BBO Discussion Forums: Deficit Reduction - BBO Discussion Forums

It's been interesting to watch the debates over the (recently leaked) Simpson-Bowles deficit reduction plan.

From my perspective, one of the most interesting aspects of the plan is the recommendation to eliminate mortgage interest deductions. As I've noted in the past, I'm all in favor of tax code simplification and agree that mortgage interest deductions should be eliminated. {Please note, I say this as a home owner with a decent sized mortgage) With this said and done, eliminating this deduction is going to be a rude awakening for a lot of people. Eliminating the mortgage interest deduction will lead to a significant increase in the cost of financing houses. In turn, this should cause a sharp decrease in housing prices... Not good for folks who were using their homes as a primary vehicle for savings.

I'm still trying to make up my minds about the various versions of the plan floating around. At first glance:

1. I am very concerned that most of the "real" cost savings are coming from deus ex machina solution that scales the cost of health care back to GNP growth + 1% starting in 2020. (This seems highly unrealisitc, especially given the failure to constrain Medicare / Medicaid costs over the last decade). The commission seems to be punting on the real issue.

2. I am very glad to see tax code simplication front and center.

3. I'm also happy to see serious discussion about cutting military spending and farm subsidies. (However, I don't think that we're cutting nearly as deeply as will be required)

4. Overall, I think that much more significiant tax hikes are going to be required (see the earlier comment about assumptions about cost savings from health care). One way or another, we're going to need some combination of a carbon tax, a VAT, and removing the $106K limit on Social Security contributions.

5. I don't think that Social Security can be reformed by raising the retirement age. It strikes me as wishful thinking. (Think how difficult it is for white collar workers to find productive work when they're 65. My folks were both bribed to take early retirement to make way for younger / cheaper workers. Now think about blue collar workers...
Do we really think that folks can work as brick layers / construction workers / etc. past 60?)

Good (in depth) analysis of the relationship between mortgage interest deductions and home ownership.
Makes many of the same points that I did...

http://modeledbehavi...-be-eliminated/

I knew of the commission of course. The first that I saw of any recommendations was in the Post this morning.

Details will emerge. Here is the part I like best: Its size. The editorial observed that there will be something for everyone to hate. I like that. We have to deal with this and I understand that that means me too, the worry is always that it is me dis-proportionately.

This business about extending the working age is tricky, very tricky. My own retirement at age 65 is a long story, too long to tell, but strange as it may seem I believe that I increased my pension by retiring at 65 instead of 70. At the very least I did not particularly reduce my pension, nor my income. It's a bit nuts.


And true, my brick laying isn't what it used to be. It never was, actually.


But we do have to deal with the problem and I really like the sheer size of the proposals. The Post quoted someone as saying that after this people will stop saying silly things such as suggesting we can solve the problem by eliminating earmarks. Indeed.

Cutting military spending is all well and good (I'm in favor of it, actually), but at the same time we will need to cut back on military operations as well, or we're going to be putting our young people even more in harm's way, and with no good reason.

kenberg, on 2010-November-11, 14:48, said:

Yes, finally something that is serious. Politicians who want to scrap something can be asked, "What offset do you propose?"

I do disagree with Richard about increasing the age for receiving full social security benefits. In my opinion the increases should be made, but should be gradual to give folks the chance to plan. And lower benefits should still be available from 62 for those who can't work productively.

hrothgar, on 2010-November-11, 14:16, said:

I think this is the only way SS reform is possible. I can't see Congress scrapping the system for something very different, and increasing the NORMAL Retirement Age (NRA) is easily justifiable (explainable) based on life expectancy increases since the creation of the system. I emphasized NORMAL because retirement is still allowable at age 62 -- you just get a smaller portion of your NORMAL benefit because you are taking it earlier. You and I have a NORMAL retirement age of 67; if we choose to begin receiving benefits at age 62 instead, we'd get 70% of our NORMAL benefit. If NORMAL retirement age is raised to 69, someone who begins payments at age 62 would instead get about 60% of their NORMAL benefit. So, increasing the NRA is really just an across-the-board benefit reduction (cost savings) that isn't called a benefit reduction; it doesn't prevent people from retiring at an earlier age.

And I agree that the contribution limit has got to go.

The proposal seems to include massive tax cuts, especially at the upper end of the income scale. Yes, I know they want to do away with most deductions as well. Nonetheless, I find it hard to consider any deficit reduction plan that includes huge tax cuts for the wealthy as a serious plan. Even the most right-wing of economists do not really believe that cutting taxes increases government revenues! I really think the starting point for a serious deficit reduction plan should be to keep all taxes at least at their current rates, with the possibility of tax increases for people and corporations that have benefitted most from the transfer of wealth upward through the last few decades. A few "easy calls" that I didn't see in the deficit commission proposals include ending tax breaks for oil companies (I heard somewhere that Exxon made billions in profit last year, and not only paid no corporate taxes but also got a big refund from the government) and taxing capital gains as real income (ending the exception that allows Warren Buffet to pay a lower tax rate than his secretary).

My understanding of Social Security is that the system was supposed to build up a big surplus over the past couple decades, which would then be used to compensate for the potential shortfall when baby boomers retire. In fact the payroll tax did generate just such a surplus (over a trillion dollars worth), but this surplus was then spent by the federal government on other priorities rather than being kept in (as Al Gore called it) the Social Security "lockbox." Now the suggestion is that Social Security is in trouble... but really what happened is that the government abused the payroll tax (revenue from which was supposed to be used to fund Social Security and Medicare) to fund the general government coffers, then gave away huge amounts of money through Bush Jr.'s tax breaks. This being the case, I can't really support drastic changes in Social Security, as that program is not really the issue.

Medicare potentially is a more serious problem. We will probably need to categorize certain kinds of end-of-life care as things that medicare simply cannot foot the bill for. However, since congress just passed a huge health care reform bill that is supposed to reduce the cost growth for insurance, it might be reasonable to wait a few years for the new programs to take effect before making massive changes to medicare.

The other budget cuts proposed are unfortunate to various degrees, but are probably necessary "medicine" to reign back out of control spending.

Mortgage interest deduction has been removed in Sweden and UK, and significantly reduced in Denmark. It is very hard to find an economist who is in favor of mortgage interest deduction - not surprising since mortgage interest deduction is both anti-social (rich people benefit more from it than poor people) and give skew incitements (depending on the implementation it may give households an artificial incitement to chose owning over renting and/or to chose borrowing over saving and/or to move more or less frequently than they otherwise would). Like Richard I say this as a home owner who benefit substantially from the way the tax system favors home owners over renters.

But it is almost equally hard to find a politician who is brave enough to say in public that it will be necessary to get rid of the tax discrimination in favor of owners versus renters. As with so many other subsidies, the ones who benefit are very much aware of the fact that they benefit, while those who get screwed (suffering from the high tax and VAT rates necessary to subsidize the housing sector while receiving little or no benefit) tend not to be aware that they get screwed. So although getting rid of tax incitements affecting the housing sector would probably benefit society as a whole, those who implement it will be punished by the voters.

Of course a major complication is that you can't make such a radical change to the tax structure from one day to another without creating havoc for existing home owners. It would take decades, and then there is a risk of some future government halting the process.

As people have alluded to, the real problem is voters.

It's easy to come up with a 'deficit reduction plan' but it's hard to convince voters that reducing the deficit is more important than them continuing to be able to consume more than they produce. Surely anything that further erodes property values would be politically suicidal, for the next few years at least.

Spending reductions will help but I doubt that sizeable cuts can be made and last for any length of time. If there is a solution, it will be a combination of capping spending at it's current level while trying to grow the economy enough to pay for that spending. You certainly won't do that with Adam's suggestion of increased taxes on corporations and wealthy individuals.

hrothgar, on 2010-November-11, 14:16, said:

Agree about the mortgage interest deduction, but politically I just don't see this happening. It is essentially welfare for the middle and upper middle class, but you have a strong lobby in the NAR, MBA and construction groups. Homebuilding has been the main cause of sprawl in the southwest where land is plentiful.

awm, on 2010-November-11, 16:50, said:

But some right-wing politicians and voters who don't understand economics actually do believe that (or say they do, anyway).

I'm hoping that many of the easy calls make it into whatever the eventual solution turns out to be.

awm, on 2010-November-11, 16:50, said:

This has a huge potential for savings. I want to see it done.

helene_t, on 2010-November-11, 16:58, said:

Up until about 1990, all interest payments (car loans, credit card payments, etc) was tax deductible. That was phased out over 5 years (only 80% deductible in year 1, etc). So, I'd expect a 10-year phase-in for eliminating the mortgage deduction.

nigel_k, on 2010-November-11, 17:19, said:

Here's some history about our top income tax rate and GDP.

From 1947 through 1963, the top income tax rate was over 80% every year. The GDP grew from 1.7922 trillion to 3.2067 trillion (inflation adjusted). That's an increase of 79% over 17 years, or 3.48% a year (with the magic of compound interest).

From 1964 through 1981, the top income tax rate was between 69.5% and 80% every year. The GDP grew from 3.2067 trillion to 5.9872 trillion. That's an increase of 87% over 18 years, or 3.53% a year.

From 1982 through 1986, the top income tax rate was 50%. The GDP grew from 5.9872 trillion to 7.0865 trillion. That's an increase of 3.43% per year over 5 years.

For 1987, the top income tax rate was 38.5% and GDP grew from 7.0865 trillion to 7.3133 trillion, an increase of 3.20% for the year.

From 1988 through 1992, the top income tax rate was between 28% and 31%. The GDP grew from 7.3133 trillion to 8.0151 trillion. That's 1.85% per year.

From 1993 through 2002, the top income tax rate was between 38.6% and 39.6%. The GDP grew from 8.0151 trillion to 11.553 trillion. That's 3.72% per year.

From 2003 through 2007 (ignoring the current downturn), the top income tax rate was 35%. GDP grew from 11.553 trillion to 13.2541 trillion. That's 2.79% per year.

If we look at 2003 through 2009, again top income tax rate 35%, GDP frew from 11.553 trillion to 12.9874 trillion. That's 1.69% per year.

Looking at this data, it's fairly clear that higher taxes on the wealthy correlate to high growth in GDP. Obviously there are many other things going on during these years, many other possible "explanations" for this phenomenon besides causation. But it is very consistent. People say things like "we have to cut taxes on the wealthy to stimulate the economy" but I don't really think the hard evidence is there. If we want to raise federal revenues, we should not reject tax hikes on the wealthy simply because of fears about the economy. Historically the economy has done better when we have higher top income tax rates.

Certainly it's always tempting to hike taxes on other people. But at the same time, I think it's fair to ask people with more money to sacrifice something to fix our country's deficit, especially since the overall wealth of the top 1% of taxpayers has increased dramatically relative to everyone else in the last few years. I'd be willing to see my personal income taxes go up (and I don't make anywhere near enough to be in the top bracket) provided that everyone who makes more money than me had to pay at least as high a tax rate as I do. That seems fair right? I'm not even demanding progressive taxation. But the fact is that right now, billionaire hedge fund managers are paying lower percentage tax rates than me (mostly because of capital gains tax).

awm, on 2010-November-11, 17:55, said:

There is enough data out there that anyone can cherry pick something to support their conclusion. For example, to avoid the problem of comparing across different time periods, you could look at effective top tax rates vs growth in North Korea compared to South Korea, or East Germany compared to West Germany. But you probably won't find that helps you.

The bigger problem is that, in real terms, a tax increase is not paid for by those who have their wealth reduced but by those who are forced to reduce their consumption. If you make Bill Gates pay more tax, he will not reduce what he spends on himself. He will either switch to investments that are taxable in other countries or will simply reduce the amount he invests. Either way, the real losers are those whose jobs are destroyed as a result of the reduced investment.

Debt Plan Ideas Draw Scorn of Liberals and Tea Party

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This ever-increasing polarization is nuts. Both sides want a free lunch, with Obama in the middle trying to reinstitute fiscal responsibility. Anyway, invective should reach the red level next year.

So the federal government has a big deficit. And the jobs situation is lousy. At the same time, we have companies making record profits (in the billions)... and rather than use those profits to hire more people or even return them to investors, they are building up their "cash reserves." And the companies doing this aren't paying a cent in taxes... in fact the government is paying them a "tax rebate" instead.

We also have wealthy individuals who are making millions or billions a year. The ratio of income for the top 1% to the US average is near an all-time high. This income gap is higher than in any other wealthy nation, and higher than it's been in the US at any time since immediately before the great depression. And these wealthy individuals aren't paying much in taxes... most of their income is taxed at the low capital gains rate of 15% (substantially less than the tax rate working-class people pay).

Considering that the government has massive debt and the middle class is suffering, it seems logical that if we want to fix our nation's problems we should ask those companies and individuals who have benefitted massively over the last few years to pay for at least some of it. This seems like a very simple fairness issue to me. Tax rates for the rich in other wealthy countries are a lot higher than in the US.

Yet the "deficit commission" wants to cut wealthy people's taxes more, to modern-era lows. And the only explanation people make is claims that raising taxes on the rich will somehow hurt the economy. Seems to me that the burden of proof is on people who want to perpetuate the massive unfair transfer of wealth upwards... and the facts simply aren't on their side. The best economic period in the USA in my life time was during the Clinton years (1992-2000). One of the first things Clinton did was raise taxes on the wealthy and one of the first things his successor did was lower them again.

Sure, things are probably different in communist regimes. If the tax rate on the wealthy was 100% and most of that money was used to spy on and lock up our own citizens, yes that would be worse than a free enterprise system. But I'm not trying to "cherry-pick" anything. I'm simply using data from the USA (the country we're talking about after all) for the last few decades. The data seems to imply that a tax rate of 40-50% on the top bracket will not substantially hurt the economy, and might actually help it.

Krugman has an interesting write up on this topic

http://www.nytimes.c.../12krugman.html

According to Ezra Klein, the draft proposal will require that 14 of 18 committee members agree before the recommendations are officially passed on. Anyone taking that bet? Please post odds.

I really feel for Paul Krugman. I was once advised by a kind, wise, older bridge player that if I shake my head like that when things go awry I'll go crazy. I don't know Krugman keeps his head attached.

y66, on 2010-November-12, 07:06, said:

The point is that if you can get 14 of 18 commission members (with varying political positions/backgrounds) to agree to a set of recommendations, you ought to be able to get enough congressmen to agree to pass it. These people are doing the work that a congressional committee should be doing, if congressional committees actually did bipartisan work. I think there's greater than a 75% chance that the commission will pass something, although it won't be exactly the first draft, which is all that we have now. The commission is comprised of 14 people who agreed to take on the job of coming up with a proposal that they can agree on, not political hacks who are protecting their home districts.

hrothgar, on 2010-November-12, 06:25, said:

If indeed the effect would be an even larger disparity between the wealthy and the rest of us, then it will rightly be DOA. I'll hold off until more is clear, but such a plan would be disastrous. This is not a matter of envy. I have never had a problem with some people owning yachts. But having a small group in luxury while the average guy is barely scraping by is no way to run a country. It simply won't work very well, regardless of how much empathy one does or doesn't feel for those on the edge.

Yes, I had noticed the quite low tax rates. Hmmm. OK, but then there is a lot of talk of reform. Yes, I have a highly developed skepticism for anything called reform. (What was called a reform school when I was young is now called a juvenile detention center. I am not sure that the name change has helped.) Maybe this time it will be different.

Alan Simpson has always had quite a mouth and certainly talking about cows and tits is not a great approach to cooperative discussion. But I had high hopes for this commission and it would be a damn shame if, as suggested, they blew it. I think that there are more than a few of us who realize that the country cannot keep spending money that it doesn't have, and would accept some painful steps to address it if we believed there was a serious plan.


We will see what comes out when they actually make their report. It's an opportunity for 18 people to make a huge impact on the future of the country. I sure as hell hope that they understand this. They should not spend their time engaging in an activity that wc decorum forbids mentioning. Obama says he will wait for the report to appear. Me too.