Six Solutions to our Debt Crisis

Print Share on LinkedIn More

We promised an analysis—a brief one!—of the different budget and debt resolving solutions proposed by six national think tanks convened by the Peter G. Peterson Foundation. You know Peterson, founder of the Blackstone Group, former CEO of Lehman Brothers, and one time secretary of commerce under President Nixon.  You also know the foundation from its ubiquitous TV commercials promoting the presidential candidacy of Hugh Jidette (“Huge Debt”, get it?) and the OweNO campaign.

But Peterson is spending money on federal debt solutions, giving each of six national think tanks $200,000 as part of the Foundation’s Solutions Initiative to develop fiscal solutions (comparable at 10 and 25 years into the future), all beginning with common baseline information from the Congressional Budget Office and reviewed for consistent analytical techniques by the Tax Policy Center.  As we promised, we’ll cover some of the more salient comparative points of concern to nonprofits from the six think tanks – the American Enterprise Institute, the Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, The Heritage Foundation, and the Roosevelt Institute Campus Network.

In our view, three of the think tanks are on the left side of the political spectrum (the Economic Policy Institute, the Center for American Progress, and the Roosevelt Campus Network), two on the right (American Enterprise Institute and the Heritage Foundation), and one “in between” (the Bipartisan Policy Center). The Wall StreetJournal offers a helpful tip to think of CAP as a proxy for President Obama, Heritage for Republican House Budget Chairman Paul Ryan, and the BPC whose plan was drafted by retired Republican Senator Pete Domenici and longtime Democratic financial expert Alice Rivlin for the Bowles-Simpson fiscal commission whose report was pronounced DOA virtually before the ink met paper.  Of course, neither the Ryan nor the Obama plans have done very well recently.  Ryan’s budget plan lost in the Democratic-dominated Senate 57 to 40 but the President’s fiscal year 2012 budget plan lost zero to 97, picking up not even one Democratic vote in support, even just for show.

The Peterson Foundation sees hope in the fact that these six organizations even participated and agreed on broad principles such as “current policy is unsustainable,” “support maintaining a social safety net for those who need it,” and “we cannot subsidize the well-off the way we currently do,” but the devil is clearly in the details. Some details that probably count for nonprofit readers may include these:

First is the huge difference among the six think tanks regarding the size of the federal budget as a proportion of Gross Domestic Product, in other words, how much should the federal government count as a part of the economy in a “fixed” federal budget scenario?

Budget levels as % of GDP in 2035 American Enterprise Institute Bipartisan Policy Center Center for American Progress Economic Policy Institute Heritage Foundation Roosevelt Campus Network
Revenues 19.9 23.1 23.8 24.1 18.5 22.9
Spending 22.8 23.7 23.2 27.8 17.7 24.8

Interesting is that AEI’s projection of the size of the federal role in GDP is much closer to the Domenici/Rivlin and CAP plans than the much smaller size of the federal government in Heritage’s vision. Heritage’s plan looks distinctly like an outlier aiming to shrink the government below a level that everyone else sees as beyond the pale.

The differences are of course magnified when examined in terms of what functions the federal budget would actually emphasize, as the conservative think tanks cut back on spending on non-defense functions while the liberal think tanks would increase non-defense spending:

Federal budget spending as % of GDP in 2035 American Enterprise Institute Bipartisan Policy Center Center for American Progress Economic Policy Institute Heritage Foundation Roosevelt Campus Network
Health 6.7 9.5 7.8 9.7 5.8 7.3
Social Security 5.3 5.9 5.9 6.2 3.4 6.2
Defense 4.0 2.4 3.2 1.9 4.0 2.9
Other governmental programs (other than paying interest on national debt) 3.8 3.8 4.0 5.8 2.8 5.1

These differing spending allocations reflect two things, one the think tanks’ perception of the cost-savings effects of their solutions to Medicare and Social Security, the other their ideological approach about government’s role in spending for non-defense functions.

All six of the think tanks and the Peterson Foundation “agree that health care costs represent the largest threat to our fiscal and economic future,” especially in light of demographic changes such as an aging population affecting Medicare.  The solutions proposed by the think tanks vary:

Recommended health policies American Enterprise Institute Bipartisan Policy Center Center for American Progress Economic Policy Institute Heritage Foundation Roosevelt Campus Network
  Repeal national health care reform and rely on market-based reforms Medicare payment reforms to promote better

coordination of care and reduce costs

expand the authority of Medicare’s Independent

Payment Advisory Board (IPAB) to limit spending increases in the private insurance market

Medicare payment reforms to promote better

coordination of care and reduce costs

Repeal national health care reform and rely on market-based reforms Medicare payment reforms to promote better

coordination of care and reduce costs

  transform Medicare into a premium support

program that would put spending and cost-containment decisions in the hands of

individuals and private-sector insurers.

Create a premium support program alternative to Medicare, but allow seniors to stay enrolled in traditional Medicare if they choose Add  a

public insurance option to the health insurance exchanges

Add a

public insurance option to the health insurance exchanges

transform Medicare into a premium support

program that would put spending and cost-containment decisions in the hands of

individuals and private-sector insurers.

add a

public insurance option to the health insurance exchanges

  individual tax exemption of

employer-sponsored health benefits (which employers also can deduct from income) should be

phased out

individual tax exemption of

employer-sponsored health benefits (which employers also can deduct from income) should be

phased out

 

    individual tax exemption of

employer-sponsored health benefits (which employers also can deduct from income) should be

phased out

 

individual tax exemption of

employer-sponsored health benefits (which employers also can deduct from income) should be

phased out

 

Notable is the interest of three of the six think tanks in resurrecting the public option, though none explicitly calling for a single-payer system.  It is clearly an ideological split, the three liberal entities still believing that a public program is valuable and necessary.  Also ideological is the recommendation regarding the phasing out of the tax exemption on employer-sponsored health benefits, which the four think takes say would “make workers more conscious about the costs of their insurance decisions.”   It is a very costly charge against the federal budget, but the justification offered points out how a federal budget is not simply financial, but affect – and is intended to affect – taxpayers’ behaviors and decisions.

Along with Medicare, the other major component of the “third rail” of American politics is tinkering with Social Security, but when paid by the Peterson Foundation, Social Security fixes can be proposed without the danger of losing at the polls.

Recommended Social Security solutions American Enterprise Institute Bipartisan Policy Center Center for American Progress Economic Policy Institute Heritage Foundation Roosevelt Campus Network
  eliminate payroll taxes for workers 62 and older raise the cap on income subject to payroll taxes and thus tax more income of higher earners;

 

raise the cap on income subject to payroll taxes and thus tax more income of higher earners

 

raise the cap on income subject to payroll taxes and thus tax more income of higher earners eliminate payroll taxes raise the cap on income subject to payroll taxes and thus tax more income of higher earners
  increase the retirement age, reduce the level of federal retirement benefits, and create  mandatory universal savings accounts for all workers. reduce benefits for higher-income people, while enhancing benefits for the very old and the poor reduce benefits for higher-income people, while enhancing benefits for the very old and the poor   increase the retirement age, reduce the level of federal retirement benefits, and create voluntary universal savings accounts for all workers. add a public insurance option to the health insurance exchanges
  Tax advantaged, flat monthly Social Security benefit that would result in higher benefits for low income persons       Tax advantaged, flat monthly Social Security benefit that would result in higher benefits for low income persons, benefit phased out at higher income levels  

One would hope that nonprofits are deeply concerned about the content and context of differing visions of the federal budget, but there are probably some whose interest boils down to individual and corporate tax rates – and change in the charitable deduction – as they might affect charitable giving.

Recommended changes in tax policy for individuals, corporations, charities American Enterprise Institute Bipartisan Policy Center Center for American Progress Economic Policy Institute Heritage Foundation Roosevelt Campus Network
Individual taxation Replace income tax with progressive consumption tax Broaden tax base, lower tax rates; tax capital gains as ordinary income Reduce low and moderate income taxes; temporary millionaires tax surcharge Extend middle-class

cuts, repeal

high-income cuts,

limit capital gains

preference; add

millionaire

surcharge

Replace with modified

flat tax on income

used for spending;

savings  and senior

benefits untaxed

Link rate structure

to share of national

income, reducing

rates for all but

high-income earners

Corporate taxation Replace with

progressive

consumption tax

Replace rate

structure with

flat 27 percent rate

Eliminate deductions Tax foreign income

as it is earned

Replace corporate tax structure with

modified flat tax

on net cash flow

Reduce rates in all

brackets by

three percentage points

Tax expenditures Eliminate most;

retain and simplify

charity, mortgage

interest, families,

work

Eliminate most;

retain and simplify

charity, mortgage

interest, families,

work

Eliminate most;

replace deductions

and exemptions with

credits

Convert charity and

mortgage interest

deductions into

credits, cap

remaining, extend/

expand many

refundable credits

Eliminate most;

retain charity,

mortgage interest,

work, and add higher

education

Eliminate mortgage

interest deduction and

reduce the value of

those that remain by

half

 

The charitable deduction would get cut in the Roosevelt plan, saved and protected by the two conservative think tanks and the Bipartisan Policy Center, and modified or replaced by tax credits –similar in some ways to the 12 percent charitable tax credit proposed by the Bowles-Simpson commission – by CAP and EPI.

While it is hard to discern serious threats to the nonprofit sector in the plans, we disagree with the Peterson Foundation’s optimism. The plans look to us very different, centered on core elements of government philosophy – who should be taxed, how much people should be taxed, and what the government should deliver as non-defense program functions. Peterson sees hope, but it looks like stalemate to us.

  • Kelly Kleiman

    Rick, This is an excellent summary of a fundamentally misguided activity. Describing government expenditures as “huge debt” doesn’t do justice to the government’s special role in supporting the economy during depression/recessions like the one we’re in now. Of course people cower in the face of “debt” but if the expenditures are described instead as “investments in infrastructure” they understand that the government is doing what it’s supposed to do. I didn’t hear anyone complaining about the “huge debt” run up by the wars in Iraq and Afghanistan so forgive me if I’m skeptical of the budget hawks’ decision to get anti-debt religion when the time comes to cut social programs.

    And please see this wonderful explanation of the real way the Federal government resembles a family. It’s not in living within its means but in allocating its resources properly: http://www.samefacts.com/2011/06/economics/its-not-about-money-and-the-country-isnt-broke/

  • rick cohen

    Thanks for your comment, Kelly. Of course the fundamental question here is our nation’s priorities–or misplaced priorities. Do note that the sponsor of this budget/debt analysis was the Peterson Foundation which is clearly raising the “huge debt” (Hugh Jidette) question rather than asking whether our nation’s resource allocation priorities are correct.

  • David Cearley

    Rick, when you talk about the nation’s resource allocation priorities, you’re talking about other people’s money like it belongs to the government or the nation. A failure to rigidly protect private capital and wealth creation may seriously imperil the nation’s ability to raise tax revenue because progressive policies create massive disincentives to invest, create taxpaying wealth or tax paying jobs. The difference between the most conservative and most liberal plans is about 9.3% of GDP, destroying more than ten percent of the private economy, millions of jobs, and tens of billions in tax revenue, actually compounding our debt problems. Throw in an energy policy forecast to raise electric rates 40-60% in the next four years, and we’re talking massive economic dislocation. Every percentage shift of GDP from the private to the public sector reduces tax revenue, or increases the burden on the remaining taxpayers. At the same time government expenditures are going up. Every government dollar spent has to be extracted from the private sector. Other than government engineered inflation, there is no other revenue source. Current spending is 40% higher than tax revenues. To pay for current spending without debt, would require tax rates to go up 70% higher than they are now. When you consider that only 50% of taxpayers actually pay any income taxes, it quickly becomes clear that we don’t have a tax revenue problem, we have a government spending problem. Meanwhile, the Democratic party hasn’t even offered a budget for the current fiscal year.

  • rick cohen

    Dear David: I do wish the Democrats offered a budget. We have already commented on that. Regarding the rest of your analysis, there are good arguments pro and con as you know. The contentions of liberals and conservatives are all over the airways, whether we need more government or less government spending, whether we should be focusing on creating jobs or reducing the deficit, etc. But some of this comes down to a question of our contrasting visions of government itself– sometimes the blindness that some people have to what government has done and continues to do for them on a daily basis. It makes me think of this recollection from former South Carolina senator Fritz Hollings:

    “A veteran returning from Korea went to college on the GI Bill, bought his house with an FHA loan, saw his kids born in a VA hospital, started a business with an SBA loan, got electricity from TVA and, later, water from an EPA project. His parents, living on Social Security, retired to a farm, got electricity from REA and had their soil tested by the USDA. When his father became ill, the family was saved from financial ruin by Medicare and a life was saved with a drug developed through NIH. His kids participated in the school lunch program, learned physics from teachers trained in an NSF program and went to college with guaranteed student loans. He drove to work on the Interstate and moored his boat in a channel dredged by Army engineers. When floods hit, he took Amtrak to Washington to apply for disaster relief and spent some time in the Smithsonian museums. Then one day he got mad. He wrote his Senator an angry letter – ‘Get the government off my back’, he wrote. ‘I’m tired of paying taxes for all those programs created for ungrateful people!'”

    Thanks for your comments David.