Archives: 12/2010

The President’s Fiscal Commission: It’s a Start

Today POLITICO Arena asks

Will implementing President Obama’s Fiscal Commission recommendations require that everyone take a hit?

My response (with tax insights from Jagadeesh Gokhale):

President Obama’s Fiscal Commission Report offers a useful start in reducing our budget deficits and national debt, but it hardly goes far enough. As several of my Cato colleagues have just noted here, here, here, and here, the report recognizes, to its credit, that our corporate income tax structure puts U.S. corporations at a considerable competitive disadvantage against their foreign competitors. And the report keeps military spending cuts on the table, even if there is much more to be cut. Yet by proposing a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years – total federal spending as recently as 2000 was just 18.4 percent of GDP – it plays the old Washington game of calling a slower increase than previously projected a “cut.”

As for taxes, this report should be read in the context of a powerful argument in last Friday’s Wall Street Journal to the effect that over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent, regardless of the top marginal personal income tax rate or whether taxes were cut or raised. What this suggests is that low tax rates spur income growth to leave the government’s revenues undiminished over the long-term. High tax rates do the opposite. It doesn’t take a large leap of faith to believe that this effect would be stronger for those who earn more and pay more in taxes. Indeed, among high earners are the nation’s business leaders – innovators who create new products and jobs – who would respond positively to the growth opportunity provided by a stable, low-tax-rate environment.  So those who believe that we help ourselves by more heavily taxing the rich need to ask themselves whether it might not be better to cut rates and keep them stable instead. Wouldn’t that promote a robust economy and lift all boats – with the government continuing to generate 19 percent in revenues?

None of this has anything to do, of course, with whether our current out-of-control federal government is constitutionally authorized to do all it is doing. But it’s a start toward returning the government to within its constitutional limits. Had those limits been respected – as the Framers understood, unlike New Deal progressives – we wouldn’t be in this mess.

Virginia Obamacare Lawsuit Dismissed

No, not the lawsuit brought by Virginia Attorney General Ken Cuccinelli (in which Cato has been filing amicus briefs), but rather one brought by Jerry Falwell’s Liberty University.  Most notably, the district judge found the individual mandate to be a lawful exercise of Congress’s powers under the Commerce Clause because

individuals’ decisions about how and when to pay for health care are activities that in the aggregate substantially affect the interstate health care market….  Far from ‘inactivity,’ by choosing to forgo insurance, Plaintiffs are making an economic decision to try to pay for health care services later, out of pocket, rather than now, through the purchase of insurance. As Congress found, the total incidence of these economic decisions has a substantial impact on the national market for health care by collectively shifting billions of dollars on to other market participants and driving up the prices of insurance policies.

This analysis echoes that of the Michigan judge who granted the government’s motion to dismiss the Thomas More Legal Center’s lawsuit in October – and is fatally flawed because everything is an “economic decision” that “substantially affects the national market” in something.  If that’s the rationale upon which the Supreme Court ultimately upholds Obamacare, then we are left quite literally with no principled limits on federal power.  Something tells me it won’t be so simple, however, even if the forces of darkness big, “self-checking” government prevail.

Nevertheless, the White House blog is understandably delighted with such rulings, trumpeting yesterday’s decision as yet another on an inexorable and inevitable march to the full vindication of an unprecedented assertion of federal power.  (Question: Was nobody there paying attention to what voters said about all that November 2?)

In any event, as I said in a recent blog post and op-ed, nobody should yet declare victory or concede defeat.  There will be many, many rulings yet, both at the trial court level and on appeal.  This will not end until the Supreme Court rules, most likely in June 2012.  But if you’re keeping track, the next major event is a December 16 summary judgment hearing in Pensacola in the Florida-led 20-state lawsuit – and we should also soon see a final ruling from the Cuccinelli case right before or after Christmas.  Expect the White House to be a bit less chipper about these events.

Overwrought On START

It is unclear whether New Strategic Arms Reduction Treaty (START) will make it to the Senate floor this year or if there are 67 votes for it if it does. According to the White House and arms control boosters, that uncertainty endangers us all by leaving Russia’s nuclear arsenal unmonitored and undermining our non-proliferation agenda. According to pundits, New START’s failure to pass in the lame-duck would be a grievous political wound for Obama adminstration, which is struggling to buy enough Republican votes for ratification.

In an op-ed out today on the National Interest’s website, Owen Cote and I say this talk is mostly hot air. New START just isn’t that big a deal. We write:

[New START] would provide minor increases in intelligence and Russian goodwill. But passing it means handing taxpayers a substantial new tab on top of what we already pay for our bloated nuclear weapons complex. And rather than reducing the arsenal’s size and cost, the treaty props it up…. The real impact of New START is distraction. By faking a drawdown, the treaty keeps Americans from noticing that deterring our enemies requires nothing like the force structure we plan to retain.

Bright Spots in Fiscal Commission Report

President Obama’s Fiscal Commission has produced a serious and sobering analysis of the government’s budget mess, and it provides some of the needed solutions. Three of the report’s main themes are on target: the need to make government leaner, the need to cut business taxes to generate economic growth, and the need to impose tighter budget rules to discipline spending.

The report rejects the view of many Democratic leaders that the welfare state built over the last 80 years must be defended against any and all budget cuts. “Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared. The federal government can and must adapt to the 21st century by transforming itself into a leaner and more efficient operation.” How lean the government should be, and how many agencies to eliminate, will be the central fiscal debate in coming years. Downsizing government is the order of the day.

The report recognizes the need to spur economic growth, particularly by cutting the corporate tax rate. “The corporate income tax, meanwhile, hurts America’s ability to compete… statutory rates in the U.S. are significantly higher than the average for industrialized countries … and our method of taxing foreign income is outside the norm…. the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors.” The report recommends cutting the 35 percent federal corporate tax rate to 28 percent or less to respond to the Global Tax Revolution and to “make America the best place to start a business and create jobs.”

Finally, the report suggests that Congress impose new procedures to enforce budget restraint. However, the rules suggested by the commission are complex and not tight enough. It would be simpler and more powerful to impose a cap on overall federal spending. For example, a law could require that the government’s overall budget not grow faster than general inflation each year else the president would sequester spending across-the-board. Such a cap would be easy for the public to understand and enforce.

In sum, the report provides a useful menu of reform options that incoming members of a more conservative Congress can pursue next year. We need bigger spending cuts than the commission has laid out—as I’ve outlined in this balanced-budget plan—but the commission deserves credit for spurring a national discussion on how to downsize the federal government.

Deficit Reduction Commission Says Military Spending Can and Must be Cut

President Obama’s Fiscal Commission’s report is out and they have wisely kept military spending on the table. Having not seen the accompanying list of specific cuts, it seems that rather than micromanage DoD’s decisions with respect to which weapons systems to cut or keep, the commissioners have laid down a different marker: find the cuts that make sense, but understand that the business-as-usual of the past decade is over.

The report fixes on a number of spending cuts and reforms that Benjamin Friedman and I call for in the Cato Policy Analysis “Budgetary Savings from Military Restraint” including cuts to the civilian workforce (see recommendation 1.10.4). They also hold fast to the proposition that all spending must be on the table, and reject out of hand the notion that military spending must be held sacrosanct. This is bad news for the “defending defense” crowd.

I am not going to comment on the Commission’s other proposals with respect to taxes, social security, health care, etc.  As for specific military spending cuts, this report is less detailed than the preliminary report issued a few weeks ago by Co-chairs Bowles and Simpson. It is appropriate, however, to task the Department of Defense with identifying additional savings (as they do in recommendation 1.11). Responsible cuts can be made if the Pentagon and the White House adopt a strategy of restraint, one that husbands American resources, focuses on a few core missions vital to U.S. national security, and requires other countries to take primary responsibility for their defense.

Washington’s Dishonest Budget Math

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

As I explain in the video below, this disconnect between supposed spending cuts and actual spending increases is the result of politicians creating a system where a spending increase can be called a “spending cut” if outlays don’t climb as fast as previously planned. This “baseline” or “current services” budgeting is a great gimmick for the politicians since they can simultaneously give more money to special interest groups while also telling voters that they are cutting the budget.

This does not mean that the folks at the Fiscal Commission are being deliberately dishonest. This process has been in use for decades and many budget wonks routinely rely on this common practice without giving any thought to whether it misleads voters.

And there are good reasons to collect “current services” data. Those numbers tell lawmakers how much spending has to increase if they, for instance, leave entitlement programs on autopilot (i.e., more senior citizens automatically leading to more Social Security spending).

Nonetheless, the debate about federal budget policy should be honest. If the Fiscal Commission thinks spending should increase at about twice the rate of inflation, and they want higher taxes to finance that spending growth, they should openly argue for that position. And if the hard left wants spending to increase three times faster than inflation, as it has during the era of Bush-Obama profligacy, they should openly make the case for why America should be more like France.

Still Not Serious About Cutting Spending

The howls of outrage that have greeted the report of the bipartisan National Commission on Fiscal Responsibility and Reform shows two things:  1) most Democrats have no interest in reducing the size and cost of government; and 2) few Republicans are actually serious about it.

From the initial reaction, one would think that the Commission has slashed government to the bone, throwing the elderly, poor and sick into the street.  In reality, the Commission report is far from a radical document.  It proposes a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years.  That’s a start.  But as recently as 2000 total federal spending was just 18.4 percent of GDP – and people were hardly dying in the streets during the Clinton years.  

In fact, the Commission doesn’t actually “cut” federal spending.  Under the Commission’s proposal, it would rise from roughly $3.5 trillion today to more than $5 trillion by 2020.  So, under the terrible “cuts” that the Commission is recommending, federal spending would still increase faster than inflation.  This is the old Washington game of calling a slower increase than previously projected a “cut.”

But Democrats appear unwilling to support even this modest slowing in the growth of government.  Instead they call for simply raising taxes to support a virtually unlimited amount of federal spending.  Republicans, meanwhile, talk about reducing government, but fall back on bromides about reducing waste, fraud, and abuse when faced with the need to make specific cuts.

If we were serious about reducing the size, cost and intrusiveness of government, we should roll back spending to Clinton-era levels.  (My colleague Chris Edwards has shown how that can be done.)  That would eliminate the need for the tax increases that the commission proposes. 

Alas, we still await political leadership with that amount of courage.