This post originally appeared on TaxVox.
In this year’s presidential campaign, Hillary Clinton’s proposal to double the child tax credit and Donald Trump’s plan replace the dependent exemption with a higher standard deduction have both helped focus attention on tax treatment of families.
Interestingly, both progressives and conservatives oppose extending preferences to children in middle and higher income families. Progressives prefer to “spend” the money on those with less income, and conservatives, especially supply-siders, believe the funds would be better used to reduce marginal tax rates.
But they confuse the two purposes of providing benefits to children. The first is a classic social welfare argument that revolves around spending to subsidize one thing (in this case, the needs of children) at the cost of higher taxes or lower subsidies for another. This is especially powerful when the benefit goes to those with the greatest needs: Concentrating a greater share of spending on lower-income people results in the greatest reduction in poverty.
But there is second goal of adjusting tax burdens for children—and it is based on a tradition that goes back at least to Aristotle: to treat equals equally under the law. Economists call it horizontal equity, but I prefer the term “equal justice.” In the tax system, this means taxing equally those with an equal ability to pay. And it should apply among all households, rich and poor alike.
This is especially important when you think about households with and without children. In almost all transfer and tax systems, benefits are adjusted for household size. For instance, the federal poverty level is about $12,000 for a one-person household and about $4,000 higher for each additional person, or about $24,000 for a four-person household. To put it another way, the guideline suggests that a $24,000 four-person family can live at the same poverty level of consumption as a $12,000 single person.
In the past, the tax system used the dependent exemption to provide equivalence for families with children. But the exemption waned in importance as per capita income rose much faster than the exemption, which for a long time was not indexed and even now is indexed only for inflation. As a result, the relative burden on households with children rose. After I revealed this in the early 1980s, President Reagan supported an increase the exemption. To believe that the current exemption of about $4,000 is the right number, one would have to believe that a couple with no children and $52,000 of income lived an equivalent lifestyle as one with $60,000 of income and two children.
More recently, Congress and presidents Bill Clinton and George W. Bush expanded the child credit in lieu of increasing the dependent exemption. That the credit has been made partially refundable and extends fairly high up the income scale implies that those expansions served both goals of spending on those in need and establishing tax parity among families of different sizes. The current exemption of about $4,000 is worth $1,000 to a family that pays a marginal tax rate of 25 percent, so the current credit of $1,000 plus the exemption grants that family about $2,000 per child in total benefits.
Whatever the right balance between the social welfare and equal justice approaches, most voters judge government on whether they think they are being treated fairly. But if children are both expensive to support and reduce a household’s ability to pay taxes, and if a welfare system separately provides supports for households with low incomes, then shouldn’t adjustment for children put explicitly in the tax system apply to most or all households? It is an interesting and important question and one for which at least politics has led elected officials to answer, “Yes.”
Photo courtesy of Ken Teegardin/via Flickr Creative Commons.
This post originally appeared on TaxVox.
The individual income tax has never taxed the very wealthy much. Donald Trump may have claimed huge losses starting in the early 1990s, but, like other rich investors, he wouldn’t have paid much tax regardless. Despite paying some tax, Warren Buffett’s release of his 2015 tax return affirms that conclusion.
There are two major reasons: first, paying individual income taxes on capital income is largely discretionary, since investors don’t pay tax on their gains until they sell an asset. Second, taxpayers can easily leverage capital gains and other tax preferences by borrowing, deducting expenses, and taking losses at higher ordinary rates while their income is taxed at lower rates. Such tax arbitrage is, in part, what Trump did.
To be fair, some, like Buffett, live modestly relative to their means and still contribute most of what they earn to society through charity. Some pay hefty property and estate taxes and bear high regulatory burdens. And salaried professionals and others with high incomes from work, whether wealthy or not, may pay fairly high tax rates on their labor income. Still, there are many ways for the wealthy to avoid reporting high net income produced by their wealth.
The phenomenon is not new. In studies over 30 years ago, I concluded that only about one-third of net income from wealth or capital was reported on individual tax returns. Taxpayers are much more likely to report (and deduct) their expenses than their positive income. In related studies, I and others found that rich taxpayers reported 3 percent or less of their wealth as taxable income each year.
But your favorite billionaire did not get that way by earning low single-digit returns to his wealth. Buffett’s 2015 adjusted gross income (of $11.6 million) would be around one-fiftieth of 1 percent of his wealth, which in recent years has been estimated to be near to $65 billion. Yet, over the past 5 complete calendar years, Buffett’s main investment, Berkshire Hathaway, has returned an average of over 10 percent annually.
The wealthy effectively avoid paying taxes on those high returns either by never selling assets and thus never recognizing capital gains, deferring income long enough that the effective tax rate is much lower, or by timing asset sales so they offset losses, as Trump likely has been doing to use up his losses from 1995.
When you die, the accrued but unrealized gains generated over your lifetime are passed to your heirs completely untaxed, though estate tax can be paid by those who, unlike Buffett, don’t give most away to charity.
“Tax arbitrage,” the second technique, is simple in concept though complex in practice. It allows an investor to leverage special tax subsidies just as she’d arbitrage up any investment—in this case, to yield multiple tax breaks. If you buy a $10 million building with $1 million of your own money and borrow the other $9 million, you’d get 10 times the tax breaks of a person who puts up $1 million but, because she doesn’t borrow, buys only a $1 million building.
The law limits the extent to which most people can use deductions and losses from one investment to offset income from other efforts, but “active” investors are exempt from most of those restrictions. In real estate it is quite common for the active individual or partner to use the interest, depreciation, and other expenses from a new investment to generate net negative taxable income to offset positive income generated by other, often older, investments.
The main trick is simply to let enough income from all the investments accrue as capital gains. For example, take a set of properties that generate $1 million in rents and $500,000 in unrealized appreciation. If expenses are $1,200,000, net economic income would be $300,000 ($1,000,000 plus $500,000 minus $1,200,000); but net taxable income would be a negative $200,000 ($1,000,000 minus $1,200,000) since the unrealized appreciation is not taxable income.
Real estate owners enjoy other tax benefits as well. They can sell a property without declaring the capital gain by swapping the asset for another piece of real estate—a practice known as a “like-kind” exchange. Often, when a property changes hands it ends up being depreciated more than once.
At the end of the day, tweaks to the individual income tax system, including higher tax rates, are unlikely to increase dramatically the taxes paid by the very wealthy. Instead, policymakers need to think more broadly about how estate, property, corporate, and individual income taxes fit together and how to reduce the use of tax arbitrage to game the system.
Photo courtesy of Stuart Isett/via Flickr Creative Commons.
A version of this post originally appeared on The Washington Post.
+What should the next president do to make Social Security more sustainable?
No one should assess Social Security policy in isolation. What is fair in Social Security must relate to what is fair for the national budget as a whole.
Congressional Budget Office projections indicate that by 2026 we’ll be 21 percent richer, and that tax revenues will rise at a slightly higher rate. That means we stand before an ocean of opportunity. But of the expected $850 billion in additional real revenues, about 150 percent (or about $1.3 trillion) is committed entirely to increasingly expensive payments to Social Security, health care and interest on the debt. And as a result of these commitments, almost anything that represents investment — in our children, infrastructure or the basic functions of government — takes it on the chin.
Even as revenues grow, the number of workers available to pay for Social Security benefits is falling rapidly, meaning that either benefits must be cut, taxes increased, or both. Every delay puts more of the cost on the young.
Social Security maintains a design built around an economy and family structure of the past. People aged 65 now live about six years longer and retire even earlier than they did in 1940 when the system first paid benefits. That means families like Clinton’s, Trump’s and mine will be getting hundreds of thousands of dollars more in lifetime benefits than they would have when the system was first created, while many future elderly will still be left in poverty.
So what must be done? Slow down and reorient the growth in benefits scheduled for future retirees. A typical couple retiring today gets more than $1 million in lifetime Social Security and Medicare benefits; millennials are unrealistically scheduled to get $2 million. That growth can be slowed without being stopped and shifted more toward those who are truly old with low- to moderate-incomes. While Social Security’s long-recognized shortfalls inevitably mean someone must pay, those with above-median incomes are the ones with the money.
Still, no Social Security benefits need to be cut for those currently retired. To do better for those elderly with median or lower lifetime incomes, we should raise minimum benefits and give credit for raising children. We should also fix absurd rules around spousal and survivor benefits and other sources of inequity.
The current system discourages work in late-middle age, something that is no longer easily affordable and which reduces economic growth, personal income and tax revenues. Congress should reduce Social Security’s natural disincentives for work both by adjusting the retirement age as we live longer and saving a larger share of lifetime benefits for later ages, when health needs rise and work is less possible. As lifespan increases, Social Security now promises a typical newly retired couple aged 62 an average of more than 28 years of benefits (today, one of them is likely to make it to 90 years of age). That’s more than enough; there are greater societal needs than the desire for more retirement years.
Finally, the tax issue. While some broadening of the Social Security tax base is possible, government needs to concentrate on raising revenue for high priorities apart from Social Security: our growing national debt, and vital investments such as education, infrastructure and support for working families. Campaigns are about giveaways, but true reform requires looking at what must be done and how, whether we want to or not.
Photo courtesy of The Social Security Administration, Public Domain.
The 2016 presidential election has made student debt a national issue. Two just-released books, one by Sandy Baum and one by Beth Akers and Matt Chingos, have done a great job of identifying the real problems with student debt, while debunking much of the rhetoric that tends to identify wrong problems and come up with wrong solutions. I highly recommend the books, though I am hardly unbiased since Matt and Sandy are colleagues of mine.
By focusing on the real risks associated with the current system, the authors emphasize that we must pay attention to who acquires the debt and who benefits from it. For instance, future doctors and lawyers with high returns to postgraduate education acquire some of the highest levels of student debt. Akers and Chingos emphasize that over 40 percent of student debt is held by those in the top 20 percent of the income stratum. Thus, simply eliminating student debt would help the highest income borrowers most.
Sandy Baum focuses on designing proposals that would prevent so many at-risk students from borrowing for programs unlikely to serve them well. She especially discredits proposals that provide the most assistance to those who are actually in the best position to repay their loans. One example of how all this plays out was shown earlier by some other colleagues: blacks as a group, who are less likely to come out of college with a degree, end up with higher average student debt than whites.
Here I wish to address a more macro question: whether this shift toward higher student debt represents just one more way that government has disinvested in the economy. As students accumulated $1.3 trillion in debt, did government make an equivalent increase in investment in what economists often call “human capital”? Or did government simply shift additional burdens onto these students with few or no significant gains in educational achievement nationwide? Or something in between?
When we look at budgets as a whole, both federal and state, it’s quite clear how resources are being shifted. Average tax rates are about where they have been, maybe a touch higher. Taxpayers may have gotten a break for a while as rates went down a bit and then back up a bit, but that’s not the main story. Both federal and state budgets have adopted huge spending increases for retirement and health care. States have also put a lot more into prisons, while the feds have put much more toward interest costs, though offered a reprieve—if one can call it that—by a weak worldwide economy that has led to low interest rates.
Clearly, a smaller share of revenues and incomes goes for education—not just higher education, but primary and secondary education as well. Almost anything that might qualify as investment, such as infrastructure, has also seen a downturn.
Taking the budget as a whole, therefore, it’s hard to avoid the conclusion that the net effect of federal and state policies, of which student loans become merely one example, has been a disinvestment in the economy as a whole.
This raises an additional issue for those assessing programs by comparing benefits to costs. In the case of student loans, if more borrowing on average increases human capital by more than the value of the loans, we would say it was worthwhile for individuals to take out those loans. Correspondingly, if we were replacing a system with less education and no loans with one that on net created more assets than debt, we would likely conclude that the shift was worthwhile societally, not just individually. However, starting from a society that had financed education more directly, the student loan policy may be a failure.
Put another way, the starting point matters. In this arena and others we usually want government to increase net investment, as well as improving the allocation of funds so as to garner the highest returns on the investment, and we need to figure out the effect across the entire balance sheet of assets and liabilities. The individual perspective compares the personal increase in assets with the personal increase in borrowing and asks whether enough people come out ahead that society is better off. But if the additional loans don’t finance an increase in education societally, whether because some students don’t attain degrees or others don’t acquire any more education than they would have undertaken anyway, then we must ask what we got for our money.
If this debt policy additionally discourages risk taking and marriage after education, then all this debt may even reduce investment over time in education, businesses, and homes combined. Unfortunately, I think this has been the most likely outcome of recent policy. Even the creative reforms that Baum, Akers, and Chingos recommend won’t restore those past losses, though they may help minimize them in the future.
Whatever your take on this issue, this presidential campaign makes clear that higher education reform very likely will be on the national agenda in the next year or two. The Baum and Akers-Chingos studies should be required reading for anyone undertaking that reform.
Photo courtesy of Andrew Bossi-Flickr.
How do people build wealth? How do low-wealth families climb the economic ladder? It’s simple. They save. They get decent or even above-average returns on their savings. And they reinvest those returns over time. Unless policymakers and advocates face up to these simple propositions, policy efforts to reduce wealth inequality will go for naught.
Over many years I have had the privilege of working with groups concerned with wealth inequality and promoting asset growth. One of them, the Corporation for Enterprise Development, has been holding its biennial Assets Learning Conference, engaging over one thousand professionals. I cofounded and work with the Urban Institute’s Opportunity and Ownership initiative, which researches wealth inequality. Because of their concern for the well-being of low-income, low-wealth households, these engaged individuals often try to figure out ways that government can simultaneously support and protect more vulnerable populations. One consequence, though, is a hope and sometimes belief that asset-building policies can increase wealth without reducing consumption and can generate higher returns without requiring risk taking.
But saving by definition means forgoing consumption. Even if government provides the money, it forces individuals to save rather than immediately spend that money.
This fact creates a controversy among progressive advocates. A dollar spent on wealth building means a dollar not spent on food, health care, or other transfers for immediate needs.
Finance 101 further teaches that higher returns on saving come from investment in riskier assets. The expected return on stock is higher than the return on bonds, and the expected return on bonds is higher than the return on savings accounts and Treasury bills. Over several decades the after-inflation investment return on corporate stock has averaged close to 6 percent, whereas the return on five-year government bonds sits at around 2 percent. The expected return on many saving and checking accounts is close to zero. Compounded over time, average stock market investors will see their money multiply about eight times after 36 years; average medium-term bond investors will see theirs double. Savers using only checking and saving accounts, meanwhile, will see little if any growth.
Over short periods, however, stocks have the highest risk of the assets just mentioned, while savings accounts have the least. Over very long periods, the risks reverse. Investing in the stock market is like flipping a coin bent enough that betting on heads on average nets a good return, but there’s a high probability of a loss with a few flips. As the number of flips increase, the odds of having more heads than tails get better and better. John Bogle, founder of Vanguard, said it like this: “The data make clear that, if risk is the chance of failing to earn a real return over the long term, bonds have carried a higher risk than stock.”
It’s possible to buy stock and insure against losses relative to, say, a short-term bond. But the insurance will cost the difference in returns plus additional transactions costs. Thus, attempts to provide low- and moderate-wealth households both higher returns and low risk tend to fail.
Just look at the household assets reported on wealth surveys. Wealthy households hold the vast majority of their wealth in stock and small business assets and real estate either directly or through retirement accounts. They make much of their money not just by saving more initially, but by allowing the saving on higher-return assets to compound. Low-wealth households, meanwhile, own few or no high-return assets, tend to hold more debt relative to their incomes, and often pay higher interest on that debt.
Timing matters, too, especially when it comes to large, infrequent purchases like buying a home. Mortgages became widely available to lower-income households in the early 2000s, when home prices were at a peak, but less available after the Great Recession, when prices were lower and owners were getting capital gains in many regions. As Bob Lerman, Sisi Zhang, and I have pointed out, this created a “buy-high, sell-low” mortgage policy that devastates low-wealth households, including the young.
The policy implications are clear. Simply taxing the rich more or distributing more to low-wealth households will do little to narrow wealth inequality. Transfer programs rarely encourage wealth-holding and may even exacerbate private wealth inequality by imposing asset tests and by favoring renting over homeownership.
None of this means that the rich shouldn’t pay higher taxes or that transfer programs don’t protect vulnerable families or even provide a type of “asset” in the form of income and risk protection. That’s another subject. The subject here is the distribution of private wealth and the power it brings.
Advocates and lawmakers trying to counter wealth inequality, therefore, must find ways to get low-wealth savers into longer-term assets like stock and real estate, mainly through retirement plans and homeownership. Small business ownership also matters. And, subsidies provided by government must encourage long holding periods—that is, saving over time, not short-term deposits. Deposits followed quickly by withdrawals or loans don’t increase saving. Nor do proposals that subsidize borrowing encourage homeownership, since, by encouraging more borrowing, they often reduce net home equity.
Of course, many low-wealth households are not ideal investors in riskier assets. But there are risks and there are risks. Remember that Social Security and Medicare—and, to some extent, traditional pension plans—already require nonelderly adults, whatever their other needs, to “save” some income today to prevent inadequate income in old age.
Successful investment requires forgoing consumption, taking risks, and adopting a long-term view. Those attempting to address wealth inequality must either recognize these fundamental facts—and the related costs involved—or fail in their mission.
Photo by 401(K) 2012 via Flickr Creative Commons.
By: C. Eugene Steuerle and Rudolph G. Penner
The nation must change how it makes budget decisions. Permanent entitlement and tax subsidy programs, particularly those that grow automatically, dominate federal spending. Their growth, often set in motion by lawmakers long since dead or retired, is not scrutinized with the same attention as the discretionary programs Congress must vote on each year to be maintained, as well as grow. The result? A predetermined, inflexible federal budget that does not reflect our country’s needs.
Social Security, Medicare, and Medicaid, the three largest entitlement programs, accounted for $1.9 trillion, or about half, of federal spending in 2015. More important, they will absorb more than all the increase in tax revenues our growing economy will provide over the next decade and beyond. This astounding growth, combined with political unwillingness to collect enough taxes to pay for current government spending, translates to accelerating increases in budget deficits and national debt.
Congress can take steps to draw more attention to long-term sustainability when making budget choices. One possible reason such growth remains unchecked is that much of the budget process currently focuses at most on total spending and revenues over the next 10 years. This leads to game-playing when policymakers decide to increase government largess: Costs can be hidden outside the budget window, or costly “pay-fors” can be postponed for a later Congress to deal with.
Reforms focused on a 10-year window are similarly myopic and inadequate. To protect existing beneficiaries when enacting reform, typically only a small portion of the deficit reduction shows up in the first decade; the most impact is made on future beneficiaries, not current ones. A longer time horizon also makes reforms more palatable politically; it shifts the focus from threatening today’s retirees to allowing younger households to garner greater resources during their working years in exchange for less relative growth in government retirement benefits.
Better presentations of the budget priorities set by the president and Congress is crucial for reform. Current budget documents do not give a very clear picture of how much growth in spending is predetermined versus newly legislated. Nor do they reflect the relationship among real growth in taxes, tax subsidies, and spending programs.
What would such an improved portrayal show? Near-term problems in how our money is spent, not just long-term ones related to growing debt. Today’s current law, as estimated by the Congressional Budget Office, implies $1.281 trillion more inflation-adjusted dollars will be spent in 2026 than in 2016: $845 billion from revenue increases and $436 billion from deficit increases. Of these dollars, 33 percent will be devoted to Social Security and 37 percent to health programs, mostly Medicare and Medicaid. A further 27 percent will be devoted to larger interest costs related to debt increases.
What does this leave for everything else? Essentially nothing. About 1 percent of the $1.281 trillion would be spent for defense and 4 percent for other mandatory spending, most of which is for non-health entitlements. Domestic programs that must be funded every year will be cut slightly in real dollars while declining substantially as a share of national income. Only much larger deficits at an unsustainable level prevent further hits on these programs.
Entitlements should be reviewed more frequently, and periodic votes of Congress should determine most of their growth. Permanent tax subsidies need similar scrutiny and limits placed on their automatic growth. In good times, tax rates must be high enough to avoid pushing today’s costs onto tomorrow.
Automatic triggers that activate if economic and demographic developments turn out worse than expected are one way to slow benefit growth or increase revenues. Sweden, Canada, Japan, and Germany use triggers in their Social Security programs; U.S. policymakers can learn from them. Of course, triggers work best when they reinforce sustainable programs. If required adjustments are too politically painful, Congress will simply override them, as it did for many years with updates to physician payment rates in Medicare.
We must grant future voters and those they elect more flexibility to allocate budget resources. Improving the way Congress budgets can enable government to better respond to changing needs, set new national priorities, and get off a disastrous fiscal path.
— C. Eugene Steuerle is an Institute fellow and the Richard B. Fisher chair at the Urban Institute. Rudolph G. Penner is an Institute fellow at the Urban Institute. They are the coauthors of “Options to Restore More Discretion to the Federal Budget,” a joint publication by the Mercatus Center at George Mason University and the Urban Institute.
A version of this post originally appeared on Economics21.
Photo by 401(K) 2012 via Flickr Creative Commons.
Without fanfare, a bipartisan group of Representatives has introduced a bill that could bring Social Security’s finances close to long-term balance. Labeled the “Save Our Social Security Act of 2016,” the proposal also recognizes an important fact: that the longer we delay reform, the more it will cost post-babyboom generations.
Gen X and Y and Millennials are already scheduled to pay more for their benefits than boomers and older generations no matter what path we take to reform. Whether we raise payroll taxes, use more income taxes to pay off Social Security obligations, or cut benefits, someone must pay. Delaying reform only increases the burden on the young.
The “SOS Act,” as it is called, was introduced by five Republicans and one Democratic member of the House. Co-sponsors Reid Ribble (R–WI) and Dan Benishek (R–MI) were joined by Jim Cooper (D–TN), Cynthia Lummis (R–WY), Scott Rigell (R–VA), and Todd Rokita (R–IN). They pieced together the proposal using an interactive tool offered by the Committee for a Responsible Federal Budget. (Disclosure: I serve on the committee’s board of directors).
The bill contains these primary features (listed in order of their ability to shrink Social Security deficits; the last two would raise deficits):
- Increase the “normal retirement age” (NRA) by two months per year until it reaches 69 for those turning 62 in 2034. Thereafter, it indexes the NRA to increases in longevity, so that the fraction of a lifetime spent in retirement stops growing.
- Levy the OASDI tax on 90% of covered earnings.
- Use a more accurate measure of inflation to determine Social Security’s cost-of-living adjustment (COLA), so that benefits fall by about one-third of one percent per year.
- When calculating average Social Security earnings, count a few more years than the 35 top-earning years, thereby creating a more accurate (and usually lower) measure of the share of a worker’s average lifetime earnings that will be replaced under the Social Security benefit formula.
- Under Social Security’s current design, the first dollars of average lifetime earnings are replaced at a 90% rate, the next dollars at a 32% rate, and the last dollars at a 15% rate; under the new proposal, the 15% rate would drop to 5% for those in that top earnings bracket.
- Raise annual benefits by roughly $1,000 a year for those with more than 20 years of coverage, and let that amount grow at the average wage growth rate.
- Set a special minimum benefit so that, for instance, workers with 20 years of coverage would receive a benefit no lower than the poverty level, and increase the minimum benefit by the average wage growth rate instead of the inflation rate.
These changes would bring the Social Security system close to long-term solvency. Enough taxes would accrue to pay full benefits not only for 75 years, but also to roughly cover benefits in the 75th and later years. By contrast, the last major reform (in 1983) didn’t close the long-term gap.
Almost as soon as that Reagan-era bill was passed and signed, its failure to cover the period after 75 years led Social Security actuaries to declare the system’s finances out of balance. The solvency issue would pop up again under subsequent presidents. The SOS Act, however, would restore balance, and do so equitably: by closing one-third of the funding gap through tax increases, one-third through progressive rate changes, and one-third through adjustments in the retirement age.
The bill can still be improved. It could do more, at a fairly moderate cost, to help those with below-median lifetime incomes. (As a member of the bipartisan 1999 National Commission on Retirement Policy, I was among the first to propose higher minimum benefits as a way to address distributional issues and improve benefits for low and moderate-income elderly.) The bill could also address the structure of survivor and spousal benefits, which is built on the notion of a stereotypical mid-20th century household with a male breadwinner and a stay-at-home wife. It could also address the negative economic consequences of keeping the early retirement age at 62 no matter how long people live.
For those who are interested, Social Security’s assessment of the bill’s consequences is helpful to read but it can also be misleading. The assessment implies that future retirees’ income replacement rates will fall relative to those of current retirees. That’s true only if Americans keep retiring as early as they currently do. In fact, many people (except those with the highest incomes) could enjoy an increase in replacement rates simply by working an additional year for every year the average life expectancy improves.
A version of this post originally appeared on the Retirement Income Journal.
Yesterday, I testified before a House Judiciary Committee Task Force on the risks of having so much of government on auto-pilot. Through permanent, automatic, and growing mandatory programs and tax subsidies, past lawmakers have pre-committed the majority of new revenues that the government is scheduled to collect. As a result, today’s lawmakers have little ability to revise priorities to keep up with a rapidly changing world. Here is a lightly edited version of my oral testimony. My full written testimony is here.
Let me begin by noting that we live at a time of extraordinary possibility, but you wouldn’t believe it by looking at the headlines. We have never before been so rich, even if many needs remain unaddressed, and many do not share in that growth.
Yet, partly because we are ruled over by dead men (and, yes, they were largely men), we stand with our backs to an ocean of possibilities that lay at our feet. I try to show this by two means. First, a decline in what I call fiscal democracy—the discretion left to current voters and policymakers to determine how government should evolve. This index measures how much of our current revenues are pre-committed to programs that require no vote by Congress or, in technical terms, to mandatory spending programs. This index is politically neutral: fiscal democracy is reduced through both increases in mandatory spending and reductions in taxes.
By this measure, in 2009 for the first time in US history, every dollar of revenue was pre-committed before the new Congress walked through the doors of the Capitol.
Steuerle-Roeper Index of Fiscal Democracy
Percentage of federal receipts remaining after mandatory and interest spending
Source: C. Eugene Steuerle and Caleb Quakenbush, 2016 calculations based on data from OMB FY2017 Historical Tables and CBO Updated Budget Projections: 2016 to 2026.
Notes: Projections assume current law.
The second piece of evidence comes from simply comparing two budgets: first, a traditional budget such as prevailed over most of this nation’s history, where spending is largely discretionary, and, second, a modern budget, where growth in spending and tax subsidies are committed to rise automatically faster than revenues. Congress and the president end up in a never-ending game of Whack-A-Mole or, should I say, Whack-Some-Dough. No wonder there are still budget problems after deficit-reducing actions in 1982, 1983, 1984, 1987, 1990, 1993, 1997, 2005, 2011, 2013, and 2015, among others.
[The Need for Discretion]
Consider the consequences. It’s not just the economic problems of rising debt and inability to respond adequately to the next recession or emergency. It’s also the political requirement imposed on you as legislators to renege on promises to the public and then facing its wrath in elections.
Yet, through inability to work together, both parties lose their agendas, getting government that is both fat and ineffective at meeting public needs.
For example, out of a scheduled increase of close to $12,000 annually per household scheduled in additional spending and tax subsidies by 2026, almost nothing goes for programs for all that encourage the development of earnings, wealth, human and social capital. And kids also get essentially nothing—NOTHING!
Restoring fiscal democracy requires nothing more or less than restoring greater discretion to the budget. Democrats must be willing to limit the share of spending on automatic pilot, and Republicans must do likewise for tax subsidies, while agreeing to collect enough revenues to pay our bills. And both the president and the Congress need to be held responsible for ALL changes in the budget, whether newly enacted or passively allowed to continue.
Restoring discretion does not simply mean paring program growth or raising taxes, but opening the door to modernizing programs to better meet public needs, including providing greater opportunity for all.
I am not naïve about the difficulty of reversing a multi-decade decline in fiscal democracy. Yet until we restore greater discretion to the budget, the frustration and anger faced by political parties and the public here and around the developed world will continue, deriving in no small part from a budget process that has shifted national debates from what we can do to what we can’t—that is, from letting dead men rule.
A version of this post originally appeared on TaxVox.