Today the President announces his $3 trillion deficit plan. First reaction: meh.
We get to count (once again) a trillion from the drawdown in Iraq and Afghanistan. That will be combined with $1.5 trillion in revenue and another $500 billion in cuts. Let’s start with revenue. We are going to hear—endlessly—about the Buffet rule. The Oracle of Omaha notes that his secretary pays at a higher marginal rate than he does. Of course, the top marginal rate for income over $379k is 35 percent. I don’t know what the Oracle pays his secretarial staff, but I know that the Oracle can only achieve a lower rate by taking his compensation primarily as investment income rather than salary. Fine. The president could not have gotten a millionaire tax passed when the Democrats controlled both chambers. He most certainly is not going to get it now. Indeed, there is no plan to do so. As the NYT reports:
Administration officials said Sunday night that they were not including any revenue from the Buffett Rule in Mr. Obama’s overall $3 trillion proposal, adding that it was more of a guiding principle the president will adopt as budget negotiations with Congress advance.
Under Mr. Obama’s proposal, $800 billion of the $1.5 trillion in tax increases would come from allowing the Bush-era tax cuts to expire. The other $700 billion, aides said, would come from a combination of closing loopholes and limiting deductions among individuals making more than $200,000 a year and families making more than $250,000.
So the millionaire tax is only a rhetorical ploy designed to warm the populist heart. It will play well—it is hoped—to frame the 2012 election as a choice between the millionaire-coddling GOP and the Hope and Change populism of the Democrats. Since the millionaire tax is not part of a deficit program, it is nothing but a campaign meme.
Even if the millionaire tax were serious, the real revenue isn’t to be extracted from the Oracle of Omaha, it must be extracted from the upper-middle class. And as the above quote suggests, that is precisely the goal. I remain astounded that the media still refers to this as the Bush tax cut. The Obama administration negotiated an extension of these very tax cuts on December 17, 2010, before the start of the current Congress. As you may recall, the President still held majorities in both chambers. Given that the extension was passed with unified Democratic control of the House, Senate, and presidency, I remain somewhat puzzled that they are still described as the Bush tax cuts. One might quibble about the applicability of the misnamed Pottery Barn rule (“you break it, you bought it”). But most certainly, if you pass a bill when you control majorities in both chambers of Congress, you own it…until you don’t.
The $700 billion in closing loopholes and deductions could be a good thing if part of comprehensive tax reform designed to eliminate the extraordinarily dense network of tax expenditures that comprise the tax code. Many of these are the instruments used in our de facto industrial policy driven, in large, by successful transfer seeking. They distort market signals and provide significant benefits to the top quintile of income earners. Even if their elimination is foolishly prohibited by Grover Nordquist’s tax pledge, anyone who has respect for market mechanisms should welcome their elimination. But my guess is, there will be significant cherry picking in identifying which loopholes and expenditures to target. But even if the elimination of some of these expenditures could be considered a net change, the post Tax Reform Act (1986) decades proved that there were no expenditures that could not be taken back and then resold to the highest bidder.
As for spending cuts, it appears that any hopes that the fiscal crisis would create a foundation for entitlement reform were misplaced. No hope, no change. The President would like to claim $248 billion from Medicare and another $72 billion from Medicaid, with the bulk of the cuts coming from providers. Given that so much of the savings from the Affordable Care Act were to come from these same sources, I find the claim that even more savings are to be found—without forcing the wholesale defection of providers from Medicaid, for example—to be a bit questionable.
There are no proposals for entitlement reform. No announced plans to increase the retirement age and nothing specific (thus far) on means testing of benefits. To the extent that this is the case, it may be little more than another hunt for “waste, fraud, and abuse.” Given the the GOP has long promised to eliminate the same “waste, fraud, and abuse,” it appears that there is room for a bipartisan snipe hunt.
The President has chosen not to promote entitlement reform and has promised to veto any legislation that seeks cuts in spending without increases in taxes. Following the debt ceiling circus from this summer, the President clearly cannot anticipate that the GOP will suddenly embrace tax increases. So there only seems to be a single conclusion one can arrive at: the deficit-cutting plan has little to do with deficits or reforming the key drivers that will lead, ultimately, to the fiscal crisis that the OMB, the GAO, and the CBO have been predicting for well over a decade.
Since we are entering election season, the lesson should be framed by using the lightly edited words proclaimed by JFK at his inaugural, “the torch has been passed can has been kicked to a new generation of Americans — born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage, and unwilling forced to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world.”
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