Responding to some of President Obama’s Medicare claims

Responding to some of President Obama’s Medicare claims

Let’s examine a few quotes from President Obama’s weekly address, which this week is about Medicare.

THE PRESIDENT: I saw how important things like Medicare and Social Security were in [my grandparents’] lives.  … That’s why, as President, my goal has been to strengthen these programs now, and preserve them for future generations.  Because today’s seniors deserve that same peace of mind.  And the millions of Americans who are working hard right now deserve to know that the care they need will be available when they need it.

Medicare, Social Security, and Medicaid are growing at unsustainable rates. The “millions of Americans who are working hard right now” are paying taxes into a system that will be unable to afford to pay the benefits it is promising them today. President Obama says these workers “deserve to know that the care they need will be available when they need it,” but he has not proposed policy changes to produce that outcome.

THE PRESIDENT: We’ve extended the life of Medicare by almost a decade.

No you haven’t. The Affordable Care Act (ACA, also known as “ObamaCare”) slowed Medicare spending growth. The Medicare Hospital Insurance Trust Fund includes less than half of Medicare spending. You can argue that you have extended the life of this trust fund by “almost a decade,” but trust fund accounting ignores a more immediate cash flow problem.  Since the HI trust fund contains only IOUs from the government to itself, this accounting ignores the question of where to find the $296 B in cash this year to pay for Medicare spending above that covered by Medicare payroll taxes and premiums.  Medicare has never been a fully self-funded program, and even with the savings enacted in the Affordable Care Act, it is still an enormous pressure on the rest of the budget.

And that’s the positive portrayal of what the President and his Congressional allies did, because at the same time they “cut” Medicare spending, they increased spending on new health entitlements in the ACA by the same amount. So the budgetary savings and reduced future deficits they legitimately achieved by slowing Medicare spending were then undone by new government spending. This is why Governor Romney and Mr. Ryan say the President “used Medicare savings to pay for [part of] ObamaCare.”

THE PRESIDENT: And I’ve proposed reforms that will save Medicare money by getting rid of wasteful spending in the health care system and reining in insurance companies – reforms that won’t touch your guaranteed Medicare benefits.

In his budget President Obama proposes to slow spending growth by about $[200] B over the next decades. He then proposes to spend that same amount increasing Medicare payments to doctors. His budget therefore proposes no net savings in Medicare.

In the grand bargain negotiations with Speaker Boehner last summer, the President proposed more significant incremental reforms (often mislabeled as “spending cuts”) to Medicare. Since then he has been unwilling to propose those changes publicly. Even if he did, they are far from sufficient to create a sustainable spending path.

THE PRESIDENT: Republicans in Congress want to turn Medicare into a voucher program.  That means that instead of being guaranteed Medicare, seniors would get a voucher to buy insurance, but it wouldn’t keep up with costs.

A version of this horrible voucher system described by the President is now in effect for more than 100 million Americans who get their health insurance through work, and will, if President Obama is reelected, take effect soon for millions more under the Affordable Care Act. The phrase “seniors would get a voucher” is designed to maximize fear among today’s seniors, especially those who vote in Florida.

(photo credit: White House photo by Chuck Kennedy)

The President is correct that “Republicans in Congress” proposed reforming Medicare such that old-style government-run Medicare would not be an option for new Medicare enrollees in the future, but the latest version of Republican reform is the Ryan/Wyden plan, which would allow seniors to choose to stay in traditional fee-for-service Medicare. The President appears to be trying to scare today’s seniors by describing an out-of-date proposal that would have only applied to future seniors.

THE PRESIDENT: As a result, one plan would force seniors to pay an extra $6,400 a year for the same benefits they get now.

This is a great example of a tactic I warned about two weeks ago:

[me]: Every “cut program X by Y%” quote about the Ryan budget will be relative to an unsustainable spending path. The irresponsible part isn’t the proposed spending cut, it’s the promise to keep spending growth going without specifying how you’ll pay for it.

The following chestnut returns as well:

THE PRESIDENT: And it would effectively end Medicare as we know it.

 

Technically, to end Medicare as we know it simply means to change Medicare. Campaigning Democrats use this language, “end Medicare as we know it” to scare the listener when describing Republican proposals. To the untrained ear it sounds a lot like “end Medicare,” and the speaker uses it to mislead the listener into thinking his or her opponent proposes to eliminate this popular program.  In reality, most Republicans elected officials want to end ObamaCare but only to change Medicare.

THE PRESIDENT: [Medicare is] about a promise this country made to our seniors that says if you put in a lifetime of hard work, you shouldn’t lose your home or your life savings just because you get sick… I’m willing to work with anyone to keep improving the current system, but I refuse to do anything that undermines the basic idea of Medicare as a guarantee for seniors who get sick.

 

This is interesting – I think it’s fairly new language for him. It provokes a few reactions.

  1. What about losing some of your life savings if you get sick if you’re wealthy? Given that Medicare spending is both unsustainable and a transfer of resources from younger workers to older retirees, I think it makes sense to slow Medicare spending growth in part by reducing the subsidies for future seniors who are wealthy.
  2. The “undermin[ing] the basic idea of Medicare as a guarantee” point ties back to the voucher attack, an attack which is now out of date because of Ryan/Wyden.
  3. The Medicare guarantee that the President trumpets is significantly weakened by the President’s unwillingness to explain how he intends to extend that guarantee into the future. Under current law Medicare benefits are not guaranteed for future generations because the President has not proposed and Congress has note enacted changes to Medicare that produce a reliable guarantee.

America needs to slow significantly the growth rate of government spending on the major old age entitlements. Language such as that used by President Obama may scare some seniors into voting for him, but it will make needed reforms that much more difficult after the election.

President Obama's Cleveland economy speech – detailed outline

President Obama's Cleveland economy speech – detailed outline

This is the second of two posts. Here is the first, a much shorter high-level version of the outline contained here.

This is my attempt to build a detailed outline of the economic speech President Obama gave in Cleveland yesterday (watch it).

I used his language in some parts, but in many parts these are his concepts expressed in my words, I hope to provide more clarity.

It won’t surprise regular readers that I disagree with much of this. I have tried not to let that cloud this summary.

Detailed outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big choice — two paths

A. Choice / two fundamentally different visions.
B. Choice and debate are not about whether we need to grow faster, but instead about how to:

1. Create strong, sustained growth;
2. Pay down our long-term debt;
3. Generate good, middle class jobs so people can have confidence that if they work hard, they can get ahead.

C. Big decisions. Not new challenges. Problems more than a decade in the making.

D. Being held back by a stalemate over two different paths for our country. Election should is about resolving this stalemate.

II. Define & blame Republican theory for bad stuff.

A. Long before 2008 the basic bargain had begun to erode
B. Define Republican theory: cut taxes, no regs, market solves everything
C. Results of Republican theory: worked well for the rich, but prosperity never trickled down to the middle class.

III. Be patient.

A. Not your normal recession.
B. It has typically taken countries up to 10 years to recover from financial crises of this magnitude.
C. We’re in better shape than Europe.

IV. Take credit for the good stuff

A. We acted fast. My policies are working.
B. We’re recovering from:

1. Financial crisis of 2008;
2. A decade of middle class falling behind;
3. Erosion of basic bargain over decade[s?]

V. Romney wants to repeat the failed experiment of the last decade.

A. We implemented Republican theory last decade:

1. Best way to grow the economy is from the top down;
2. Eliminate most regulations;
3. Cut taxes by trillions of dollars;
4. Strip down government to national security and a few other basic functions.

B. This failed theory created the fiscal problems we face now and the financial crisis that caused this weak economy.

C. Romney wants to return to and repeat this failed theory.

VI. Romney’s plan is bad for the middle class.

A. Keep Bush tax cuts in place and add another $5T in tax cuts on top of that.

1. 70% of those will go to >$200K/year, and >$1M/year will get an average tax cut of about 25%

B. Cut valuable government programs: student loans, Head Start, health research and scientific grants.
C. Eliminate health insurance for 33m (repeal ACA) + 19m more (Medicaid cuts).
D. Scale back or eliminate tax breaks that help middle class families: health care, college, retirement, homeownership.
E. Repeat of failed top-down growth theory.

VII. My plan is an economy built from a growing middle class. Race to the top.

A. Education;
B. Energy;
C. Innovation;
D. Investment;
E. Tax code based on American job creation and balanced deficit reduction.

VIII. I’m a centrist, look at my record.

A. I have cut taxes.
B. Fewer regulations than Bush in first three years.
C. Signed into law $2T of spending cuts.
D. Deficit reduction plan to slow health cost growth, not shift costs to seniors.
E. Domestic discretionary spending lowest share of GDP in nearly 60 years.

IX. I’m for keeping the American tradition of bipartisan government involvement in the economy.

A. Government is not the answer to all our problems, and I’m not proposing government run everything.
B. Romney and Republicans want to return us to no rules and unregulated market free-for-all.
C. America has succeeded not by telling everyone to fend for themselves, but by all of us pitching in, all of us pulling our own weight. That’s what I’m for.

I hope you find this useful.

(photo credit: Obama campaign)

President Obama's Cleveland economy speech – high-level outline

President Obama's Cleveland economy speech – high-level outline

This is the first of two posts.

Here is my attempt to outline the meaty 53 minute economic speech President Obama gave yesterday in Cleveland. I built this outline to help myself analyze the speech, then realized that others might find it useful. While it is true that little of the substance was new, this is nevertheless a serious policy speech that makes what the President and his advisors think is the economic part of their best case for reelection. I will take it seriously and recommend you do so as well — this isn’t just another blow-off stump speech. This is the theory of the economic case the way the President wants you to see it.

If you’re a student of economic policy I recommend you watch or read the whole speech. No summary or analysis can substitute for the candidate’s own words and presentation.

Here is my plan of attack: summarize first; then explain; then respond. Today is just the first step, the summary.

In some cases i use the President’s words, but I’m often using my own more colloquial language to express his arguments more clearly if I can. So in some cases these are his thoughts (I think) in my words. I have done my level best to capture his arguments in their most effective and convincing form, especially when I disagree with them. I will express my disagreements another time.

This post contains just the highest level outline. The next post contains a much more detailed outline. I recommend you skim this one, then read that one.

High level outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big and fundamental choice — two paths.

II. Define & blame Republican theory for bad stuff.

III. Be patient.

IV. Take credit for progress / the good stuff.

V. Romney wants to repeat the failed experiment of the last decade.

VI. Romney’s plan is bad for the middle class.

VII. My plan is an economy built from a growing middle class. Race to the top.

VIII. I’m a centrist, look at my record.

IX. I am for keeping the American tradition of bipartisan government involvement in the economy.

That’s the short, high-level outline. Here is the detailed version.

I hope you find this useful.

(photo credit: Obama campaign)

Why delay austerity decisions?

Why delay austerity decisions?

Lefty and Righty are debating stimulus and austerity over a cup of coffee.

Lefty: Growth of the U.S. economy is slowing due to insufficient domestic demand and headwinds, especially from Europe. We need to make sure we don’t make the same mistakes as those Europeans who are weakening their economies through austerity. I’m for growth now. We need to increase highway spending, hire more teachers and policeman, and prevent tax increases, except for on the rich.

Righty: I’m not sure I agree with your diagnosis but want to focus on your “growth now” point. Why does it have to be either-or? Why can’t we pursue growth policies and austerity policies simultaneously? You and I disagree both on what policies best lead to increased economic growth and on the best way to address our underlying fiscal problems, but I don’t see why we have to choose between the two goals.

Lefty: Because austerity hurts economic growth and because our need for growth policies is urgent. We need to prioritize growth now because the economy is weak now.

Righty: I’m not being clear. I agree that the short-term outlook is for weak growth at best, and I don’t want to do anything to hurt that.

Lefty: Except you want to slash government spending. That will have a countercyclical effect. Not only will teachers and policemen be laid off, they won’t have income to spend and so shop clerks and plumbers will lose business.

Righty: You and I disagree about the magnitude of that effect. You think it’s big, I think it’s small, and some of my associates think it’s zero. But let’s assume for the moment that you’re right. My principal focus is not on cutting today’s spending. My top austerity priority is to reduce future deficits by reforming and slowing the spending growth of the the big 3 entitlements: Social Security, Medicare, and Medicaid.

Lefty: Your House Republican friends left Social Security reform out of their budget.

Righty: Yes they did, and I wish they hadn’t. But my point stands — I want to fix our government’s unsustainable borrowing path by making big changes to medium and long-term government spending, especially in the big 3 entitlements. In any conceivable reform those changes don’t even begin for a few years, and once they do, the spending “cuts,” as you call them, phase in gradually over time. I propose policy changes that have no effect for the next few years, then a small effect for a few years. It then grows gradually over time to have huge long-term effects.

Lefty: You want to destroy Social Security, Medicare, and Medicaid.

Righty: That’s a cheap shot and you know it. For the moment let’s set aside the specific changes I want to make. My argument holds even for a very different type of austerity package.

I think that in the long run you want to make only minor tweaks to those entitlement spending programs and instead rely heavily on tax increases to reduce future deficits. I’m just guessing, though, because the only thing you ever say is …

Lefty: I want a balance of spending cuts and tax increases to address our long-term deficit problems.

Righty: Right on cue, thank you. You’re always a bit light on the specifics of your long-term tax increases. But let’s suppose you had specifics. Like mine, your austerity package would have little fiscal effect immediately, and, like mine, your package would phase in gradually over time. This is true if you only raise taxes or if you combine incremental entitlement spending reforms with tax increases. The fiscal effects start small and build up slowly.

To achieve its principal goal, the austerity, also known as deficit reduction, package does not have to have any immediate fiscal effects. I’ll tell you what: you pick a delayed start of up to five years, however much time you think we need for the economy to fully recover and for us to return to full employment. I’ll commit right now that whatever deficit reduction we negotiate will not begin until we are past your initial delay as long as we actually solve the long-term problem. That way, in your Keynesian view of the world, our austerity / deficit reduction package won’t hurt our prospects for short-term growth.

Lefty: So growth now, austerity later? I’m good with that. Always have been. In fact, that’s what I have been saying, if only you had listened more closely.

Righty: Right. I think we both know what each of us wants for short-term economic growth. As I said, I’ll start the deficit reduction discussion with the House-passed Ryan plan + Social Security reform, with a delayed start date of your choosing of up to five years. What is your opening for deficit reduction?

Lefty: Well, I have already proposed $4 trillion of deficit reduction over the next 12 years…

Righty: … which would still leave more than $6 trillion of increased debt over the next decade. And that includes only the beginning of the steep part of the entitlement spending curve.  Your proposal would still leaving a massive medium-term increase in debt. My plan would solve the long-term fiscal problem. You don’t like its effect on Social Security and the health entitlements.  Fine.  What is your solution to the long-term fiscal problem, rather than your first step toward a solution?

Lefty: I’ll tell you later.

Righty: What?

Lefty: I’ll tell you later, when we negotiate austerity, maybe in 2013 or 2014, whenever we’re past this short-term economic weakness. Or maybe we’ll just negotiate this first austerity step after the economy has recovered, and then tackle the rest sometime after that.  You said it:  growth now, austerity later. I’ll tell you my complete solution later.

Righty: No, no, no. We need to negotiate both now.

Lefty: But you said growth now and austerity later!

Righty: I was talking about implementation dates. We need to agree to both sets of policies now, or at least soon. I am committing that the implementation of whatever austerity we agree to won’t begin until after your delay. We negotiate growth now and austerity now. The growth policies are enacted now and start taking effect now. The austerity policies are enacted into law now but don’t begin to take effect for a few years.

Lefty: Why not wait to negotiate austerity? Growth is more urgent, and we both know how hard it will be to reach agreement on solving our long-term fiscal problem.

Righty: My biggest reason is that I lack confidence in anyone’s promises that they will make hard decisions and cast hard votes at some unspecified future date. But let me invert your question: why wait to negotiate on austerity?

Lefty: Because I don’t want to slow growth.

Righty: But enacting legislation soon to reduce future spending, on a time delay, isn’t going to slow short-term growth, especially in your Keynesian view of the world.

Lefty: If it doesn’t start to take effect for 3-5 years then we have 3-5 years to negotiate.

Righty: No we don’t, because markets are forward-looking and so are people. There is an immediate and significant market benefit in committing the U.S. to a fiscally sustainable path as soon as possible. And people need time to plan for big future changes in old age retirement and health promises.

Lefty: Well we’re not going to be able to negotiate either growth or austerity before the election. It’s too risky.

Righty: You’re probably right, and I’m not locked into any particular timing. The sooner the better. If sooner means right after Election Day, then I’m good. If it means early in 2013, immediately after concluding a short-term negotiation or a new President Romney takes office, I can live with that, too. I don’t need short-term growth and long-term austerity to be negotiated simultaneously or enacted as part of the same legislation.

But it’s crazy to argue that we must wait for the short-term economy to recover before we enact long-term changes that reduce future deficits. The constraints on proposing, negotiating, and enacting long-term deficit reduction are political and legislative, not economic. A weak short-term economy is not a valid excuse for delaying the legislative enactment of policy changes that would solve our deficit and debt problem. It is an excuse only for beginning the immediate implementation of those policy changes, and we can delay that implementation to address short-term growth concerns. Long-term austerity can be proposed, negotiated, and enacted while the short-term economy is weak and even if it is getting weaker.

Lefty: Umm…

Righty: Will you therefore put on the table now a delayed-start austerity plan to compare to mine? If this coming election is to be a choice about two different visions of America, will you present your long-term fiscal vision now so voters can compare our plans? If not, will you commit now to proposing a specific long-term austerity plan no later than January 2013 with a goal of concluding negotiations within a few months? There is no good policy reason to wait longer than that, even if the U.S. economy is in the tank.

Lefty: <Lefty looks at his watch.> Oh my! Look at the time. I am so sorry to rush out on you but I am late for another meeting. I’ll catch you next time. <Lefty shakes Righty’s hand and hurries out.>

Righty: <sigh>

(photo credit: mementosis)

America's entitlement spending problem

America's entitlement spending problem

I want to highlight two points from the Reports of the Social Security and Medicare Trustees, released Tuesday.

Point 1:  If you do not change Social Security’s promised benefit payouts you would need to set aside $23.2 trillion today to permanently fill the hole between promised Social Security benefits and dedicated Social Security taxes (almost all of which are payroll taxes).

For comparison $23.2 trillion is about one and a half years of U.S. GDP.  Take the entire economic output produced in the USA for the next 18 months.  Set it aside.  Now you have enough cash, when combined with future projected Social Security payroll and other dedicated taxes, to pay current and future benefit promises.  That’s a mighty big hole to fill.

For the technicians, the present value of the infinite horizon liability is $20.5 trillion, but that assumes one will magically find $2.7 trillion of change under the couch cushions to “pay back the Social Security Trust Fund’s obligations.”  The concept I’m trying to capture with the $23.2 trillion is the cash needed now to defease the Social Security liability:  suppose you were going to give someone all future revenues dedicated to Social Security, and they would commit to forever paying all promised Social Security benefits.  How much additional would you have to pay someone today to accept this deal?  I think that’s the appropriate way to measure the size of the Social Security funding gap.

Point 2:  For the next two decades demographics are a bigger driver of entitlement spending growth than is health cost growth.  Here are the Trustees:

Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary factors will be population aging caused by increasing longevity and health care cost growth somewhat more rapid than GDP growth.

There is an incorrect and misleading conventional wisdom that health care costs are the principal driver of our long-term entitlement spending problem.  That’s true, but only starting about 20 years from now.  For the next two decades demographics, specifically the retirement of the Baby Boomers, is the biggest driver of entitlement spending growth.  The point that everyone misses is that Medicare (and Medicaid) spending growth are driven by a combination of health cost growth and demographics.  When you combine the demographic factor driving part of Medicare spending growth with the demographic cost driver of Social Security, you account for more of the total spending growth than if you look only at the effect of per capita health spending growth.

Health cost growth dominates everything in the long run, but on our current path we won’t make it to the long run.  If policymakers do not change the spending paths of Social Security and Medicare (and Medicaid, but that’s not in these reports) soon, things will break long before we get to the time when health costs are the principal driver.

This conventional wisdom and confusion result from two factors:

  1. People ignore the demographic drivers in Medicare spending.  Medicare grows because there are more seniors collecting it and because spending per senior is growing unsustainably fast.
  2. Advocates for the Affordable Care Act, including President Obama and his former budget director Peter Orszag, worked hard to convince people that “It’s all about health cost growth.”  This served two of their purposes:  to make an argument for their health care reform proposal and to rationalize not doing anything to fix Social Security.

I am not arguing that we should ignore health cost growth; just the opposite.  It is a huge driver of short-term entitlement spending growth, it’s just not the biggest factor in the next two decades.  Instead we must change policy to address both demographics and health cost growth, and we must address demographics in all three major entitlement programs: Social Security, Medicare, and Medicaid.

(photo credit: RenoTahoe)

Eight month scoop?

Eight month scoop?

Sunday’s Washington Post contains an excellent article:  Obama’s evolution: Behind the failed ‘grand bargain’ on the debt.  Congratulations to Peter Wallsten, Lori Montgomery, and Scott Wilson for this combination of analysis and tick tock reporting.

You can, if you like, compare it to something I posted at the time:  Why the Obama-Boehner talks fell apart.  I think this means I scooped the Post by about eight months.

I also wrote a contemporaneous post opposing the Gang of Six plan that received some attention at the time.

(photo credit: Franklin B Thompson)

The President’s economic policy priorities

The President’s economic policy priorities

The President’s 2012 economic policy agenda emphasizes four policy challenges:

  1. the loss of American manufacturing employment;
  2. America’s dependence on oil;
  3. America’s sub-par (my phrase) education and training; and
  4. increasing income inequality.

Each of these trends began decades ago:

  • Our employment has been shifting from manufacturing to services for decades, as it shifted from agriculture to manufacturing in the 19th century (all while American manufacturing output continues to grow over time);
  • We have been dependent on oil as a fuel source for oh, about 100 years;
  • The seminal report on American education, A Nation at Risk, was published in 1983, yet it reads as if it were written this year; and
  • Income inequality has been increasing since about the 1970s, while even the spike in inequality at the very high end is probably 20ish years old.

There is nothing wrong with prioritizing long-term economic problems and challenges; in fact, quite the opposite.  Washington usually focuses only on problems and challenges that will bite before the next election.

And yet:

  • The President barely mentions the greatest long-term (and, increasingly, short-term) economic policy challenge we face, the size and growth of unfunded entitlement spending promises to the (current and future) elderly;
  • The second greatest long-term economic policy challenge, closely related to the first, continues to be the unsustainable growth in per capita health spending, notwithstanding mistaken claims that the Affordable Care Act will slow that growth;
  • The most urgent economic policy challenge we face is the slow recovery of the U.S. labor market, with housing weakness and macro/financial threats from Europe in a close second and third;
  • In last year’s State of the Union address, President Obama framed the central policy challenge as infrastructure and public investment competition from China and India, something that doesn’t really make his top four this year (his manufacturing message is somewhat different);
  • President Obama emphasizes frequently that he doesn’t want to “return to the policies of the past,” meaning the Bush era, yet these policies were not the cause of the problems he now stresses; and
  • The President is not claiming that his proposed policies would solve even a significant portion of the problems he describes.

I would like instead to see the President set economic policy priorities like these:

  • Clear out the barriers to private sector expansion and investment, in particular by reducing both the drags induced by recently enacted expansions of government and the massive uncertainty caused by lingering open policy debates;
  • Stop trying to “fix” the housing market and let housing prices find a painful but market-clearing bottom so that more normal growth could resume;
  • Make structural reforms to Social Security and Medicare and Medicaid that adapt them for inevitable demographic trends as well as evitable unsustainable promised benefit growth; and
  • Aggressively expand international trade and investment rather than throw up protectionist barriers and rhetoric.

The massive recent and planned future expansions of government are the greatest threats to ongoing American economic strength in both the short and long term. Expanding the scope of government further as the President proposes will make things worse, not better.

(photo credit: Lawrence Jackson for The White House)

Why I oppose the Gang of Six plan

Why I oppose the Gang of Six plan

If you’d like to understand the details of the Gang of Six plan, please read my (quite long) earlier post.

I strongly oppose the Gang of Six plan. I think it is absolutely terrible fiscal policy.

First I’ll flag a few things I like in the plan.

  • I support making a technical correction to CPI, even though it would result in higher revenues.
  • Repeal of the CLASS Act is great.
  • It’s good they included medical malpractice reform.

That’s it. Others right-of-center are salivating at the low marginal income tax rates described in the plan, both for individuals and corporations. I think those low rates never materialize, for both arithmetic and legislative reasons, and explain why below.

I make a lot of assertions in the following argument. For backup, please see my earlier explanatory post, which contains links to the Gang’s source documents.

Here are 17 reasons why I oppose the Gang of Six plan.

1. It provides no discretionary spending totals.

Discretionary spending is 37% of the budget next year. The Gang of Six plan does not specify discretionary spending totals. How can I support (or even evaluate) a budget plan that promises to cap 37% of spending but doesn’t tell me at what level, next year or for nine years thereafter?

2. It cuts defense spending while hiding the ball on nondefense spending.

The only discretionary spending number provided is $866 B in defense (security) discretionary savings over the next 10 years. I care about the discretionary spending total and about the balance between defense and nondefense. I am open to defense spending cuts, but not if I’m not told what the plan does to nondefense spending as well. How can I support or evaluate $866 B of defense appropriations cuts when I am not told whether the plan cuts, holds harmless, or even increases nondefense appropriations?

3. The promised deficit reduction is both overstated and less than is needed.

Their $3.7 trillion of claimed deficit reduction is bogus. It includes an unspecified amount of savings from a future legislative fast-track process that would require further Congressional and Presidential action if health spending growth exceeds a certain target.

The Gang’s plan also uses at least three different baselines in different parts of the document. Combine that with the absence of discretionary spending totals and I have no confidence in their $3.7 trillion deficit reduction number. It is easy to solve this problem – I guarantee Chairman Conrad has a table of numbers that shows these calculations. All he has to do is release that table.

Even if I did believe it, this amount of savings won’t cover CBO’s projected $5.4 trillion of net interest costs over the same timeframe. In fairness, other plans face this same problem. We need much more deficit reduction (through spending cuts).

4. It is a huge net tax increase.

The Gang of Six plan would increase taxes by $2.3 trillion over the next 10 years relative to current policy. That’s roughly a 6.5 percent increase in total taxation.

Put another way, the Gang of Six plan raises taxes $830 B more than would President Obama’s February budget.

To those who like the promise of low statutory tax rates – the benefits of low marginal rates are far outweighed by the increase in average effective rates. This is a massive hidden tax increase.

5. It’s a far worse trade than Bowles-Simpson.

The fundamental trade of the Bowles-Simpson group was higher net taxation in exchange for (huge long-term spending reduction, especially in entitlements + fundamental structural entitlement reform + pro-growth tax reform).

The Gang of Six plan drops the first two elements of that trade, the huge long-term spending reductions and the structural entitlement reforms. It instead purports to offer pro-growth tax reform in exchange for much higher net tax levels. It offers trivial spending cuts, no flattening of long-term entitlement spending trends, and no structural reform to the Big 3 entitlements. That is a terrible trade, and far worse than Senators Durbin and Conrad agreed to in Bowles-Simpson. Why did the Republicans in the Gang take a deal far worse than Bowles-Simpson?

6. It trades a permanent tax increase for only a temporary respite on spending.

The plan proposes permanent increases in net taxation levels in exchange for a temporary slowdown in spending. The entitlement spending line would be shifted ever so slightly downward – there would be no long-term “flattening of the spending curve.” The Gang tries to address that through a poorly-defined process to slow health spending growth that offers no specific policy changes and promises only to “require (future) action by Congress and the President if needed.” That sounds awfully familiar (see: Medicare funding trigger, turned off by Democrats in 2009).

The consequence of this would be kicking the can down the road. Deficits would be smaller for the next 5-10 years while the higher tax levels offset entitlement spending growth. But since the plan does nothing to flatten the curve of Social Security, Medicare, or Medicaid spending, 5-10 years from now we will be right back where we are now, but with higher levels of taxation. We will again face huge and growing future deficits, driven by unsustainable entitlement spending growth.

Then we’ll repeat this game all over again. Raise taxes once again to buy another decade or so. The Gang of Six plan raises taxes and hands off an unsolved entitlement spending problem to the next generation.

We need a solution that caps total government spending at some share of GDP. Cut, Cap, and Balance sets a limit of 20% of GDP, which I like.  Bowles-Simpson raised taxes and moved toward a spending cap (but not far enough). The rumor at the time was that the Bowles-Simpson group was working toward a 21% cap. The Gang of Six plan raises taxes but does nothing to change the underlying spending trends. I hate the tax increases in Bowles-Simpson, but at least it moved in the direction of a permanent spending fix.

7. It’s an unfair deal on CPI.

A CPI fix raises revenues and cuts spending. I’d like to use the higher revenues to cut tax rates. Those on the left would like to spend the deficit reduction from slower Social Security spending growth on their priorities. I think the legislatively balanced way to do CPI is to do neither.  All the fiscal benefits of a CPI correction go to deficit reduction. Treat it like it is – as a technical correction to more accurately measure inflation. It is not a policy change and therefore none of its effects should be mitigated. By increasing Social Security spending on low-income beneficiaries, the Gang of Six plan breaks this fair pain-all-around compromise in favor of one side’s policy preferences.

8. It precludes structural reforms to Medicare and Medicaid.

The Plan says “while maintaining the basic structure of [Medicare and Medicaid].” That language precludes needed fundamental reforms to these programs, as contemplated in Bowles-Simpson, Rivlin-Ryan, or the House-passed budget resolution. We need structural reforms to these programs to flatten their long-term spending trends.

This plan doesn’t even include the modest Medicare eligibility age increase proposed by Sen. Lieberman and endorsed by the President.

9. It does almost nothing to slow health spending growth, and even the $115 B of additional health savings are bracketed.

The Biden group agreed to $203 B of health savings over 10 years. That is pitifully small compared to what is needed.

The Gang of Six plan includes two numbers for health savings: $202 B and $85 B. It appears they are trying to sell two incompatible numbers:  they tell Republicans it’s $202 B, and Democrats it’s $85 B. The documents literally show both numbers with no explanation or clarification about which one binds.

10. It leaves the core trillion dollar ObamaCare health entitlement in place.

This problem is not specific to the Gang’s proposal, but it’s another reason for me to oppose it. Why are we talking about raising taxes and cutting defense spending at the same time that we are creating a new trillion health entitlement promise?

Yes, repealing the CLASS Act is good, but it’s far from sufficient.

11. It makes it harder to do Social Security reform, drops the specific Social Security reforms of Bowles-Simpson and increases Social Security spending.

The Gang’s plan sets up two new procedural barriers to Social Security reform. A Social Security plan cannot be considered in the Senate until and unless the rest of the Gang’s plan has passed the Senate. And 60 votes would be needed not just to break a filibuster, but to vote aye on final passage. Both changes make Social Security reform procedurally harder than it is right now.

The Gang claims the Bowles-Simpson mantle on Social Security reform, yet contains none of the specific Social Security reforms from Bowles-Simpson:

  • raising the Social Security eligibility age;
  • slowing future benefit growth for high earners; or
  • raising the cap on taxable wages.

I hate the last one, but the Gang plan include none of these specific reforms. Sorry, guys, correcting the CPI for a technical flaw and erecting two new procedural hurdles does not count as Social Security reform.

The only specific Social Security policy change the Gang proposes is to increase spending on poor people. The program is going broke and is already in a cash flow deficit and they are increasing entitlement spending.

12. It sets the wrong bar for Social Security reform and tilts reform toward tax increases.

There are two ways to measure whether you have reformed Social Security: “75-year actuarial balance” and “cash flow balance.” The Trustees report both. Bowles-Simpson said their Social Security reform had to meet both tests.

The Gang’s plan sets 75-year actuarial balance as the only test. This is the easier bar, and this way of measuring reform tilts the playing field toward short-term patches and tax increases. It’s a repeat of the “permanent tax increases for temporary spending changes” problem I describe above. The only way to guarantee a permanent (or even long-term) solution on Social Security is to require a reform plan meet the cash flow balance test (as well as the easier 75-year test).

The Gang’s metric instead will lead to Social Security “reform” that will incrementally tweak benefit spending growth, combine that with a big tax increase, and appear to solve the problem for “75 years.” Then 10-15 years from now we’ll be back in cash flow deficit and we’ll repeat this all over again, only from a higher starting point on taxes. This has happened before, several times.

13. It locks in the net tax increase, then hopes to deliver on the stated tax reform policies.

Procedurally the Gang’s plan would be turned into a budget resolution that can only commit the Senate to a total level of taxation, one that is way too high. After the budget resolution has been passed, then tax reform legislation would move (the plan says “within six months.”) If you are tempted by the promised details of tax reform, remember that those details would be negotiated after the Senate had already committed to a $2.3 trillion tax increase.

Even if I could swallow a $2.3 trillion tax increase, which I can’t, I don’t trust the tax reform process enough to take that risk. The plan offers no procedural guarantees to prevent the tax policies described within it from being ignored by the Senate Finance Committee.

By the way, good luck legislating tax reform that raises taxes $2.3 trillion more revenue than current policy. You’ll create so many more losers than winners that it will be impossible to round up the votes. Even revenue-neutral tax reform is extremely hard because the losers scream more loudly than the winners.

14. It undoes most of the benefits of last December’s tax policy battle.

The keep-taxes-low crowd won a significant battle last December when a bipartisan majority of the Congress passed and the President signed a two-year extension of the Bush tax rates. Despite months of intense campaigning by the President, and a press corps that accepted the framing of “letting the Bush tax cuts expire,” the votes in Congress supported a current policy baseline perspective. Despite the rhetoric from the left, Members voted to prevent tax increases.

By framing a $2.3 trillion tax increase as a $1.5 trillion tax cut, the Gang’s plan concedes this hard-fought intellectual ground and makes it easier for those who want to raise taxes even further to achieve that goal. Switching from a current policy to a current law tax baseline biases future legislation toward tax increases.

15. It sets up a tradeoff between marginal income rate cuts and capital tax rates.

The tax reform described in the Gang’s plan is silent on capital taxation. Side conversations suggest the Gang agreed to but did not put on paper a 20% rate for capital gains and dividends. From a pro-growth perspective, lowering marginal income tax rates by raising capital taxation rates is a bad trade. And both the numbers and politics suggest that much of the higher revenues raised from “eliminating tax breaks” would come from higher tax rates on capital rather than scaling back even more popular tax preferences for homeownership, charity, and health insurance.

Lowering the corporate income tax rate is nice, but you get more growth bang for the buck by allowing immediate expensing of investment. If depreciation is treated as a tax expenditure and the lower corporate rates are paid for in part by lengthening depreciation schedules, that will slow growth, not accelerate it.

16. The rate cuts are overpromised because the Gang overestimated the revenue that would be raised from reducing tax expenditures.

I strongly support scaling back or even eliminating most if not all tax preferences. I’d go much further than I could ever get support for from elected Members of Congress. But I want to use the revenue raised from eliminating those tax expenditures to cut rates, not to make spending cuts smaller as the Gang’s plan does.

The Joint Tax Committee warns us that the revenue raised by eliminating a tax preference is less than the measured “tax expenditure,” and often far less, because of the incentive effects. It appears the Gang far overestimated the revenues that would be raised from eliminating tax preferences, and therefore are promising marginal rates they cannot deliver. Those who are attracted by the low promised rates for individual and corporate income should understand that if the revenue raised from eliminating other tax preferences is insufficient, the actual rates in reform will be higher. And that’s assuming you trust a Senate Democratic majority process to deliver the unenforceable tax policy promises described in the Gang’s plan.

Tax experts I trust tell me they can’t see how you could design a tax reform that hits the revenue targets promised (even with a +$2.3T revenue increase) and get statutory rates as low as promised. The revenue raised from “reforming” these preferences won’t be enough to lower rates that much, and repeal the AMT, and move to a territorial system, and reduce deficits.

17. The plan proposes a deficit trigger mechanism that might include automatic tax increases.

The President proposed a version of this – a trigger that would guarantee that future deficits do not exceed a given target. The Gang’s target is procedurally weaker but still dangerous. I hate big future deficits but hate as much any process which makes it easier to raise future taxes to address those deficits. The Gang’s trigger is ambiguous on this point, and the legislative language would be drafted by the Senate’s Democratic majority.

Like many others, I am attracted to Members working across the aisle and breaking the natural partisan divide. For me, the substance trumps that, and the substance of this plan is simply terrible.

Jim Capretta and Charles Blahous have also commented on the Gang of Six’s plan.

(photo credit: Graham White)

Understanding Cut, Cap, and Balance

Understanding Cut, Cap, and Balance

Sometime this week the House of Representatives will consider Rep. Jason Chaffetz’ H.R. 2560, the “Cut, Cap & Balance Act.”

We are entering the arcane world of budget process, so this could be tough sledding. I will do my best to distill the essential elements and simplify it.

The key to understanding this bill is that it focuses on government spending, rather than on taxes or deficits. The bill would achieve significant deficit reduction through cutting and limiting spending, and all of its mechanisms use spending rather than deficit targets.

Surprise, surprise: the bill consists of three parts.

  1. Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. (I explain a sequester below.) The intent of this section is to force Congress and the President to cut spending immediately.
  2. Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.
  3. Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).

What is a sequester?

A sequester is an automatic across-the-board proportional spending cut written into law and implemented by the Office of Management and Budget (OMB). It is usually combined with some kind of budget target and designed as a backup measure to force legislative action to hit that target.

Example

Imagine there are 10 government programs that spend $50 each. Congress passes and the President signs a law that includes a spending target of $490, a deadline of December 31st, and an across-the-board sequester.

If new laws are not enacted by December 31 to reducing spending to $490, then the sequester kicks in. OMB cuts all 10 programs by whatever percentage is needed to hit the target. In this case, each $50 program is cut by 2%, to $49, to hit the aggregate spending target.

If the new law were to exempt five of the 10 programs from the sequester, then the remaining programs would be subject to a 4% cut to hit the same spending target.

If Congress doesn’t like the results of an anticipated sequester, they can and should enact a new law before December 31 which hits $490 in a different way. They could cut one program by 20% ($10) and leave the other 49 programs untouched, for example.

Types of sequesters

There are discretionary sequesters which apply to programs that face annual appropriations.

There is a mandatory sequester, which is designed to apply to mandatory/entitlement spending.

Or you could do a spending sequester which applies to both discretionary and mandatory spending.

In March the President floated the idea of a sequester that would raise taxes as well as increase spending.

The challenge: exemptions

The hard part of designing a sequester mechanism is rounding up the votes for a bill that includes an automatic across-the-board cut. Members of Congress will say, “I support your spending target, and I support the hammer of creating a sequester, but I can’t vote for it if the sequester would cut X. Give X an exemption from the sequester and I’ll vote for your bill.”

The exemptions to the sequester are the key that shapes subsequent Congressional negotiations. If your spending priorities are exempted from the sequester, then you have less incentive to cut a deal after this new law is in effect. You have leverage in the negotiations.

In addition, Members expose themselves to political risk when they vote for the creation of an across-the-board sequester. This is why all mandatory sequesters enacted so far have exempted Social Security, even though Social Security is the largest component of mandatory spending.

The spending limits in Cut and Cap

I support the numeric spending targets in the Cup and Cap sections. For me the most important number is “below 20% of GDP” in the cap section. I think that’s the right target, and it is the primary reason I support this bill.

For comparison:

  • Federal spending in the 50 years preceding the Obama Administration averaged 20.2% of GDP.
  • Federal spending in 2009 hit an all-time post-WWII high of 24.7% 28.5% of GDP.
  • Under the President’s original budget, it would be 23.6% this year, 22.7% in 2013, and then begin a steady climb to 24.5% of GDP at the end of the decade in 2021. Since the President didn’t provide detail with his second round budget, I can’t provide parallel figures for that.
  • The 23.6% figures means federal spending will be 15% larger, measured as a share of the economy, then it has historically been.

Those extreme spending shares are the result of several factors: higher automatic stabilizer payments in a weak economy, government actions like stimulus laws and ObamaCare, and long-term entitlement spending trends that build gradually over time.

Anticipating the replies from my left-of-center friends, yes, I am willing to make whatever changes are needed to the big 3 entitlements to stay within this cap. I would rather change the nature of future government benefit promises than see the private sector shrink.

The sequesters in Cut and Cap

Most Members of Congress complain that automatic sequester mechanisms include programs they don’t want to cut. I have the opposite complaint – the sequesters in this bill exempt too much. In particular, both the mandatory sequester in the Cut section and the across-the-board sequester in the Cap section exclude Social Security, Medicare, military personnel, and interest costs. While military personnel costs would rank high on my list of spending priorities, I think the best sequester mechanisms apply to all non-interest spending.

In particular, we need to address spending trends in the big three entitlements. By exempting Social Security and Medicare from the sequester, this bill makes it that much harder for Congress to bite the bullet and make needed changes in both programs. It is easy to understand the legislative necessity that drove this decision, but it’s a big policy mistake nonetheless.

At the same time, these sequester mechanisms are much better than past ones enacted into law, which exempted hundreds of programs from the across-the-board cut. A well-designed sequester is not supposed to be the mechanism that cuts spending. It is supposed to be the forcing mechanism that convinces Congress to make decisions to cut spending. If you exempt too much, then the incentive placed on Congress is even weaker.

Debt limit – Balanced Budget Amendment

It is important to understand that the debt limit increase in this bill is not just tied to any Balanced Budget Amendment to the Constitution, but to one which meets certain parameters. The BBA must not just guarantee a balanced budget. It must also limit spending as a percent of GDP as in the Cap section of this bill, and it must raise the legislative bar for tax increases to a two-thirds vote of both the House and Senate.

It might therefore be more appropriate to think of this as a “Balanced Budget through Spending Cuts Amendment.”

I support balancing the budget through cutting spending rather than raising taxes. I don’t feel strongly either way about whether or not this should be enshrined in the Constitution. I lean a little against, because I hate messing with the Constitution.

All that is irrelevant, however, because even if this kind of BBA did pass both Houses of Congress, it would take many years for three-fifths three-fourths of the States to ratify it as an amendment to the Constitution. Federal budget problems are upon us now – we can’t wait for a Balanced Budget Amendment to be ratified. While this part of the bill is useful to make a point, I fear it serves as a distraction from actually cutting spending.

Since Congress will not pass a Balanced Budget Amendment through both Houses in the next two weeks, and since this section makes a debt limit increase contingent upon such passage, I have a big problem here. That problem is solved as long as some other bill becomes law soon to increase the debt limit.

Summary of my views on Cut, Cap, and Balance

I recommend supporting this bill even with its significant imperfections. I place enormous value on the creation of an enforceable cap on total government spending.

Good

  • Focuses on the problem I think needs to be solved: too high and too rapidly growing government spending;
  • Cuts spending 2012 and creates a sequester to enforce those cuts;
  • Caps federal spending below 20% of GDP and phases down to that over a few years;
  • Creates a sequester mechanism to force spending cuts to hit those levels;
  • The mandatory spending sequesters are far broader and therefore superior to those enacted in the past; and
  • The form of the Balanced Budget Amendment, which would drive spending cuts rather than tax increases, is good.

Bad

  • The sequester exempts too much, and in particular it exempts the two largest entitlement spending programs, Social Security and Medicare. If enacted, this bill might make it legislatively harder to reform these two programs. That’s a huge problem.
  • While it appears to increase the debt limit, it sets conditions that won’t be met in time. This problem is solved as long as some other bill becomes law soon to increase the debt limit.
  • I lean against amending the Constitution, even for a Balanced Budget Amendment whose form I like. And the legislative reality means time spent on a BBA could be better spent trying to cut spending.

No bill is perfect. In my view, the good far outweighs the bad in this bill.

(photo credit: Alan Bedenko)

The substance of the budget negotiations

The substance of the budget negotiations

It appears the primary action on budget negotiations has shifted from the White House to a discussion between Leaders McConnell and Reid. Still, the White House discussions appear to be continuing, and even if they fall apart, the positions of the various parties are still important.

Piecing together information on a moving target from several sources, here’s my best interpretation of where things stood as of late Thursday / Friday. I believe this is consistent with most reporting from major news sources. I think it’s also somewhat more detailed, at least compared to anything I have seen so far. If knowledgeable insiders wants to suggest corrections to what I describe below, please email me.

There are three levels of negotiations:

  1. The Biden group:  VP Biden, Budget Director Jack Lew, Treasury Secretary Geithner, and NEC Director Sperling, negotiating with House Majority Leader Cantor, House Minority Leader Pelosi, Senate Majority Whip Durbin, and Senate Minority Whip Kyl;
  2. Discussions between the Speaker and the President about a possible Grand Bargain; and
  3. A new round of discussions between Senate Minority Leader McConnell and Senate Majority Leader Reid.

I explained Leader McConnell’s proposal last Thursday, but cannot provide any additional detail on the substance of his negotiations with Leader Reid, such as whether they are thinking of including some or all of the agreed-upon savings provisions from the Biden group.

I will therefore focus on my admittedly imperfect understanding of the substance of the Biden group negotiations and the Grand Bargain discussions.

The Biden group

This negotiation appears to be working under a least common denominator principle. Only those policy changes that all parties agree to are included. This kind of approach results in a smaller package and less savings the more people and the wider the perspectives you include in the negotiation, so it’s unsurprising that this is a modest package.

As I understand it, the most recent least common denominator of that group includes:

  • $203 B in health mandatory savings over 10 years. All of this is spending cuts (technically, reductions in the rate of spending growth). I think that “health” here includes only Medicare and Medicaid, with maybe a few billion savings from cutting a bell or whistle attached to the Affordable Care Act (aka ObamaCare). Of this $203 B in savings, $195 B comes from traditional cuts in how much the government pays a doctor, hospital, or other health provider for a given service. The other $8 B comes, I think, from changes that more directly affect beneficiaries (maybe a smidge more means-testing or higher copays, these amounts are small enough to likely be trivial in their effect).
  • $220 B in other mandatory savings over 10 years. I understand that one quarter of this ($55 B) comes from policy changes that would look to an average person like a spending cut. The other $165 B are real policy changes that involve policy pain to certain constituencies, but to the average person they don’t look like spending cuts. Higher fees on Fannie & Freddie, on defined benefit pension plans, on aviation, and telecommunications spectrum and property sales all fit in this box because they are technically user fees rather than tax increases.. This is real deficit reduction and these are not gimmicks. Even though they are technically classified as spending cuts, you cannot conclude that they actually reduce government spending or the size of government (good luck figuring that one out – it’s an accounting convention).
  • $1,050 B ($1.05 trillion) in discretionary savings over 10 years. I understand this is a $2 B cut in the topline for next year (FY12) relative to FY11. After that, the topline would be allowed to grow at 2/3 the rate of inflation. The savings figure is (apparently) calculated by subtracting the resulting amounts from a baseline under which spending grows at the rate of inflation.
  • No change to how CPI is calculated, as was apparently discussed as part of a Grand Bargain.

That totals $1.473 trillion of savings over 10 years. I use a 20% rule-of-thumb for interest savings over this timeframe, meaning I assume almost $300 B of interest savings would result from these amounts of direct policy changes. If that’s right, you’re looking at a ballpark of just under $1.8 trillion of savings over 10 years.

As with any measure of deficit reduction, you have to be careful about the baseline. Unfortunately, I don’t know the discretionary baseline they’re using here, and in particular what it assumes for war costs in Iraq and Afghanistan. This makes me skeptical about the $1.05 trillion number until I get clarification.

This package is, I understand, smaller than it was earlier last week. I understand the Biden group had been circling around about $330 – $350 B in health savings and about $260 – 330 B in other mandatory savings. I am told that Democrats pulled items off the list throughout the week, insisting they were conditional on Republicans agreeing to tax increases, resulting in the above position late in the week.

This would explain the “$2 trillion” number you hear coming from the President and Congressional Democrats. I understand the White House / Democratic position to be a package that would score as about $2 trillion of spending reductions plus interest savings contingent upon Republicans agreeing to additional tax increases. If Republicans are unwilling to raise taxes, than it appears Democrats are in the ballpark of about $1.75 trillion of spending reductions plus interest savings as described above.

This means the narrative of Democrats insisting on tax increases as part of a deal, and Republicans refusing those tax increases, applies not just to the Grand Bargain discussions, but also to the more modest results of the Biden group.

The President’s position in a so-called Grand Bargain

I don’t know the details of the Speaker’s position in the so-called Grand Bargain discussions, but I think I understand the President’s position in those talks. It includes the following on the spending side:

  • all of the above from the Biden group (including, I think, the larger health and other mandatory savings amounts);
  • plus an additional $150ish B of discretionary savings over 10 years, for a total of about $1.2 trillion relative to an inflation baseline (with the same caveat as above);
  • plus making technical corrections to the Consumer Price Index as a measure of inflation, which would slow the growth of future Social Security COLAs and increase future income tax revenues;
  • plus raising the Medicare eligibility age to match scheduled increases in the Social Security age;
  • plus [a little?] more means-testing and higher copayments in Medicare, and maybe some Medigap reforms;

on the tax side, I understand the President’s proposal would:

  • make permanent the bottom four income tax rates and other tax relief provisions not for “the rich,” preventing tax increases scheduled for 2013;
  • allow the top two individual income tax rates to increase in 2013;
  • increase total government revenues by about $1 trillion over the next ten years (again, I’m skeptical because I don’t know the baseline here); and
  • include some form of commitment to future comprehensive tax reform, with specific parameters that I don’t yet know.

(photo credit: White House by Pete Souza)

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