How to Approach Tax Reform and Balancing the Budget

Mark Thoma quotes Robert Reich on "grand bargain" negotiations, with Reich proposing how President Obama could open negotiations by describing a set of tax increases and loophole closures that would balance the budget, without any need to "raise taxes on America’s beleaguered middle class, cut Social Security or Medicare and Medicaid, reduce spending on education or infrastructure, or cut programs for the poor".

Although Reich presents his argument in apparent earnest, I don't think he expects that the President will follow his advice. Thoma presents a more basic suggestion,

Obama should at least reverse the Republican pre-election mantra and insist: raise taxes first, then we'll talk spending cuts.

I think you can take a bit from all three columns. The President could actually use Reich's model to illustrate "This is how we can balance the budget with tax increases," followed by, "Here are the tax increases and loophole closures I actually propose." He can add, I'm not saying these tax increases and reforms cannot be reduced or eliminated but I am saying this: before I'm willing to revisit that part of my proposal we must identify enough spending cuts to balance the budget, and only if we accomplish that can we start talking about additional spending cuts that might offset the revenue we otherwise need to raise through the tax changes I've identified."

I also think he should stick to his guns on Social Security, even if it makes some people gnash their teeth, with the same sort of tweaks that were made in 1982. Change as little as possible, in a manner that will make the CBO happy over a fifty year projection. It's the position he took in the debates, and it's consistent with the notion that Social Security should be self-funding.

Frankly, I think the conceit of the "grand bargain" can get in the way of good policy formation, just as throwing three competing goals (universal coverage, revenue neutrality, reduction of healthcare costs) into healthcare reform unnecessarily complicated the debate and legislation while arguably producing a weaker bill than might have been achieved through separate legislation. Social Security expenditures are increasing, but are not out of control. The federal deficit is not all that bad when you remove Medicare, Medicaid and Social Security from the mix. The real issue is the present cost and projected growth of healthcare expenditures. Ezra Klein summed up the issues a few days ago with a series of CBO graphs.

What these three charts tell you is simple: It’s all about health care. Spending on Social Security is expected to rise, but not particularly quickly. Spending on everything else is actually falling. It’s health care that contains most all of our future deficit problems. And the situation is even worse than it looks on this graph: Private health spending is racing upwards even faster than public health spending, so the problem the federal government is showing in its budget projections is mirrored on the budgets of every family and business that purchases health insurance....

Page 9 of the report includes this remarkable statistic: If we just continue on the way we’re going , then “spending for Social Security, Medicare, other major health programs, defense, and interest payments” will “nearly equal all of the government’s revenues in 2020 and would exceed them from 2022 onward — leaving no revenues to cover any other federal activities, such as income security programs, retirement benefits for federal civilian and military employees, transportation, research, education, law enforcement, and many other programs.”

The projection does not include reforms not yet in effect, i.e., those of the Patient Protection and Affordable Care Act ("Obamacare"), but it's beyond obvious that healthcare costs are the elephant in the room. The cost control measures of Obamacare are not going to fix the problem, but at least they're a starting point. If the Republicans choose to continue to pretend that this is a problem we can fix by repealing the first serious effort to bend the cost curve, or by cutting funds for PBS, they're (still) not serious about balancing the budget. If you recall, when the Democrats proposed a modest measure to help patients understand end-of-life care, something that could conceivably lead to better care and outcomes for elderly patients, the Republicans demagogued about "death panels".

The only Republican reform ideas we seem to be hearing about on healthcare are to turn all public insurance programs into voucher programs, and to strip preventive care out of health insurance and pretty much make everything but catastrophic care self-funded through a MSA. "Let's not look at what is working here, and certainly not at what is working in the rest of the world." If our nation's per capita healthcare expenses were reduced to the levels typical of other developed nations, most of our immediate budgetary problems would disappear - we would still have a cost curve issue, but we would have a much better starting point. The Republicans won't consider emulating even the most market-based foreign healthcare models - not just because ideology trumps balancing the budget, but because it's easier to argue for cuts if you first contrive a crisis.