Frequently Asked Questions
No – in fact quite the opposite is true. A sustained economic recovery will be impossible without a credible plan to get our medium- and long-term fiscal situation under control. And though a plan should be enacted immediately, the Fiscal Commission plan would reduce the deficit very gradually to avoid adversely impacting the recovery in the immediate term. No deficit reduction would begin until 2012, and there would be no nominal spending cuts or revenue increases until 2013.
Having a strategy for getting our national debt to a manageable level will send a signal to global credit markets that the U.S. is, and will continue to be, a good place to invest. In fact, the economic recovery could very well receive a boost from enactment of a credible deficit reduction plan.
The Commission also made the promotion of economic growth and competitiveness a priority in its plan. On the spending side, the plan would maintain or increase important funding for education, infrastructure, and high-value R&D, and provide for establishment of a Cut-and-Invest Committee that would identify low priority or duplicative spending that can be eliminated in order to free up resources for high-value investments. On the tax side, the plan would drastically reduce rates and reform the corporate code in order to promote economic growth and make the U.S. more competitive.
The ratio of spending cuts to revenue increases in the plan can be calculated in several different ways depending on which baseline is used, how interest savings are accounted, and other factors. Depending on which measures are used, revenues account for between 25 percent and 50 percent of the deficit reduction in the plan. With such a broad range, any representation of the ratio of spending cuts to revenue increases paints an incomplete picture.
That being the case, the Commission was not focused on baselines, but rather at bringing revenue and spending levels closely in line. Under the Commission recommendations, spending would be held to below 22 percent of GDP from 2014 onward – about a percentage point higher than historical levels but two and a half points below where it is headed by 2020. Revenues in the plan are projected to reach 20.6 percent of GDP in 2020, which is about two and a half points higher than the historical levels, but consistent with revenue levels last time we ran a budget surplus.
Both revenue and spending cuts will need to be part of the fiscal solution, and the Commission offers a balanced plan which brings the two in line.
The Commission set out to close the unsustainable gap between spending and revenue, with the eventual goal of achieving balance. The Commission concluded that 21 percent of GDP was the highest revenue level consistent with robust long-term economic growth, and that 21 percent of GDP was the lowest level of spending that ambitious spending restraint could realistically expect to achieve in the next two decades. The revenue level is somewhat higher than historical averages, but the Commission concluded this was necessitated by changing demographic factors which will create greater pressures on spending programs in the future than has been the case in the past.
The main reason that revenues have never reached 21 percent of GDP is that when revenues get close to that level Congress has enacted tax cuts. The Commission report recognized that Congress may wish to enact additional rate reductions if revenues increase more rapidly than expected, but simply sets a higher bar for the revenue level at which tax cuts should be considered.
While it is true that there could be some negative feedback from increasing tax rates, the Commission does not attempt to raise revenue through higher rates. Rather, the commission plan raises new revenue by eliminating or scaling back most of the deductions, credits, and other so-called “tax expenditures” while actually lowering marginal tax rates. A tax reform proposal which broadens the base will lead to less tax avoidance and faster economic growth, and can reasonably be expected to eventually raise revenue up to 21 percent of GDP. Also note that the Commission plan would increase revenues as a percentage of GDP very gradually, reaching approximately 19.3 percent of GDP by 2016 and 20.6 percent of GDP by 2020, which are well within historical norms. Revenues would not reach 21 percent under the Commission plan until early in the next decade.
Rather than inhibit our ability to reduce the debt, comprehensive tax reform which broadens the base and lowers rates enhances our ability to do so. Just as importantly, lower rates and a broader base will help to promote economic growth, which will result in greater revenue, increase the nation’s debt capacity, and make painful tax and spending changes easier for individuals to bear.
Currently, the United States spends over $1 trillion a year on tax expenditures, the various deductions, credits, and exclusions that are really just spending by another name. By scaling back or eliminating these expenditures, there is plenty of room to both reduce the deficit and reduce marginal rates. In doing so, the Commission’s tax reform plan would be likely to promote economic growth even as it raised an additional $180 billion in revenue in 2020 alone.
Moreover, because tax expenditures disproportionately benefit those at the top, the Commission’s tax reform plan would actually increase the progressivity of the code. Under its illustrative plan, the bottom 20 percent of taxpayers would receive a small tax cut, while those in the middle paid 1 percent to 1.5 percent more of their income and those in the top 1 percent paid an extra 8 percent of income. This is hardly a tax cut for the wealthy.
The Commission plan would cut tax rates, potentially to their lowest level in almost a century, broadening the base, reducing the deficit, and eliminating backdoor spending in the tax code. The deficit reduction from the tax reform recommended by the Commission would be achieved primarily by eliminating or scaling back tax expenditures, many of which are simply spending by another name. By simplifying the tax code and lower individual and corporate tax rates in this manner, the Commission plan will promote economic growth, and generate more income for the American people and businesses. Failing to take action on our long term deficit problem will increase the risk of large, ongoing tax increases in the future.
The Commission plan also required that the spending cuts be put in place before the revenue changes occur. In addition, any revenue growth beyond the static projections that is achieved through faster economic growth generated by tax reform will be plowed back into additional rate reduction or deficit reduction, not higher spending.
In order to understand the impact of the tax reform package, you must look at the package as a whole, not piece by piece. The Commission concluded that lowering rates across the board and dramatically simplifying the tax code will provide numerous economic benefits for the American people. While the Commission proposal called for tax reform which dramatically reduced the number of tax expenditures, it recognized that some tax expenditures serve important functions that should be preserved, and that elimination or reforms of other tax expenditures should be phased in gradually to avoid adverse consequences.
In fact, the Commission called for tax reform to include provisions providing support for low income workers and families, mortgage interest for principal residences, employer provided health insurance, charitable giving and retirement savings in a reformed tax code. However, the Commission decided that starting with the zero plan approach would force Congress to evaluate the merit each tax expenditure carefully before adding it back, as each would have to be paid for by raising rates. This would encourage Congress to keep rates low, eliminate unnecessary or poorly constructed expenditures, and better target those tax expenditures that are added back.
One of the Commission’s guiding principles was to protect the truly disadvantaged. That is why the Commission plan focuses benefits and other services on those who need them the most. The Commission worked to hold the truly disadvantaged harmless from changes in all aspects of the plan – discretionary spending, mandatory spending, Social Security reform, and tax reform. At the same time, the plan asks those who have done better to contribute more and accept a little less.
In general, the Commission does not make any cuts to mandatory programs for the most disadvantaged, such as unemployment compensation, food stamps, and SSI. It also demonstrates how discretionary spending cuts can be made without hurting low income individuals. With regards to tax reform, the Commission required any changes maintain or increase progressivity – and its illustrative plan would actually represent a tax cut for the bottom quintile.
Finally, on Social Security, the plan provides greater poverty protections than current law by establishing a new minimum benefit which guarantees a full career worker a benefit equal to 125 percent of the poverty and grows that benefit with wages, over time; and it provides a flat-dollar benefit bump-up for the very old and long-term disabled.
Most importantly, the Commission protects the most vulnerable by reducing the deficit and improving the country’s long-term fiscal outlook now, through thoughtful and gradual changes. Waiting for a fiscal crisis to force action is the most harmful and inhumane thing we can do, as it would likely lead to high levels of unemployment and force across-the-board cuts in government spending (and across-the-board tax increases). By acting now, we can protect those who are the most vulnerable and reduce the deficit on our own terms.
The Commission’s proposal would maintain important funding for education, infrastructure, and high-value R&D. In fact, the plan calls for the establishment of a Cut-and-Invest Committee to cut low-priority spending and increase high-priority investments. Reducing spending overall does not mean cutting every single program.
In fact, duplicative programs and other waste are a drain on our budget and leave less room for important investments whether there are restrictions on top line spending or not. Spending caps will force Congress to prioritize and fund those programs that are the most important and efficient – ensuring that the government is using taxpayers’ money in the best way possible.
Leaving our debt to future generations will undermine rather than protect important investments. Growing levels of public debt will crowd out private investment, while increasing interest payments will leave less room for spending on important public investments. If we are forced to act – which we will be eventually if we remain on this unsustainable fiscal path – we will not have a choice and those programs and investments that are the most important to Americans will be jeopardized.
Admiral Mullen, Chairman of the Joint Chiefs of Staff, has said that the greatest threat to our national security is our debt. As Senator Tom Coburn said during the Commission deliberations, “peace through strength can’t be achieved by wasting money. We’re buying things we don’t need.” The practice of deciding what constitutes a strong defense purely on the budgetary top line has led to a process in which there is not as much scrutiny of how money is being spent. With all this and much other evidence, the Commission concluded that the Department of Defense and other security agencies can greatly reduce spending and increase efficiency without affecting their ability to keep our nation secure.
A recent GAO report on duplication and overlap in government identified billions of dollars of savings that could be achieved through greater efficiencies and consolidation of functions within the Department of Defense. The Commission put forward over $100 billion in illustrative defense savings options, including eliminating wasteful and outdated weapon systems, reducing the number of contractors, and reducing excessive defense entitlements. None of these reforms would impact force structure or do anything to undermine our national defense.
No – every dollar of savings within the ten-year window is either accounted for with a tangible and scoreable policy, or else called for through a credible process in which specific parameters are set, illustrative examples are provided, and an enforcement mechanism is put in place to guarantee the savings will be achieved.
On discretionary spending, the Commission proposed multi-year statutory caps enforced by a point of order and sequestration. Such caps are the only way to control discretionary spending beyond the current year, and similar caps were very effective in controlling discretionary spending in the 1990s. On top of these caps, though, the Commission offered about $200 billion in annual illustrative savings, and calls for several specific cuts up front (for example, freezing federal pay) in order to make it easier to meet the caps and to act as a down-payment.
With regards to mandatory spending, the Commission proposed over $600 billion in specific tangible policies to reduce the deficit, most of them scored by the Congressional Budget Office; among them included over $400 in specific reforms to reduce federal health spending. Beyond 2020, the Commission did recommend limiting the growth federal budgetary commitment to health care GDP + one percent, since there is no expert consensus on the best way to control costs. The combination of the cuts scheduled in law under PPACA and those from Commission recommendations should make meeting this cap far easier, however the Commission recognized that other changes – for example premium support for Medicare and/or a public option in the exchanges – might be necessary. Even without this long-term cap, the Commission plan would still stabilize the debt through at least 2040.
On tax reform, it is true that the Commission did not have the time to work out every minor detail of fundamental tax reform – particularly with regards to transitions rules – and so recommended that those details be worked out by the committees of jurisdiction. But the Commission also does not offer a “vague call” for tax reform, as some have suggested; it puts forward a serious and credible process with very specific parameters, targets, and enforcement mechanisms. In particular, it instructs the relevant congressional committees to develop reform based on the premise of “zero based budgeting” of tax expenditures, and requires any plan to reduce the top (and corporate) rate to 29 percent or lower, raise an additional $80 billion in 2015 and $180 billion in 2020, maintain or increase the progressivity of the code, and move to a competitive territorial system. It enforces this call through an automatic “failsafe” that would cut tax expenditures across the board if the committees do not comply by the end of 2012. And finally, to show what a reformed tax code could look like after transition, the Commission offers an illustrative tax reform plan which sets rates to 12 percent, 22 percent, and 28 percent, creates a 12 percent mortgage interest and charitable giving credit, limits the size of retirement accounts, and phases out the health exclusion, among other changes.
Though much of the “low hanging fruit” for health care cost control was included in the Patient Protection and Affordable Care Act (PPACA), the Commission proposed over $400 billion in health savings with the goal of further bending the health care cost curve. For example, the Commission proposed reforming cost sharing rules to offer Medicare beneficiaries better catastrophic coverage but make them more price sensitive to routine health services.
In addition, the Commission called for medical malpractice liability reform, changes to physician payments which encourage coordinated care, the acceleration and expansion of the payment reform pilots and other demonstration projects in PPACA that show potential to achieve cost savings, and the elimination of provider carve outs under the Independent Payment Advisory Board (IPAB). It also recommended “piloting” premium support through the FEHB program and increasing state Medicaid waivers to allow them to experiment with other cost control measures.
On top of this, the commission reduced federal health spending in a number of ways – including reducing payments for graduate (and indirect) medical education, limiting the ability of States to manipulate their federal Medicaid matches by taxing providers, expanding Medicaid drug rebates to low-income Medicare recipients, and reducing fraudulent payments.
Furthermore, the commission’s tax reform plan would limit or eliminate the tax benefits for employer provider health insurance – a change which economists and health care experts of all stripes agree would slow health care cost growth.
And finally, the Commission recommended replacing the government’s open-ended commitment to health care with a budget for all federal budgetary commitments to health care (on the tax and spending side) that grows at GDP+1. Should the reforms from PPACA and the Commission proposal be insufficient to meet this cap, the Commission recommended considering a wide range of options, including premium support, Medicaid block granting, increasing the retirement age, instituting a public option, strengthening IPAB, strengthening CMS to be a more active purchaser of health care services to promote high value care, or moving to an all-payer system.
The executive order creating the Fiscal Commission directed us to make recommendations for deficit reduction in the near term to achieve primary balance by 2015 and additional reforms to “meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending.” The Social Security reforms the Commission proposed had nothing to do with the first goal of reducing the deficit in the near term and everything to do with the second goal of improving our long-term fiscal outlook. No responsible plan to deal with the long-term fiscal outlook could ignore that the nation’s largest government program is headed towards insolvency.
The Social Security reforms were completely excluded from the Fiscal Commission’s calculations for short term deficit reduction and meeting the goal of primary balance by 2015. The Commission’s recommendations regarding Social Security were made to ensure that Social Security remains financially sound for future generations. Social Security is now in permanent deficit, and by 2037 its trust fund will run dry. This would result in an unacceptable 22 percent cut in benefits for all Social Security recipients. Experts from across the political spectrum agree that prompt but gradual action is the best way to avoid this abrupt cut.
The Commission plan is a balanced plan that relies both on reductions in scheduled benefits and increases in scheduled revenues.
Those concerned that the plan relies on excessive benefit cuts should note the Commission plan calls for more revenues than previous bipartisan plans introduced in Congress. Much of the analysis suggesting the contrary looks at net effect of revenue provisions, which includes their effect on increasing benefits. Looking instead at cost and revenue rates, revenue increases make up 46 percent of the total reduction in the 75-year shortfall, and 35 percent of the reduction in the 75th year.
Those concerned that the plan relies too much on revenue need to recognize the short-fall that Social Security faces, and the difficulty in closing that gap with spending cuts alone. Like most Social Security plans, the Commission plan exempts current and near retirees from cuts and protects the most vulnerable among us. To accomplish this, the commission called for aggressive cost control for higher earners along with an increase in the retirement age. However, new revenues were still needed to close the gap – and this is particularly true over the medium term, since benefit changes tend to phase in slowly. These revenues came from a gradual increase in the amount of income subject to the payroll tax; and increase that would by 2050 allow the payroll tax to cover the same amount of income as it did in the 1980s.
Those concerned about the ratio of the Social Security plan should keep in mind the alternative to reaching consensus today. The do-nothing plan – a plan to leave Social Security alone – would lead to a 22 percent across the board benefit cuts in 2037. Or, alternatively, could force politicians to enact an equally massive tax hike weeks or months before the trust fund is exhausted. Continuing to wait to reform Social Security is a high risk gamble.
The Commission proposed a technical change which would index government programs and the tax code to a more accurate measure of inflation known as the chained CPI. There is a broad consensus among economists that the measure of inflation currently used (CPI) overstates inflation, and that chained CPI is a more accurate measure of cost of living.
Some argue that Social Security and other age-related programs should calculate COLAs using the CPI-E – a measure that attempts to estimate inflation for a market basket that more accurately reflects the items purchased by the elderly.
The chained-CPI has been developed and refined over more than a decade and is now widely accepted as a more accurate measure of inflation. By contrast, the CPI-E is still an experimental measure, and many questions remain about the methodology used in calculating the CPI-E and the accuracy of the measure. In a recent issue brief discussing the options for using alternative measures of inflation for indexing government programs and the tax code, the Congressional Budget Office said that “it is unclear….whether the cost of living actually grows at a faster rate for the elderly than for younger people” and cited research suggesting that the CPI-E may overstate inflation.
In addition, using different measures of inflation for different purposes, such as using the CPI-E to index programs for the elderly while using CPI-U for other programs, would be a policy change that goes well beyond the technical issue of accuracy.