Why Is the Chained CPI in the President’s Budget?

My last post took on some of the basic questions raised by the debate over using the chained CPI (Consumer Price Index) to adjust Social Security benefits.

I deferred the question in the headline here because the post was already quite long, and the answer isn’t simple. So here goes …

Social Security and the Deficit

Strictly speaking, Social Security doesn’t belong in the budget at all — at least, not in the package of spending and revenue proposals we ordinarily think of as such.

It has its own revenue stream — the payroll tax, plus an earmarked portion of income taxes paid on some of the benefits it provides. It also has $2.7 trillion in reserves, i.e., the unused portion of these taxes, invested in Treasury bonds, and the interest on these.

That’s all it’s got.

A shortfall would be dreadful, but it would have no impact on the deficit — unless, as seems likely, Congress used general tax revenues to avert a sudden, big benefits cut.

This, however, is an argument for crafting a measure that will keep the program solvent, not for putting the chained CPI in the budget.

Some say that the Trust Fund is just an accounting fiction. The Treasury bonds the reserves are invested in signify money that’s being used to help pay for items in what we ordinarily think of as the budget.

When Social Security starts drawing on its reserves, as it already has, the Treasury Department has to sell some bonds to other investors in order to pay the program what it owes — or use revenues from taxes not specifically intended for Social Security.

This doesn’t mean that Social Security is contributing to the deficit, however — any more than you or I could be said to increase the deficit if we cashed in some savings bonds a grandparent once gave us.

More Revenues Without Tax Reform

The chained CPI is probably in the President’s budget in part because it would increase tax revenues without any rate-raising or loophole-closing at all.

According to Congressional Budget Office estimates, the federal government would gain $123.7 billion* over the first 10 years because tax brackets and other annually-adjusted tax provisions, e.g., the personal exemption and standard deduction, would rise more slowly.

So even a quite small increase in income could get taxed at a higher rate. The amount we’d owe wouldn’t be a whole lot greater than what we’d owe if the Internal Revenue Service continued to use the same inflation measure it’s been using.

But the tax code would be somewhat less progressive because filers at fairly low and moderate-income levels would take the biggest hits.

And at least some low and moderate-income families would get smaller reductions and/or refunds from the Earned Income Tax Credit because the maximum credit is adjusted for inflation, as are the phase-outs that gradually lower the credit when earnings reach some level above the amount eligible for the maximum.

There would be no impact on the refundable Child Tax Credit if Congress makes the current threshold for claiming it permanent, as the President has proposed.

Big if here, since we know that Congressional Republicans have wanted the EITC and the Child Tax Credit to revert to their more restrictive pre-Recovery Act forms.

Political Strategy

The revenues raised would be a small portion of the total increase the President now says he’d settle for. So it’s pretty clear the chained CPI is in the budget mainly for strategic reasons.

The received wisdom seems to be that he’s again striving for a grand bargain — offering Republican Congressional leaders the chained CPI and Medicare spending cuts they said they wanted in the fond hope they’ll agree to a scaled-back revenue-raising plan.

Or if not that, perhaps proving they’re altogether unreasonable and ought to lose their House majority next year so that Congress can get important business done.

This is what Michael Tomasky at The Daily Beast thinks the President is up to — and why he thinks no one should fret about the chained CPI.

The Nation‘s John Nichols thinks otherwise. Look, he says, at how the chairman of the National Republican Congressional Committee is already messaging the President’s proposal as a “shocking assault on seniors.”

This is likely to depress votes for Democrats next year, Nichols predicts, citing examples from past mid-term Congressional elections.

The chained CPI proposal certainly has complicated life for Democrats in Congress now, even if they ultimately don’t have to cast an up-or-down vote on it — still TBD.

The larger issue, I think, is that the President has, to some extent, legitimized use of the chained CPI as a way to “save” Social Security — and chosen it instead of lifting the payroll tax cap.

So, as Blake Zeff at Salon asks, “How hard would it be for Republicans to push cuts through, when this [the chained CPI] is now mainstream Democratic policy?”

Cuts, I’d add, that could extend to programs specifically for low-income people, which the President’s proposal would hold harmless.

Note how House Majority Leader John Boehner grudgingly welcomes the chained CPI as an acknowledgment that “our safety net programs are unsustainable.”

This implies something far more sweeping than what the President has proposed for Social Security and Medicare, which arguably aren’t safety net programs anyway.

Well, maybe the rumblings and grumblings, mine included, are just worst-case scenarios. But I’m not ready to bet on that.

* The Office of Management and Budget estimates the revenue gain at $100 billion. Differences between CBO and OMB estimates are not unusual.

Mayor Gray Proposes More Money for Some, But Not Enough for the Neediest

Washington City Paper‘s headline after Mayor Gray released his proposed Fiscal Year 2014 budget proclaimed “Money for Everyone!” Not altogether so.

There will be money for most, but not quite everyone. There will be more money for some — both businesses and individuals, including some of the District’s lowest-income residents.

But their needs still get shorted, even now that the District is looking forward to $79.7 million more in revenues than the windfall expected for this fiscal year.

So here’s a selective look at who will get more, focused mainly, as you might expect, on spending that will — or at least, could — help low-income residents. Next post will deal with help they won’t get, but could have.

There will certainly be more money for construction companies. The proposed budget bulges with projects for them — public school buildings (new and modernized), infrastructure, recreational facilities, libraries.

If the companies comply with the District’s First Source law, there could be more jobs — hence money — for unemployed and underemployed D.C. residents too.

There will be more money for affordable housing developers, since the Mayor decided to invest the bulk of his promised $100 million in the Housing Production Trust Fund.

This should ultimately mean more money for food, clothing and other necessities for some of the nearly two-thirds of extremely low-income District households who are now paying more than half their income for rent because 40% of Trust Fund dollars are supposed to help finance housing for them.

An additional $5 million will go for housing vouchers that help pay for the operating costs of units designated for the District’s lowest-income residents — an essential complement to the Trust Fund money.

Another $3.1 million will provide more housing for victims of domestic violence.

And there will be a total of $2 million more for one-time and limited-term assistance to families for whom the rent has been so unaffordable that they’ve been evicted — or are about to be.

But — getting ahead of myself here, I know — not a penny more for regular vouchers that homeless and other very low-income residents could use to help pay market-rate rents.

There will be more money for all District employees, who’ll get their first pay increases in at least four years — not only fair, but perhaps job-creating if the employees spend some of their extra cash locally.

There will be more money for some nonprofits because the Mayor’s budget would create a $15 million competitive grant fund for them.

And there will be more money for lots of District residents who’ve got municipal bonds in their investment portfolios.

Current law would impose a tax on the interest these bonds earn, unless issued by the District.

But the Mayor wants to repeal it, giving us bondholders a total of nearly $13 million over the next five years — and the unique privilege of investing tax-free in bonds of no benefit to our community.

The tax giveaway and the values it reflects are among the reasons that there’s no more money for some of the urgent needs of the District’s low-income residents, though there will be more money for other “quality of life” investments like bike lanes.

Nothing against bike lanes, mind you. But I would have put a higher priority on improving the quality of life of homeless families, some of whom will probably again be spending their nights in Metro stations, hospital waiting rooms and the like.

And a higher priority on other programs and services that can advance not only the Mayor’s quality of life improvement goal, but his other goals too.

Simpler Tax Code Good, But No Tax Prep Better

I’ve just finished preparing my federal tax returns. I do them myself not only to save professional preparation fees, but to see what deductions and credits I might claim — and the plethora I never could.

But I know that someone can claim them because every tax-reducing provision got into the code for a reason — not necessarily what we who don’t benefit think a good one, of course.

This is one of the reasons the big brouhaha about tax reform may come to nothing.

The biggest barrier at this point is the partisan divide on what to do with savings the federal government would achieve if it weren’t spending so much through the tax code — an estimated $1.3 trillion this year alone.

The Republicans, as you probably know, want to use all the savings to offset the costs of reducing tax rates.

The Democrats generally want to use some of the savings for deficit reduction, thus meeting the targets in the Budget Control Act with less severe cuts than the mandatory caps would require. But they’re far from united.

The other barrier though is that every provision that tax reform might eliminate or constrict has a constituency.

Hedge fund managers, for example, would again cry out if Congress tried to close the loophole that allows them to pay the lower capital gains rate on what’s really salary income.

The largest tax expenditures have much larger constituencies — in some cases, more than one.

The mortgage tax interest deduction, for example, is near and dear not only to homeowners (and yacht owners), but to real estate brokers, building companies and, of course, mortgage bankers.

So actually cleaning out the tax code may prove beyond what this highly-partisan — and donor-indebted — Congress can do.

It could, however, make the tax code “simpler and smarter,” as Howard Gleckman at the Tax Policy Center suggests.

At least one of the simpler, smarter reforms tax experts have recommended would benefit low-income couples, many of whom pay to have their tax forms prepared because of the complexities involved in claiming the Earned Income Tax Credit and the Child Tax Credit.

Anyone who’s seen the signs in the windows of neighborhood tax preparers knows that these couples are likely to be offered instant refunds — essentially for-fee advances on what the preparer figures they’ll get from the Internal Revenue Service and perhaps their state tax office.

A now-outdated, but still useful study found that taxpayers in the Washington, D.C. area forfeited, on average, more than $189 of a $1,500 EITC refund once all the fees, including the refund anticipation loan were deducted.

That was back in 2001-2. Fees have gone up since then, of course. And though banks have been forced out of the RAL business, tax preparers have found workarounds.

If claiming the refundable credits were a whole lot simpler, low-income families would get the full benefit intended. And volunteers who provide free tax preparation services could help more of those who still found the forms daunting.

Or what about letting IRS do the tax prep work for free? This probably wouldn’t save time — or alternatively money — for filers who can claim those various arcane credits and/or will owe less if they itemize.

But past studies have estimated that well over 40% of filers would use what’s been called a return-free system. Their savings could total more than $2 billion a year.

And IRS would collect some portion of the $350 billion that the now-Chairman of the Senate Finance Committee has said we collectively owe, but don’t pay.

Which is why Grover Norquist, whose cause in life is starving the federal government of tax revenues, opposes it, as do some other so-called taxpayer advocacy groups.

Lined up in opposition for other, obvious reasons are members of the Computer and Communications Industry Association, including Intuit. It’s the firm that produces TurboTax — the software most do-it-yourselfers use.

Intuit claims, among other things, that a voluntary return-free system would curtail “citizen participation in the taxation process” because lots of us take stock of our personal finances only at tax time — and, one’s given to understand, wouldn’t if all we had to do was review, edit or altogether reject a form IRS prepared for us.

Nothing whatever to do with the $1.47 billion or so that Intuit reaps from TurboTax.

I, for one, would readily forgo the form of participation I’ve just concluded — and the alleged “financial literacy” I’ve gained — if I could just check what IRS had produced against the 1099s I’ve laboriously keyed in

What about you?

Minimum Wage Increase vs. EITC Is a False Choice

Opponents of a minimum wage increase argue, among other things, that it’s not an effective anti-poverty tool.

Most minimum wage workers don’t live in households below the poverty line, says Michael Saltsman at the Employment Policies Institute — a think tank funded by the restaurant industry and other low-wage employers.

Besides, minimum wage workers tend to be young, he says. This is true, but as I’ve earlier noted, intended to mislead us into thinking that they’re mostly teenagers who work just to earn a little running around money.

At the same time, Saltsman argues that a minimum wage increase will harm these young workers because they’ll lose those entry-level jobs that put them on the bottom rung of a wage ladder they’d climb if employers could just pay them little enough at the start.

He doesn’t stop there, however, as some who are fond of this meme do.

The better alternative, he says, is an expansion of the Earned Income Tax Credit. He’s far from alone in this view — and joined by some who’ve no vested interest in supporting low-wage business donors.

Washington Post columnist Charles Lane, for example, asserts that the EITC is a “more efficient, better targeted alternative” to a minimum wage increase — more efficient, I infer, because more of the money would flow to poor families.

And if “poverty reduction, income equality and maximal employment can be thought of as public goods,” we should all “purchase” them through a tax-code subsidy.

Like Lane, economist Edward Glaeser believes that we should all pay for measures to alleviate poverty and “make work more attractive for the poor” — through either an enhanced EITC or a brand new federally-funded program.

Blogger Evan Soltas favors the EITC too, noting that economists generally agree on its value as an anti-poverty measure.

We’ve got good evidence for the anti-poverty impacts of the tax reductions and refunds the EITC provides.

According to the Center on Budget and Policy Priorities, an analysis of Census Bureau data shows that the tax credit lifted 6.3 million people above the poverty threshold in 2011.

So does it follow that we should scrap the proposed minimum wage increase and expand the EITC instead?

The puzzle is why we’re asked to choose. Do we, for example, ask whether we should provide job training or a tax benefit for people who find work as a result?

As CBPP President Robert Greenstein argues, we need both a minimum wage increase and a stronger EITC “to lift working families’ incomes to an adequate level.”

Every expert I’ve read agrees that we can’t, at this point, convert the minimum wage to a genuine living wage without truly risking job losses. As I’ve already indicated, job losses caused by a modest increase are a whole other matter.

On the other hand, making up for low wages through the EITC alone would cost the federal government more than what policymakers “would likely countenance,” Greenstein says.

Understatement. We should recall that Republicans didn’t want to extend the expanded version of the EITC that was originally part of the Recovery Act — even though it reduced a potential deterrent to marriage.

Would they now expand it to give childless workers more than a pittance — enough so that, at the very least, those who are single wouldn’t owe any federal income tax if they earned the minimum wage?

In short, we should be very wary of the notion that some unspecified improvements in the EITC trump the President’s proposed minimum wage increase.

We know that certain businesses interests might prefer it because, as Rortybomb blogger Mike Konczal says, the EITC partially subsidizes employers by enabling them to pay rock-bottom wages.

But the either/or framing is, in many cases, just a way to seem concerned about working people in poverty while helping to ensure they remain as poor as they are.

In others it’s a failure to grasp — or perhaps care about — the real-world political consequences.