Former Bush economic advisers pan Gang of Six proposal
posted at 11:45 am on July 21, 2011 by Ed Morrissey
“Proposal” might be giving it more credit than it deserves at this point. Right now, the Gang of Six entry into the deficit reduction/debt ceiling debate better resembles a statement of principles with few specifics, which is one reason why no one expects the Go-6 to have a bill ready for a vote for weeks or perhaps even months. Barack Obama has already begun hedging his “no short-term debt ceiling increase” pledge in order to accommodate the Go-6 team. Right now, there isn’t even enough specifics for the CBO to score the plan to determine whether it actually accomplishes what its backers claim.
To say that the Go-6 is getting mixed reviews among conservatives would be a rather generous assessment. Still, the plan has drawn some praise on the Right, most notably from Larry Kudlow at National Review, who calls it “pro-growth”:
The best part of the Gang of Six plan is a reduction in the top personal tax rate from 35 percent to a range of 23 to 29 percent. For businesses, the rate would drop in the same manner. And thecorporate tax would be territorial rather than global, thereby avoiding the double tax on foreign earnings of U.S. companies. Finally, the plan would abolish the $1.7 trillion alternative minimum tax.That’s huge. It’s another pro-growth tax reform.
In a more perfect world, the Congressional Budget Office would score the pro-growth incentives of lower marginal tax rates in terms of a tax-revenue increase. That’s the history stretching back to JFK, Reagan, and George W. Bush circa 2003.
And right now, the Gang of Six package is the first real pro-growth tax reform of all the debt-ceiling plans. It acknowledges the need for a growth element in order to solve our budget bankruptcy and limit spending, deficits, and debt. It would boost the economy and broaden the base (by reforming or limiting numerous deductions). As a result, more income would be taxed at lower rates in a rising economy, throwing off a hell of a lot more revenues than we’re getting today. Rising revenues from lower tax rates are a good thing.
Kudlow acknowledges that the plan falls short in other areas, but argues that it’s good enough to be given a chance to work:
In the Gang of Six plan, there are a lot of planned spending cuts across-the-board for all the cabinet departments. There is spending-cap enforcement. And, importantly, the plan would repeal the CLASS Act, an Obamacare entitlement for long-term health-care insurance that would exponentially elevate future federal spending. This would mark the first step toward undoing Obamacare.
But — and I acknowledge this weakness — the health-care savings look inadequate and murky. And the Social Security reform is completely unknown. The cut-and-cap Paul Ryan budget, which would reduce spending by $110 billion in 2012, or $6 trillion over ten years, looks a lot more powerfulthan the Gang of Six proposal. Ditto for the Ryan domestic discretionary budget cut of $76 billion in 2012, which stretches out to $1.8 trillion in ten years. And of course, I acknowledge that two-to-one or three-to-one formulas for spending cuts and tax increases have always broken down in the past. You get the taxes but not the lower spending.
Chuck Blahous argues that the Social Security reform isn’t just unknown, it actually erects barriers to later SocSec reform:
The text of the Gang of Six document offers obeisance to a talking point that has become common on the political left: that Social Security is not really a part of our broader deficit problem, so there should be no discussion of Social Security reform in a deficit reduction context. Specifically, the document states that Social Security reform should be “isolated from deficit reduction” and proposes a procedure by which Social Security reform would be considered “if and only if” a comprehensive deficit reduction bill has “already received 60 votes” in the Senate. It further requires that the Social Security reforms themselves must receive 60 votes. This approach contains several problems.
First, Social Security is a significant contributor to the current federal deficit, and current policies are intermingling Social Security finances and the general government accounts in an especially direct way. This year, for example, incoming program taxes will fall short of benefit payments by more than $150 billion. This is in part because Congress recently cut the payroll tax and transferred general government revenues to the Trust Fund to make up the difference (though Social Security would still have added to the deficit even without this action).
If bipartisan reformers do not confront these realities, they will not be able to counter existing factual confusion and explain the reality of Social Security’s current cash shortfall, its relationship to the larger budget, and the ramifications of further subsidization of Social Security from the general fund (not only occurring this year, but being proposed by some for extension into next year). Second, while reformers should perhaps favor “separating” Social Security if this expedites action, this framework does not so expedite. It instead indicates that Social Security reform should only proceed if broader deficit reduction is voted through first. This is highly problematic for a program with its own shortfall to resolve irrespective of problems elsewhere in the budget.
Blahous calls the Go-6 proposal “a step backward” for Social Security reform — and he was a defender of the Simpson-Bowles plan earlier this year. Blahous gives five substantial reasons to oppose the Go-6 plan, but another former Bush economic adviser, Keith Hennessey, gives 17 of them. Here are a few:
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.
Hennessey echoes Blahous on the plan’s interference on entitlement reform, not just Social Security but also Medicare and Medicaid:
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.
After reading through Hennessey’s and Blahous’ detailed objections, I doubt that conservatives would get behind the Go-6 plan. Since the Senate isn’t likely to pass the CCB bill that came out of the House — Harry Reid’s scheduling of the vote is a pretty clear indication that he can defeat it — that’s probably going to leave us with the McConnell plan. At least that keeps the issue of structural reform and deficit control on the table, rather than providing a false “solution” that will fall apart like a cheap suit within the next couple of years.