“Investment” and Obama’s First Budget
Posted: January 6, 2009 Filed under: Children, Columns, Economic Growth and Productivity, Income and Wealth, Taxes and Budget Leave a comment »President-elect Obama’s chief in-house economic advisor Larry Summers suggests in a recent Washington Post piece that the new Administration will put a lot of effort into addressing long-term growth challenges, not just short-term policies that generate consumer spending. How? Through “investments.” To make sure we get the point, Summers uses that word or some variation 12 times.
But the first Obama budget will not be oriented toward investment. Just as with recent administrations, the words will stress “investment” but the numbers will emphasize “consumption”—not only in the short-term but, more dangerously, in the long-term. In fairness, this is the budget the new administration inherits. They gain control of the wheel of a battleship sailing full-steam ahead toward the icebergs. But by using terms like “down payment” to describe new proposals, Summers hints that no major course correction will be sought.
Consider first the short-term. If, by the time the recession is over, the government takes on net additional liabilities of, say, $2 trillion and invests even as much as one-fourth of that amount, then its net investment is minus $1.5 trillion. And that assumes that the investments really are investments. Believe me, politicians will now be calling every item they favor, even the subsidized importation of tsetse flies, an “investment.”
I’m not suggesting that a faster economic recovery, if achieved, could not bring enormous benefits, eventually including higher private investment and higher government revenues. But regardless of Summers’ pitch for investment, the means toward that end still rests primarily on financing additional consumption through higher debt.
So the real issue is the long term. If we consume more temporarily as a means of recovering our economic health while moving toward a path of long-term investment, it’s one thing. If we’re planning on only increasing our consumption even further down the road, it’s another.
Recently, I led a study sponsored by the Partnership for America’s Economic Success that comprehensively examined total investment policies by the federal government (see http://www.urban.org/UploadedPDF/411539_investing_in_children.pdf). While we paid special attention to investments in children because of their extraordinary long-term importance and potential high rates of return, we nonetheless reviewed all types of investment. Because researchers disagree on exactly how to measure investment, especially if counting some forms of social spending, we also used a variety of measures.
No matter how we parsed the numbers, the message was clear: relative to GDP or domestic spending, total federal investment and investment in children fell over the past few decades. More importantly, overall government investment, and especially investment in children, is declining in relative and sometimes absolute importance.
The cause of the problem: these potential investments are being squeezed out mainly by faster, automatically growing programs that tend to favor consumption. For instance, while growth in the economy would provide some additional $650 billion in additional domestic spending annually by 2017, the amount going toward education and research would be about zero under current law. Alternatively, the share going toward kids’ education and research and work supports for families with children and social supports for children would be only about $26 billion, and that number is weakly positive only because of bad news: constantly growing health costs.
Unlike the one-time costs of dealing with a recession, such large numbers would repeat over and over again at ever higher levels each succeeding year. For almost all purposes, including investment, how we spend hundreds of billions and eventually trillions of dollars of additional revenues year after year swamps in importance how well we allocate stimulus spending meant to be temporary.
Despite several mentions of the long term and a few mentions of children, Summers did not really intend for his Washington Post piece to set out the long-term policies of the Obama administration. He was more narrowly addressing an ongoing debate, primarily among Democrats, about how to spend new stimulus money made available today. Should we aim only to get money out to people as quickly as possible to stimulate their demand and consumption? Or should we determine that if we are going to spend so much money, we ought to get something back for it in the form of “investment.” That Summers published the piece tells us that his side won the internal debate within the Obama camp.
The issue for many of us is not just about whether we do a little maintenance on the side while we fix the battleship’s leaking hull. The ship is still heading in the wrong direction—not without potential consequences for both the hull and the battleship as a whole.
Modernizing Social Security
Posted: September 19, 2008 Filed under: Columns, Income and Wealth, Job Market and Labor Force Leave a comment »Certainly one important question raised about Social Security today is how to balance its finances. But it’s only one question. Social Security exists-or should exist-to serve people, and lately it’s been doing only a so-so job on that front.
Many of Social Security’s features were designed around a view of the economy and the family that is at least three-quarters of a century old. Congress spends tens of billions more every single year for the program, but few of those extra dollars address the needs of the poor or very old. Meanwhile, the program discourages work at a time when the labor force is growing at a slower pace, and it discriminates strongly against single parents, usually women.
Three major reforms are required to modernize Social Security: better poverty reduction, less discouragement of work, and fairer treatment of the family.
Poverty reduction. Consider: early in its history, Social Security brought many of the old out of poverty; today, its additional spending does little to help the poor and nearly poor. Instead, higher benefits every year are allocated across the board to all future retirees, and because we’re living longer, smaller shares go to those who really are old.
Establishing a decent minimum benefit would help address this problem, as it would set a base to which other amounts could be added if desired. Before tackling issues such as middle- and upper-class benefits and individual accounts, reformers from across the ideological spectrum ought first to set a base that would improve the quality of life for the bottom third or bottom half.
Higher benefits in older age and lower benefits at the earliest ages of eligibility are another way to address the poverty problems of the very old. Your 85-year-old neighbor is more likely than your 62-year-old neighbor to be unhealthy, vulnerable, and without a spouse to help with impairments.
Additional work. Consider: Social Security, like the rest of government, is largely funded by taxes paid by workers. Encouraging more work is the one reform alternative that is almost a magic elixir. At any given tax rate, it would allow:
- higher Social Security lifetime benefits for everyone (because of more Social Security revenues);
- much higher annual Social Security benefits (because lifetime benefits are withdrawn over fewer years);
- higher personal income (because of a higher GDP);
- and, significant income tax revenues for the rest of government, hence reducing the squeeze of retirement on other essential domestic programs.
Social Security’s early retirement age sends a signal to people that they are old (and elgible for “Old” Age Insurance) at age 62. Today, however, many people retiring at that age still have close to two decades, or around one-third of their adult lives, left to live. Many of your moms and dads have liveor are living a lot longer than your grandparents, and you are going to live, on average, a lot longer than they are.
Raising the early retirement age by itself doesn’t actually save Social Security any money, but people who wo onal income, pay additional taxes, and significantly increase their own living standards in retirement. Other changes in the retirement age can bein a way that, on average, increases lifetime benefits of the most vulnerable-the poor, the disabled, and the very old.
Social Security can also stop discriminating against-as a hypothetical-your fellow worker who works 40 years for an much lower benefits than someone who works 30 years for $40,000. Congress should also recognize that the current program discourages work because of its confusing rules on “earnings tests” (between age 62-66) and “delayed retirement credits” (age 66-70).
Fairer treatment of the family. Consider all of the following examples of the unfair treatment of families:
- A single head of household paying taxes and supporting children often recieves tens or hundreds of thousands of dollars less in lifetime benefits than spouses who do not work, do not raise children, and do not pay any taxes.
- A husband and wife who each earn $40,000 will receive tens of thousands of dollars fewer in lifetime benefits than a husband who earns $80,000 and a wife who earns nothing.
- A divorced spouse with nine years and 11 months of marriage gets nothing out of spousal and survivor benefits, while a divorced spouse with 10 years and one month of marriage gets expected benefits worth hundreds of thousands of dollars.
- Widows who dare to remarry can lose tens of thousands of dollars of benefits by remarrying someone who earns less than their late spouse did.
- Individuals (mainly men, for biological reasons) can generate tens of thousands of dollars of benefits by having children later in life (generally after age 40)–benefits not available to most people who raise children.
Most of these problems derive from a stereotypical view of the family that was never accurate and is increasingly out of date. The courts would dethis design discriminatory if private plans tried to adopt it.
Modernizing Social Security requires addressing these three basic issues of fairness and efficiency. Otherwise, Social Security reform will fail no matter what level of solvency it attains.
An Issue of Democracy
Posted: June 23, 2008 Filed under: Children, Columns, Income and Wealth, Taxes and Budget Leave a comment »I know. It’s campaign time. Time for our politicians to promise us more and more. Of course, it is always someone else who will pick up the tab. Senator Russell Long’s famous quip still holds: “Don’t tax you. Don’t tax me. Tax the man behind the tree.”
Today “the man” is increasingly the young, who are not only asked to pay more for others and get less for themselves, but who are increasingly being denied their fundamental democratic rights to share equally in deciding just what type of government we should have.
In normal times, additional promises at election time would be okay, even proper. Many of our government institutions—including the tax structure and health subsidies—do need fixing, and the country should have an open debate about how. But these aren’t normal times.
The mantra of both Republicans and Democrats today is that no politician can win office by being totally honest about the balance sheet—those spending cuts and tax increases required to pay not just for their new spending increases and tax cut proposals, but all those promises arising from past legislation.
Oh, the Democrats tell us they will tax the rich a bit more, and the Republicans tell us they will eliminate waste. But, in truth, the middle class is so large that it mainly pays for whatever promises do materialize.
The threat is not simply to the economy. Today, our fundamental democratic institutions are threatened in a very new way. While it has become increasingly difficult to deny the vote de jure on the basis of property, gender, or race, our laws now discriminate de facto against the young.
At its core, democracy is about equal rights to vote—and have your representatives vote—on the nation’s current priorities. But many recent laws attempt to deny us—and, even more so, our children—the opportunity to determine those priorities.
The reason is simple, but its effects are profound. Never before in U.S. history have so many promises been made to so many people for so many years into the future. Every additional promise, no matter what its merit, only attempts to tie that fiscal straightjacket tighter around future voters.
If our tax laws merely stay the same from 2006 to 2010, for instance, government revenues would rise by several hundred billion dollars. But guess what? Most of those revenue increases are already committed, mainly to the growing costs of our current health and retirement programs.
It gets worse. In a little more than a decade, we’ll likely have around $1 trillion more in annual revenues, yet under current law almost all of that growth will have been pre-allocated without so much as a nod from the existing or future Congresses.
Until those issues are dealt with up front, new promises by our presidential candidates are largely puffs in the wind.
Do you believe we should spend more on health care for the nonelderly? Sorry, nothing left for that. Help the elderly poor or those in their last years of life? Sorry, we’ve already promised an increasing share of revenues to younger and healthier seniors. How about tax cuts to restrain government growth? Sorry, tax revenues won’t even cover the promises already on record. Spend a little to fix our educational system? Give me a break. The share of spending on children is already scheduled to decline to help pay for an even larger share for groups already getting the lion’s share of government spending.
To be clear, the issue here is not whether political promises are for things silly or sane. U.S. history is replete with gut-wrenching and nation-changing debates on how government should wield its tax and spending powers. Those who defended Henry Clay’s “American System” believed in expanding public works into ever-more territories. Those opposing Clay considered this form of spending corrupt and objected to the tariffs used to finance them.
Jumping forward about a century, most of Franklin Roosevelt’s Depression-era spending priorities aimed to help Americans get jobs and to help support the unemployed. Families who weathered that longest of downturns have been forever grateful as a result. Many family histories, including mine, include stories of relatives who got public service jobs that tided them over.
Economists see it differently, crediting better monetary and fiscal policy, largely following the war effort, for ending the Depression.
Still, in most of the 200-plus years since the American republic was founded, most spending and tax debates were over projects of the day. They weren’t about controlling what government priorities would be in 50 years. Whether worthwhile or horrible, precedent-setting or routine, new laws and programs weren’t designed to predetermine government’s direction for decades to come.
Given the fix we’re in now, the debate over taxing and spending will not and should not end. The crux of the debates from here on out must be distinguishing between laws written for today and mandates for tomorrow. Saddling distant tomorrows with growing commitments forecloses other potential uses of the revenues that come with a growing economy. It takes democracy out of the hands of citizens, especially the young, who can be counted on to rebel—as some already are—against paying for priorities they didn’t help pick.
Broader Issues in Taxing Hedge Fund Managers and Private Equity Partners
Posted: October 15, 2007 Filed under: Columns, Income and Wealth, Taxes and Budget Leave a comment »Once upon a time there was a fairly rich society. In it lived a fairly exclusive club of people who paid low individual tax rates. Some got into this club because they didn’t have a lot of income. Others joined by hanging on to their appreciated assets instead of selling them and recognizing the income for tax purposes. Still others belonged because the society’s legislature gave them an individual tax break, presuming they had paid business taxes on the same income—whether or not they did. A few squeezed in by figuring out how to arbitrage or leverage up differentials in the tax system. Membership in this last group grew larger each year.
Outside this low-and-no-tax club was another that paid fairly high marginal tax rates on money it had saved. Members included students saving for college, many welfare recipients, savings account holders, and some fairly successful executives who couldn’t get in or didn’t want to join the more exclusive club.
Many people belonged to neither club.
By and by, a debate arose over whether some of those who leveraged and arbitraged both financial investments and tax avoidance opportunities deserved membership in the no-and-low-tax club. Minutes of the club meetings detailed spats over some very technical membership rules, but most of the debate boiled down to two points:
- Those fearing they would be booted out argued that they were as deserving as many other rich members of this club.
- Their opponents argued that the group in question was no more deserving than those already excluded.
Both were right.
This little vignette comes from my oral testimony before the Committee on Ways and Means on the taxation of “carried interest” (for the written version, go to http://www.urban.org). I used it to put the broader issue of club membership rules into context, rather than simply focusing on the tax treatment of hedge fund managers and private equity partners who get “carried interest.”
If we’re going to have a club whose members pay fairly low individual tax rates, we need to determine who deserves membership on the basis of principles.
Progressivity in taxation is one such principle to consider. In practice, that means imposing fewer and lower taxes on the poor. Equity and efficiency are other sound principles that tax policymakers and theorists often espouse. These touchstones suggest, for instance, that we might want to keep minimal any additional layer of individual tax on enterprise owners who have already paid a business tax on their earnings.
With one exception that I’ll get to next, few argue that letting hedge fund managers and private equity partners in the club furthers either progressivity or efficiency principles. The one legitimate argument for these club members’ special status is simplification—continuing to treat all types of income the same among members of partnerships. Hardly convincing at all is the related argument that we shouldn’t pick on this particular set of partners when plenty of others (say, individuals who manage their own portfolios) get the same low tax rates. One wouldn’t maintain, for instance, that Floyd Landis deserves to keep his Tour de France title over other competitors simply because he is as worthy as some other sports figures.
Some lobbyists leave principles like these aside altogether. They act like the proverbial defense attorneys who argue that the client did not steal the object, that it was worthless in the first place, and, that, in any case, it had been returned. The real-life version of this joke is that their clients are risk-takers and entrepreneurs beside whose work and investment everyone else’s seems mundane and risk-free.
Alas, there is no policy principle on a par with progressivity, equal justice under the law for those in equal circumstances, or efficiency—the classics—that justifies subsidizing risk or entrepreneurs. In fact, there is no pure dividing line for identifying who are risk-takers and entrepreneurs. Even if there were, should Evel Knievel–wannabes have their taxes allocated by the width of the canyons over which they hurdle on their Harleys?
In point of fact, the bank account investor—who is not tax favored—probably faces a higher risk of getting a lousy real return on saving over the long run than many favored investors.
Unlike fables, this story has a bottom line instead of a moral: giving some people lower-than-average tax rates forces others to pay higher tax rates to support any given level of government spending. If that’s okay with you, make sure it fits the principles you apply fairly to all taxpayers.
Do I Really Deserve Even More Of Your Money?
Posted: June 18, 2007 Filed under: Aging, Columns, Health and Health Policy, Income and Wealth, Taxes and Budget Leave a comment »The Centers for Medicare & Medicaid Services (CMS) have once again expanded the services provided under Medicare. New coverage of ultrasound monitoring of cardiac output today, new treatments for congestive heart failure yesterday, and, undoubtedly, some new cancer treatment tomorrow.
As a baby boomer nearing Medicare eligibility, I’m hoping to benefit from some of these many new treatments promising a longer life and a healthier old age. New technology might even help reduce Medicare costs, though past history argues against that rosy result for most improvements. Getting more usually means paying more.
Who will pay for my additional benefits? Current law suggests you—at least, if you are in your prime working years. I’ll pay a premium in retirement that covers perhaps one-eighth of the insurance value of my Medicare and potential Medicaid long-term care benefits. Benefits now are so extensive, especially relative to past Medicare taxes, that most of us baby boomers are already scheduled to reap huge transfers from you who are younger. A typical couple retiring in 2020, for instance, will have paid about $100,000 in lifetime Medicare taxes (much less if we don’t credit them with interest on their past contributions). For that price, this couple is scheduled to receive about $500,000 in lifetime Medicare benefits over and above the premiums it additionally pays in retirement.
Is there a better business plan? You bet. A basic principle of governing is that we should pay for what we get, unless a case can be made for government to interfere and require others to pay. But by what rationale should you be paying ever more for me? If it’s some notion of transferring from the haves to the have-nots, including the poor or those who can’t work, you should know that, like most of my generation, I’m not poor and am quite capable of work. True, many capable and relatively young retirees look poorer because they stop working—as you would if you stopped working—but, even then, the poverty rate of retirees today is well below that of children.
The lure of new benefits as an incentive to stop working aside, the case for you providing my generation increasingly more benefits over time certainly isn’t progressive government—that is, unless “progressive” just means bigger. Indeed, promising to pay me so many additional benefits every year now pushes government to scrimp on education, after-school activities, and a whole host of other needs for groups of people, including children who truly are needy.
The driving force here is not some rational democratic budget procedure for determining which of society’s needs are most pressing and whether government remedies are appropriate. Instead, medical benefits now compound automatically and so quickly that they force other programs to compete for leftovers that shrink as those benefits grow.
It’s not that government-run health insurance should avoid financing health care improvements. But why should you keep footing the bill by default when I’m the one who’s enjoying the longer and better life? And why should my needs for an ever larger share of your money trump society’s many other needs?
I can help pay for what I reap by giving up some early retirement and health benefits to pay for added benefits later, perhaps by working longer and, thereby, paying more taxes. Look at the private model. If I want my 401(k) account to pay out an annual benefit that grows by 6 percent a year until I die, as opposed to a level benefit, my mutual fund or bank or insurance company simply reduces my up-front benefits to pay for that annual boost.
Medicare is more complicated, but the analogy is still apt. If I have to pay for some of the built-in growth but think that the cost is too high, I’ll have more reason to demand that government better control costs. But as long as I can simply shove the costs to you, the incentive is to take all I can get—that is, if I don’t care how little government provides for the needs of my children, my grandchildren, and their world.
