Bring Back Big (or: Better than Boehner, More Robust than Reid, More Meaningful than McConnell, and More Comprehensive than Coburn)

July 30th, 2011

A follow-up to My Plan to Solve the Debt Crisis, inspired by Debate reveals a Republican Party at war with itself (Dan Balz, Wash Post 7/30/11).

 

In some things, bigger is in fact better,

Especially if you’re an stressed out debtor.

***

Here’s my own modest proposal to “bring back big” to the deficit reduction discussion, in the context of current proposals for a debt commission.

Raise the target for total deficit reduction to $9 trillion, including both cuts directly included in the package and the amount of future cuts to be identified by the commission and then presented to Congress for an up-or-down, no-amendments vote. Based on current discussions, this $9 trillion would be $1 trillion in deficit reduction cuts in the package, and then a further $8 trillion to be identified by the Commission, but those ratios could also be changed without changing the overall structure of the proposal.

I choose $9 trillion total because that matches Coburn, but here’s the key difference between my proposal and that one: the budget period in question is 2013-2022, i.e. beginning after the Bush tax cuts are currently scheduled to expire, and it includes the expiration of those tax cuts as its baseline.

The full package could therefore be revenue neutral for the 10-year period beginning1/01/2013 (i.e., after expiration of the Bush tax cuts), while still including up to (about) $4 trillion in increased revenue. That way, Republicans supporting the package won’t violate the Norquist pledge, but revenues would still significantly increase (and deficits significantly drop) relative to current levels.

(The package could even be net-revenue negative, relative to projected revenues. E.g., $1-2 trillion of the projected $4 trillion increased revenues from expiration of the Bush tax cuts could be “given back” in the form of lower tax rates. I discuss that further below.)

Most net revenue increases should come in form of tax reform and loophole restriction rather than higher rates, and should be backloaded and phased in so as to minimize economic impact (especially for working and middle class taxpayers). My proposal would also include creation of a National Debt Repayment Program (NDRP), a new tax, and a trust fund, the Comprehensive Lockbox to Ensure Achievement of National Sustainable Liability Amortization Trust, or CLEAN SLAT.

The CLEAN STAT trust fund would be Congressionally created and statutorily controlled, but off-budget and independently operated. It would create a separate stream of revenue legally limited to payment of interest and principle on the national debt, i.e., it could not be used to fund new or existing government spending programs.

Payments into the fund (the NDRP tax) would be administered and treated like the Social Security Tax: a flat x% of income deducted from one’s paycheck, possibly with an income ceiling, but preferably without one, since that would allow the tax rate to be significantly lower. Aside from Schedule C filers, it would not appear in annual federal income tax filings or payments, except as referenced in W2s. (In order to diversify revenue sources, other or additional potential sources could be considered, e.g., a value-added tax.)

Ideally, the total of the NDRP tax and new marginal rates would be lower than the current top total marginal rate for most taxpayers, at least initially. Any increase in rates for anyone should be gradually phased in. Since interest payments would now be covered from this trust fund, federal income taxes could and would be reduced. To make the package more attractive to Republicans (and also more economically and fiscally responsible), most/all net revenue increases would finance deficit and debt reduction rather than increased spending. CLEAN SLAT would be legally required to become and remain solvent over a legislatively-set time horizon, and subsequently reduce our debt/GDPratio to a more sustainable level. The flat tax rate would then be gradually increased or decreased as necessary from year to year (and as interest rates rose or fell), with the goal being to reduce the tax over time, while avoiding disruptive short-term increases in the NDRP tax rate.

The CLEAN SLAT approach has the political and psychological advantage of clearly delineating past and present. Don’t like paying taxes to support a bloated government? You won’t be. What you’ll be paying is your fair share of the interest on the national debt racked up over time by your forefathers and predecessors. Think some of that accumulated national debt was a mistake or a waste? It doesn’t matter, since that’s in the past and can’t be changed.

CLEAN SLAT would also address the common Republican criticism that a large number of American’s pay no tax, since everyone with income for Social Security purposes would pay the NDRP tax–sort of a “price of admission” to live in this great  and bountiful country of ours as a contributing member of society rather than a freeloader, with everyone paying equally for the debts that this and past generations incurred. (That  flat tax-like approach should also appeal to Republicans, since they’re always pushing for a flat tax system.)

Politically, the NDRP tax would allow Congress to focus on real budget issues instead of meaningless and counter-productive atmospherics. It would appeal to Dems because it would eliminate the pressure to balance the budget entirely on the backs of discretionary spending, which anyone speaking truthfully will admit is itself an impossible task. For Republicans who truly want to reduce spending, it would give them more manageable and realistic goals, instead of subjecting them to critics like me who point out that even their most draconian cuts are still just an insignificant drop in the bucket compared to the overall deficit and debt: taking interest payments out of the picture would make those cuts much more mathematically significant.

Of course, the starting point for all of this are the spending cuts and revenue measures designed to get the ball rolling. Those measures will be back-loaded in order to reduce economic further stunting the economic recovery, while significantly reducing debt levels in the long term, which would send a strong signal to the markets. Ideally, these measures would be combined with a parallel measure to create and fund an infrastructure bank to take necessary infrastructure spending off-budget, and the lock-boxification of the Social Security Trust fund so that its income and payments also become off-budget. (NB: Both of these measures should appeal to Republicans, since trust funds in name only have in the past been used to finance other spending programs, rather than for their intended purposes. Making these trust funds truly off-budget will end that charade. Congress would still set tax rates and benefit levels, but only with goal of improving solvency.)

Spending cuts and revenue measures would be coupled with a one-time big ($4-5.7 trillion) increase of debt ceiling now, with strong triggers to ensure follow-up action on both sides of the aisle. Graham-Rudman would be strengthened, and a modified balanced budget amendment could even be considered (multi-year budget balance, rainy day funds, automatic tax increases, etc., and applying only to the discretionary budget).

Two spending cuts which the Commission should definitely propose (in my view, it would have been better if they’d been part of an initial “grand bargain) are modest increases in Social Security and Medicare eligibility ages (except for certain physical jobs, which would not change, or would change less) and modified indexing (e.g., according to inflation rather than wage growth). If these modifications created project trust fund surpluses, then their relevant tax rates would be reduced (rather than leave them high and spend the surpluses on other programs), which would partially offset the new NDRP tax.

The $9 trillion deficit reduction would be a “reach” goal: i.e., Congress would attempt to achieve it, but triggers to enforce that would not kick in at the $9 trillion level (in this way, it’s identical to the Coburn proposal, since Coburn himself recognized that his $9 trillion in proposed deficit reduction could never be agreed upon). The minimum deficit reduction target at which mandatory measures would kick in would be $7 trillion (still a nice big number), which I calculated as follows: the ~$3.2 trillion in cuts Obama initially agreed to with Speaker Boehner + the ~$800 million in revenues Boehner initially agreed to + $3 of the projected $4 trillion in increased revenue for 2013-2022 after expiration of the Bush tax cuts.

Why $3 trillion instead of $4? Why leave a trillion in revenue on the table? That would give both Dems and Republicans a strong incentive to come to the table and negotiate a tax reform/revenue enhancement structure that is both better for economic growth, more fair to working and middle class Americans (i.e., raises taxes on them less than expiration of the Bush tax cuts would), and could be phased in over a 10 year period instead of happening overnight on 12/31/2012 as expiration of the Bush tax cuts are currently scheduled to.

Remember, a scant 10 years ago, theU.S.had a budget surplus, with future surpluses as far as the eye could see, and economists were worried about the negative economic impact of completely paying off the national debt. The gap between that future and our miserable present show the difference that a decade of bad fiscal policy makes, but it also shows that good policy can make a difference.

Which hopefully this proposal, or parts of it, could.

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Comments

4 Responses to “Bring Back Big (or: Better than Boehner, More Robust than Reid, More Meaningful than McConnell, and More Comprehensive than Coburn)”

  1. Shanna Says:

    I bow down humbly in the prsenece of such greatness.

  2. Newsericks » Blog Archive » Rage Against the Extreme Says:

    […] Inspired by Boehner opens door to ‘new revenue’ to curb debt (Lori Montgomery, WashingtonPost.com 11/07/12), After Obama wins, overtures on debt: Boehner opens door to a deal (Zach Goldfarb and Lori Montgomery, Washington Post 11/08/12 A1), GOP tax-rate stand toughens debt-deal talks (Paul Kane and David Fahrenthold, Washington Post 11/09/12 A1), and Obama, Boehner again prepare to tackle debt (Lori Montgomery and Zach Goldfarb, Washington Post 11/09/12 A8), here’s my brilliant idea (if I say so myself) to strengthen Speaker Boehner against his extreme Tea Party wing in order to allow negotiation of a new Grand Bargain.  […]

  3. Newsericks » Blog Archive » He Built That Says:

    […] it again to accomplish what we and the American people elected you to do. We can knock doors for a Grand Bargain. We can knock on doors for a fairer tax code. We can knock on doors for the Infrastructure Bank. We […]

  4. Newsericks » Blog Archive » Opening Bid Says:

    […] future. They also oppose any changes to Social Security, correctly arguing that Social Security is not part of the deficit. The combination of these two factors allows for an interesting approach: the payroll tax waiver […]

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