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

April 25, 2013

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.


Not All Tax Cuts Are Created Equal

September 8, 2011

We know that a vast majority of Republicans in Congress have pledged to oppose any and all tax increases unless they’re matched, dollar for dollar, by reduced tax rates. They also seem to have taken a pledge to preface any mention of tax increases with “job-killing” or the equivalent.

But come January 1, all workers will face higher payroll taxes unless the one-year 2% cut agreed to last December is extended. Congressional Republicans, including two on the so-called Super Committee, seem inclined to let it expire.

“Not all tax relief is created equal for the purposes of getting the economy moving again,” says Super Committee Co-Chair Jeb Hensarling (R-TX).

Congressman David Camp (R-MI) has other objections. “No matter how well intended,” he says, tax reductions “will push the deficit higher.”

These are the same folks who were ready to let the government shut down unless the Bush tax cuts for high earners were extended. CNNMoney put the two-year cost at about $81.5 billion.

We didn’t hear a peep from the Republicans about driving up the deficit. Nor much concern about evidence of potential impact on economic growth.

The nonpartisan Congressional Budget Office ranked income tax cuts generally as the least effective of the 11 options it reviewed. A payroll tax cut for employees came in fourth.

Now is another tax cut fight brewing — this one centered directly in the ongoing jobs crisis.

Seems to me the comments above raise two main issues — the effectiveness of the employee payroll tax cut and the tax relief House Republicans want instead.

No one, to my knowledge, is arguing that an extension of the employee payroll tax cut will give our sluggish economy the boost it needs to start creating jobs for the more than 23.7 million unemployed and under-employed workers who need them.

The rationale, as I understand it, is rather that jobs will be lost if workers have to pay the full tax again because they’ll compensate by cutting back on spending.

The President has said this could cost the economy a million jobs. John Irons at the Economic Policy Institute puts the figure at 972,000 — still a significant dent in a job market that’s already shy about 11.1 million jobs.

The House Republicans’ latest job creation plan doesn’t delve into such specifics. Merely cites gross job creation figures from the hardly reliable analysts at the Heritage Foundation.

It does, however, specify two forms of tax relief.

One is a cut of at least 10% in the nominal corporate tax rate, apparently offset by some other specified changes in the tax code. The other is a “tax holiday” that would let corporations bring home profits gained abroad at a fraction of what they’d otherwise pay.

These measures would, in theory, enable corporations to invest more funds in creating jobs here. But there’s no evidence they’d do anything of the sort.

Corporations, after all, aren’t exactly short on cash. Many are sitting on big bundles of it. They’re creating jobs, as they always do, when they need them and where they can fill them at the lowest cost.

For multinationals as a whole, that appears to be mainly outside the U.S. No indication that the corporate tax rate cut the Republicans have in mind would change this.

For the “tax holiday,” we can look to past experience, since Congress put one into a job creation package in 2004.

As the Center on Budget and Policy Priorities reports, a number of studies found that it didn’t increase domestic investment or employment. In fact, some large companies that brought home billions turned around a laid off American employees.

CBPP argues — persuasively, I think — that another “tax holiday” would probably encourage corporations to shift even more of their income overseas.

For this reason, among others, the Joint Committee on Taxation estimates lost federal revenues at up to nearly $79 billion over the next 10 years.

If past is prologue, there’d be more American jobs lost too.

UPDATE: Shortly after I posted this, I saw a new brief on the employee payroll tax cut by the Center on Budget and Policy Priorities.

It includes an interesting table showing how much more, on average, workers in different occupations would pay if the cut expires. An even more interesting (to me) table showing how much workers in each state are receiving as a result of the cut.

CBPP makes the important point that other measures will be needed to boost job creation and economic growth. But letting the employee payroll tax cut expire without putting something more effective in its place would decrease consumer purchasing power by well over $110 billion.


Speak Out For The True Conservative Position On Deficit Reduction

June 29, 2011

It’s time for those of us who care about the needs of low-income people to advocate a conservative position.

As you probably know, programs that serve these needs are at high risk as the President seeks to forge a compromise that will avert a default on the federal debt.

The Republicans are demanding at least $2 trillion in spending cuts, along with “reforms” in Medicare — maybe other so-called entitlements too.

They’ve said they won’t accept tax increases of any sort, betting that the President and other Democrats at the table will cave to avert an unprecedented economic crisis — even if it means throwing poor people under the bus.

It’s hard to imagine a spending-cut-only plan in the trillions that wouldn’t.

There’s nothing conservative about this. It’s a radical departure from a long-standing consensus that deficit reduction plans should, at the very least, protect programs for low-income people.

All the deficit reduction plans passed in the last 25 years did. Several of them actually strengthened anti-poverty measures, e.g., by expanding the Earned Income Tax Credit. The Children’s Health Insurance Program came into being as part of the Clinton era Balanced Budget Act.

Even President Obama’s deficit hawkish fiscal commission adopted, as a guiding principle, “protect the truly disadvantaged.”

The true conservative position is thus to conserve programs that mitigate poverty and offer low-income people opportunities for a better life.

The programs need to be protected from specific near-term budget cuts and also from any automatic cuts that would be triggered if Congress fails to achieve some as-yet undetermined deficit or debt reduction targets in the future.

Leaders of major national faith-based, civil rights, charitable, economic research and advocacy organizations have written the President, the Vice President and the Congressional leaders of both parties urging them to “honor the precedent set by previous deficit reduction negotiations.”

The Coalition on Human Needs tells us that we need to join our voices to theirs. The stakes are alarmingly high and the clock is ticking.

Here are two quick, easy ways to let the President know that we want him to stand firm for the conservative principles of past deficit reduction plans — protection for programs that serve low-income people and revenue raisers that will help make the total package balanced and fair.

We can leave a message on the White House comment line. The toll-free number is 888-245-0215.

We can also use this editable e-mail provided by the Half in Ten campaign.


If Not Tax Increases, What?

May 14, 2011

Spent a good part of last Monday watching the DC Council hearing on Mayor Gray’s Fiscal Year 2012 budget. None of the six Councilmembers participating was ready to go along with all the proposed revenue raisers that would help close the $322 million budget gap.

Much has already been written about the split over the proposed income tax increase. What was news, at least to me, was that even Councilmembers in favor of that balk at extending the sales tax to live performances.

Bad for the cultural vitality that makes the District an attractive place to live.

So there goes an estimated $2.3 million — not much, but it has to be made up somewhere.

Then there’s the matter of $22 million or so that the mayor’s budget would shift from two special accounts established to fund neighborhood development projects. “Not fair,” says Councilmember Jack Evans. “Disingenuous,” in fact.

And the matter of the large funding reduction for homeless services. Council Chairman Kwame Brown repeatedly expresses concerns about impending shelter closures.

Says he intends to look for a way to restore the lost funds. That’s at least $7.1 million, since he seems committed to sheltering only homeless families and victims of domestic violence.

Also to addressing the perceived need for more police officers. Another $10 million there.

So where are these millions going to come from?

Not from an income tax increase, it seems. Council Chairman Brown and participating colleagues Bowser, Evans and Catania all reiterate adamant opposition.

Brown since has said he’ll accept the deduction limit, but not the rate increase, which accounts for the larger share of the $35.4 million the mayor’s proposal would raise. Questionable whether he can corral a majority for this.

Catania rails against “the tired old notion of tax increases” — apparently referring to the idea that high-income residents should pay higher rates.

Seems he’s again holding out the possibility that he’d support a uniform across-the-board rate increase. “Whether people can afford to contribute” is something he “doesn’t care about.”

But this is merely a rhetorical flourish. He repeatedly insists that spending cuts versus tax increases is a “false either/or.”

When he became chairman of the Health Committee, he reviewed every item the departments the committee oversees spent money on. Found a lot of excess expenditures. Would that other committee chairs had done the same.

The answer, Catania says, is to go after our “gout-ridden government” — shrink “the bureaucracy that continues to feed itself.” This apparently would not qualify as a spending cut.

We heard a less florid version of the same from witness Barbara Lang, President and CEO of the D.C. Chamber of Commerce. She, on behalf of members, objects to all tax increases. Also wants the funds cut from small business technical assistance restored.

The local government, she says, isn’t operating efficiently. Implies that eliminating unnecessary and redundant functions would allow the government to deliver all essential services without raising either taxes or fees.

Now, I’m the last one to say that the District government — or any government for that matter — is as efficient as it could be. Surely some functions are duplicative, unnecessary or of such low priority that they could, in theory, be eliminated.

But let’s get real. Virtually every function — indeed, every significant expenditure — has supporters that would make meaningful reductions politically difficult. Recall, for example, what happened when former Mayor Fenty tried to fold the Office on Asian and Pacific Affairs into a larger unit.

More importantly, the Gray administration and the Council would have to find — and agree on — some $127 million in “efficiencies” in order to balance the budget with no tax increases or yet deeper cuts in core services.

Also somehow to accommodate the cost impacts of a large increase in unemployed residents — not only government employees, but those employed by contractors and the many local retailers that would come up short on revenues.

And they’d have to do it before May 24, when the Council is scheduled to vote on the budget.

All this efficiencies business is just a distraction from the very real choice between adopting even more significant revenue raisers than the mayor has proposed or creating even greater hardships for low-income District residents.

NOTE: Just as I was finishing up this posting, Councilmember Evans marked up the Finance Committee’s share of the proposed budget. Under his leadership, the committee majority rejected virtually all the revenue raisers. This reportedly leaves the budget shy nearly $119.5 million.

Like Catania, Evans claims that revenue raisers versus deep cuts in social services is a “false choice.” No hint as to what the real choice is.