gives us estimates about that, and not about our own.
Still, if we did pull our military out of Iraq and Afghanistan, isn't it plausible that our spending on those wars would go down?
Everyone seems to be jumping on the elimination of mortgage interest as a tax deduction. The report reads that only mortgage interest on second homes; home equity loans, and mortgages over $500k would be excluded…..seems fair to me.
My take on this is that the proposal, not surprisingly, follows the pattern of the last deficit reduction that last time the Tea Party effected the election out come.
In 1992.
In 1992, the Tea Party defeated HW Bush for trying to deal with the deficit, an issue that the infant Tea Party movement had raised in 88 and 90. The Tea Party then came back with a vengeance in 92 and defeated HW and elected Clinton by voting for the Angle and I-am-not-a-witch Ross Perot.
So, Clinton responded to the Tea Party even more actively than HW did, and in his first major address states something like "I have looked at the budget deficit, and it is a big problem, and the changes require sacrifice from everyone."
He then pushed his budget through Congress, rammed it through with budget reconciliation without a single Republican vote. He then turned to the other big issue, the structural problem with health care, and the Tea Party knives came out, and he was blocked.
The Tea Party roared back again in outrage at Clinton daring to reduce the deficit with budget cuts and tax hikes, budget cuts to the military were a sacred cow, and the attempts to cut health care were too big a sacrifice to the doctors and medical firm CEOs, and the Republicans swept Congress.
Republicans claim they balanced the budget, not Clinton, but replacing only Clinton resulted in the rapidly rising budget deficit, so the problem is clearly the Republicans, and the Tea Party was certainly cheer leading the increased deficits.
Obama was faced with even worse problems than Clinton, but he faced the deficit in his book four years ago, and the only real difference between Obama and Clinton was he took on health care deficits first.
Why?
Simple, Republicans wiped out everything Clinton accomplished in just over two years. Clinton left office with a strong economy, high rates of employment, a structural budget surplus that would reduce the external debt before the Social Security trust would need to be drawn on increasing external debt.
The tax revenue from 1998-2001 was just over 20%, and the economy was great, unemployment was low, and more important, the employment rate was the highest ever with wages rising slowly.
Only wage income creates real wealth.
So, the draft report calls for tax revenues of about 21%, about the same amount as the Clinton budgets resulted in for 1998-2001. Rates that were not bad for high growth and high employment.
If you want to point to a problem with the late 90s taxes it would be the pump and dump promoting capital gains tax cut. After all, no real capitalist ever pays a capital gains tax; a capitalist creates or acquires capital and holds it and holds it and holds it, just reaping the dividends of return on invested capital. That help promote the idea that Pets.com was a wise investment because you buy and hold for a year and get rich selling it and paying only 15%, much less tax than laboring for a year and earning the same.
But the Tea Party hated the fact that Clinton balanced the budget because they were a big part of the attack movement on Clinton, and a big part of wiping out all traces of his budget balancing, and clearly behind the creation of the current deficit.
Note how the Tea Party didn't revive itself until AFTER REPUBLICANS HAD LOST because of the terrible economy. And after Obama pushed Democrats to ram through Congress health deficit reduction.
No one can point to a single case where the quality of health care equal to the US can cost less without universal coverage. The Swiss did not have universal coverage until 1995 so they had the second highest health care costs, with costs spiraling out of control.
The Tea Party again expressed their outrage at Obama addressing the long term budget deficit by making everyone share in the sacrifice of reducing the health care deficit built into the budget. And by focusing on the long term growth issues by spreading the sacrifice around.
Obama did not directly attack the short term deficit like Clinton did, because he saw that Clinton's effort was totally wasted by the Tea Party wiping it out in a couple of years.
What the Tea Party is great at doing is preserving and expanding entitlements and the deficits while cutting taxes. But that is only possible with Republicans in power.
So, my advice to Obama is to hammer at the House, where all the tax and spend laws must come from, to reform the tax law to generate at least 20% of GDP revenue, less than is called for by Simpson-Bowles, as its only mission for the next two years.
Demand that any extension of the Bush tax cuts require the Congress pass a tax reform law that goes into effect in 2013 that generates a minimum CBO long term projection of 20% of GDP revenue.
The only way the short and long term deficit can be addressed is if Republicans hike taxes, either with the Tea Party, or by destroying the Tea Party.
What so bad about letting the government drive its budget off the cliff and go bankrupt? I hoping for as much in California actually.
@Tom Grey
"Those who want smaller gov't need to be asking — how to get smaller gov't?
Answer, (read my lips) NO NEW TAXES."
This is simplistic. It's like saying "Those who want less violent crime need to be asking — how to get less violent crime? Answer, (read my lips) GET RID OF WEAPONS." Simplistic.
Here's an approach that might actually work.
Face it, cities are government magnets. You get a lot of people living close together, and the more crowded they are the more they have to be regulated. The better we can limit large cities, the less government we will need.
So, if we find a way to tax people for living in cities, that will be a good step. The bigger the city, the higher the tax, in a graduated way. So, people who live in unincorporated areas would not pay this tax at all. People who live in small towns (say up to 30,000 people) would pay a small tax, perhaps $50/year. People who live in NYC would pay, say, $5000/year for the privilege. Welfare would be given only to people who do not live in cities.
As the tax base disappeared, cities would become untenable as places for anybody to live.
Employment would tend to follow management — manufacturing management would tend to put their factories in places that would be easy commutes for them, and workers would commute in from wherever they could afford.
Many of the problems of big cities would vanish. Urban planning. Urban waste management. Urban police. Urban traffic. Urban mass transit. Lots of things that require a whole lot of government regulation and government spending.
As the various urbanites come to live in small towns all over the country, they will take on small-town values. Soon it will be not only possible but politically necessary to cut government spending.
As long as we have cities, those cities will lobby for more government spending to maintain them. and as the cities get bigger they need more maintenance and more spending. So any solution must include getting rid of US cities, particularly the largest cities.
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