by Keith Hennessee
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.
Art courtesy of Rich and Lucy @ www.TerrellAfterMath.com
In reality Obama is so full of crap that he will get nothing off the ground
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 po