There's been a lot of hoopla about the various groups focusing on the U.S. deficit and their recommendations to Congress and the President. One of them is the Peterson-Pew group. Peterson has been trying to get Congress to gut Social Security for decades, so it isn't surprising that Social Security comes up in their report. Getting Back in the Black: Summary; Full Report (Nov. 10, 2010). The report argues for a limit on debt and a one-year freeze on discretionary spending, with adjustments thereafter based on growth rather than inflation (resulting in lower payments to seniors under Social Security). The report also recommends "triggers" that will automatically cut benefits: "budget limits with automatic triggers are attached to the drivers of fiscal imbalances: health care, Social Security, and tax expenditures."
Clearly, Social Security reduction is one of the drivers of the Peterson-Pew group thinking, but Social Security is not a "driver of fiscal imbalance." Social Security is a good program, serves very important societal needs that a large majority of Americans support, represents no part of the growth in the deficit (even if one thinks that the deficit is a central problem), and can resolve any shortfalls it has with VERY minimal tax increases by making the payroll tax fairer (increasing or removing the cap).
The military expenditures, however, are a driver of fiscal imbalance. Spending on defense went down under Clinton, then up sharply under Bush II because of the wars of choice in Iraq and Afghanistan and huge inputs to defense spending beyond those. Those costs, of course, continue and will do so until we get out of the war zones. The total defense request for FY 2011 is $895 billion. US Economy: Military Budget (About.com) We get about 1.1 trillion from individual taxpayers. US Statistics of Income for Individuals 2008. That means that more than 80% of the taxes received from individual taxpayers support our military expenditures. Now that's a driver of imbalance. George Bush increased our military expenditures back to about 5.5% of GDP. Think what could be done if we reduced the military expenditures back to where they were under Clinton, or lower.
The other is the President's commission, headed by Bowles (Democrat) and Simpson (Republican). The two "bipartisan" heads of the commission released their talking points--and not unexpectedly, they think Social Security benefits should be cut. See Co-Chairs Proposal November 2010. The argument is that we must sacrifice to bring our budget in line with our tax revenues and that means cutting "spending we can't afford".
The co-chairs suggest simplifying taxes, broadening the base, and lowering rates. That's what the 1986 reforms spearheaded by Rostenkowski in the House and Packwood in the Senate did--but back then, the rates were much higher, the Code was more riddled with special exemptions, and we didn't have the ridiculous anti-tax, anti-government loony fringe in Congress that never saw a tax it doesn't hate. It's not clear that base broadening and rate cutting is a prescription for success now. It certainly isn't clear that the result would be a fair distribution of the tax burden. The Bowles-Simpson program would reduce progressivity even further by leaving only 3 rates and eliminating the AMT--that would mean that the ridiculous rate compression that we have had would become even worse. Billionaires and ordinary workers making $50,000 a year would pay rates not far apart, when instead we should be re-instituting a rate structure with more distinctions to acknowledge the world as it is today. Most of their tax savings are health and mortgage--of course, without real health reform (single payer, single provider), that will mean that workers who bargained for health benefits as part of their pay package will lose even more of their wages, which have already been stagnant or declining for the last decade. Not a good deal for ordinary Americans. Now there are some good ideas here--like ending the mortgage interest deduction for mortgages on vacation homes and capping the mortgage on which interest can be deducted at $500,000. Our current mortgage interest deduction is a significant tax expenditure of primary benefit to the wealthy, and there is no justification for that.
the corporate tax provisions are the corporatist agenda personified. They want to permanently extend the R&D credit and cut the corporate rate from 35% to 26%. They want a territorial tax system.
- Extending the R&D credit is a waste of money--as bad or worse than the mortgage interst deduction. Corporate R&D expenditures are seldom the kind of innovative, basic research that can transform an economy--that's more often done in government or university labs and that's where we should be spending R&D dollars. The credit amounts to a giveaway. Let corporations deduct their business R&D expenses, and that's all they need. Much of their R&D is just repackaging an existing product and not real innovation. The credit isn't really an incentive--whatever corporations need to do they will do whether its a credit or a deduction.
- Cutting the rate to 26% doesn't make sense--corporations already pay an effective rate lower than that, and they will continue to hire expensive tax attorneys to cut their taxes unless there is no tax. We'd be better off considering Joseph Dodge's suggestion in the Fall 2010 aBA Tax Section NewsQuarterly--tax corporations on their book income, no ifs, ands or buts allowed, and at the same time eliminate the capital gains preference.
- Territorial taxation will permit US multinationals to pay almost nothing in taxes in this country, as they continue to offshore their operating businesses.
The co-chairs argue for "tort reform" as a way to reduce costs and they have similar proposals to "cap" damages for medical malpractice. Again, this is just the corporatist agenda. Tort reform isn't needed and is in fact harmful to ordinary people's rights to redress when they are wronged. Tort actions are often the only existing method to cause a corporate entity to compensate those who suffer because of its recklessness and greed in putting out an unsafe product. Studies have shown that there is no epidemic of bad tort cases. None of the "tort reform" proponents have established that tort reform benefits anyone except wrongdoers. If a doctor amputates the wrong limb, why shouldn't the doctor and hospital pay punitive damages of some significant amount. We could put those punitive damages into a public fund rather than having them go to the victim, but it invites moral hazard to limit the malpractice claims to protect doctors and hospitals.
The co-chairs argue for setting an arbitrary target for growth in health care costs (GDP+1%). we might well say, as a society, that we think it is reasonable to spend more on health care to provide a better quality of life for all, and to spend less on other things. Arbitrary caps and triggers give the appearance of reasonable cost-saving measures, until you realize the result is care that is not provided that could have been without too great a sacrifice. Other suggestions seem equally short-sighted--capping long-term medicaid payments and cutting spending for graduate medical education are both likely to result in long-term detriments. but some seem reasonable--such as considering a public option!
The co-chairs have Social Security written all over their cut recommendations, even though they indirectly acknowledge that their call to "reform" Social Security has nothing to do with deficit reduction (see page 43 where they note that this is a call to "reform Social Security for its own sake, not for deficit reduction"). They suggest"ensuring" that Social Security is sound over the long run. They want to use chained CPI to measure adjustments, resulting in significantly less benefits. They want a more progressive formula for benefits, and higher ages for retirement (normal retirement at 69 by 2075). All state and local workers would be added to the program by 2020. They suggest lifting the cap, so that the tax applies to 90% of wages by 2050.
Later on they say that we have to "enact tough discretionary spending caps". why? If we want to spend more of our GDP through government programs that allocate resources to initiatives that serve the public interest, why should we cap those programs? It's a question of priority setting. Arbitrary caps, whether at 20% of GDP or 21% or whatever, make no sense whatsoever. They just sound easy. What needs to be done is to determine whether we want sound health care in a reasonable system (single payer public option, extending Medicare as a program of choice for more, etc.) or whether we want the majority of Americans to continue to suffer a declining standard of living because of putting our priorities on corporate insurer profits instead of people's needs for health care. Setting arbitrary spending caps is like deciding that you will only buy items that are located in the first isle at the grocery store so that you can make the trip more efficient. You'll get out in record time, sure, but you won't have any of the things that you need for a balanced diet, and your health will suffer so that you'll be much worse off in the long run because of your arbitrary decisionmaking.
The specifics for the military budget don't seem to make a lot of sense. Freeze pay for 3 years. Replace military with private contractors. (Hey--that's not exactly worked since Reagan started it and the Bush I and Bush II regimes accelerated it. We paid at least double for every Blackwater mercenary that we paid for regular soldiers, even while we had to deal with the repercussions of out-of-control mercenaries killing innocent civilians in Iraq.) They call for reducing expenditures on base support, facilities maintenance and R&D--the latter by 10%. Now, I'm for reducing military costs, but I doubt if deferring maintenance or cutting R&D is the best way to do it. Much of military R&D expenditure has civilian uses--we need to boost real, basic, R&D in lots of ways, instead of giving tax breaks to corporations for jusgt recylcing a patent to a slightly new variant (as we do with drug development).
Bowles and Simpson also want to freeze all federal salaries for 3 years and cut 10% of the federal workforce. That sounds like a recipe for disaster, on top of the existing unemployment and underemployment. The freeze on salaries might be sustainable, but wholesale firing of thousands? No way can that be in the best interest of the country.
Oh, --"sell excess federal property". I suppose that would be Arctic wilderness areas, roadless areas and other natural resources that natural resource extractive companies would just love to "develop." ???
Not surprisingly, the Heritage Foundation, which is notorious for arguing for reduction of social security and other safety net programs, thinks the co-chairs' recommendations are a "good first step". Bowles-Simpson Co-Chair Report (11/10/10) (arguing that the "entitlement programs" are the "major drivers" of government spending and that "reining in government spending" will close the deficit).
This emphasis on the deficit seems to be off track. It has little or nothing to do with getting the US economy back on a good, sustainable track that will provide a decent standard of living for Americans, with sound support for a strong middle class, the backbone of the country. Deficits aren't the "evil of all evils" that these commissions and their backers make them out to be. ordinary people are being called to sacrifice even more, when they are bearing already heavy burdens from the financial crisis,high unemployment and high rates of foreclosures. In the name of deficit reduction, these "experts" want us to forego tort remedies against institutions that cause life-long harms that cannot be made whole. In the name of deficit reduction, they want us to work longer and retire with less benefits, while there is no provision for eliminating the capital gain preference giving those who have income from capital assets an easy pass on taxes.
When people and businesses aren't spending, the government needs to spend. That money is the fluid that drives the economy. If it isn't there, we will have a double dip recession or worse. cutting back government expenditures in the drastic ways called for here (10% of federal workers fired, etc.) will have a negative impact on the economy that will ripple through ordinary Americans' lives.