Over the past few months, Rep. Paul Ryan has frequently expressed his annoyance that the president formed a bipartisan fiscal commission and then ignored the ideas its co-founders, and a majority of its members, backed. “The president just took us a few steps backwards by ignoring the commission’s findings, by ignoring its conclusions,” he told Politico’s Mike Allen. “He punted to a fiscal commission and then he just didn’t even embrace the Fiscal Commission,” he told Fox News.
Well, now six senators have brought out a plan almost identical to the Simpson-Bowles recommendations and the president has embraced it. Ryan’s response? Not so positive (pdf). Which is entirely predictable, as Ryan served on the fiscal commission and then voted against the final proposal. But it does put his complaints over the past few months into context. Ryan wasn’t upset that the president didn’t support a plan that Ryan also didn’t support. That would be absurd. He just saw an opportunity to attack him for not supporting a plan that, at the least, a lot of Washington elites supported, and saw as a mark of seriousness.
THE GANG OF SIX BUDGET EFFORT
PROBLEMS, QUESTIONS AND THE POTENTIAL FOR
PROMISING REFORMS
July 19, 2011
__________________
Earlier today, a group of U.S. Senators (“Gang of Six”) released “A Bipartisan Plan to Reduce Our __________________
Nation’s Deficits.” The plan is not a budget. It is a set of talking points and graphs that outlines an
ambitious proposal that has serious flaws but also the potential for worthwhile budget and tax
reforms. The following analysis examines these problems, raises questions about the lack of detail
in the plan, and notes the areas where there is potential to make progress on spending restraint and
tax reform.
Of note, in response to release of the Gang of Six plan, House Budget Committee Chairman Paul
Ryan issued the following statement:
“The proposal put forward by a group of seven senators today is a useful addition to
the budget debate. I share the frustration that these senators appear to have with the
U.S. Senate’s inability to pass a budget in over 800 days. While the proposal lacks
detail in many respects, it includes some reforms that could help put our country on a
sounder fiscal footing. Most importantly, it reflects a bipartisan recognition that
lower tax rates are essential to help spur economic growth. Unfortunately, it
increases revenues while failing to seriously address exploding federal spending on
health care, which is the primary driver of our debt. There are also serious concerns
that the proposal’s substance on spending falls far short of what is needed to achieve
the savings it claims. Nevertheless, this effort serves as a sign that we can work
together on a bipartisan basis to make a serious down payment now to avert the debt
fueled economic crisis before us.”
_______________________________
Problems
Heavy Reliance on Revenues.
The plan claims to increase revenues by $1.2 trillion relative to a
“plausible baseline.” It also claims to provide $1.5 trillion in tax relief relative to the CBO March
baseline. The CBO baseline assumes the expiration of tax relief, resulting in a $3.5 trillion revenue
increase. As a result, the plan appears to include a $2 trillion revenue increase relative to a curren
policy baseline. If the $800 billion in tax increases from the new health care law are included, the
plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care
spending that is driving our debt problems.
“plausible baseline.” It also claims to provide $1.5 trillion in tax relief relative to the CBO March
baseline. The CBO baseline assumes the expiration of tax relief, resulting in a $3.5 trillion revenue
increase. As a result, the plan appears to include a $2 trillion revenue increase relative to a curren
policy baseline. If the $800 billion in tax increases from the new health care law are included, the
plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care
spending that is driving our debt problems.
Elusive Spending Restraint. It is unclear how much the plan achieves in spending savings. Based on
released documents, it appears to primarily rely on cuts in the defense budget through $886 billion
in reductions from the President’s budget for “security programs.”1
in reductions from the President’s budget for “security programs.”1
Lack of Entitlement Reform.
The plan does not address the $1.4 trillion in spending expansions in
the new health care law. The health care law increases eligibility for the Medicaid program by one‐
third and creates a brand new health care entitlement. It does not appear to include reforms to the
Medicare program. While it appears to pursue Social Security reform, it could end up creating
barriers to enactment of these reforms.
third and creates a brand new health care entitlement. It does not appear to include reforms to the
Medicare program. While it appears to pursue Social Security reform, it could end up creating
barriers to enactment of these reforms.
Questions
Unspecified Savings Relative to What? The plan is described as savings relative to a “baseline.” The
plan appears to use three different baselines for showing savings: 1) CBO’s current law March
baseline; 2) an undefined modification to that baseline (what it calls a “plausible baseline”); and 3)
the Fiscal Commission’s baseline. It does not provide annual spending and revenue totals by
category, relying instead on savings relative to three different baselines. So, it is unclear what
exactly the spending and tax proposals are.
baseline; 2) an undefined modification to that baseline (what it calls a “plausible baseline”); and 3)
the Fiscal Commission’s baseline. It does not provide annual spending and revenue totals by
category, relying instead on savings relative to three different baselines. So, it is unclear what
exactly the spending and tax proposals are.
Where Does the Revenue Come From?
It sets a tall order for tax reform with what appear to be
conflicting assumptions: 1) raise $1.2 trillion in revenue; 2) repeal the alternative minimum tax at a
cost of $1.7 trillion; 3) lower tax rates to encourage economic growth (top rate of no higher than
29%); 4) do not eliminate tax expenditures for health care, charitable giving, homeownership,
retirement, and low‐income workers and families (the largest of the tax expenditures); 5) raise
$133 billion in revenue by 2021 for the highway trust fund without raising gasoline taxes.
conflicting assumptions: 1) raise $1.2 trillion in revenue; 2) repeal the alternative minimum tax at a
cost of $1.7 trillion; 3) lower tax rates to encourage economic growth (top rate of no higher than
29%); 4) do not eliminate tax expenditures for health care, charitable giving, homeownership,
retirement, and low‐income workers and families (the largest of the tax expenditures); 5) raise
$133 billion in revenue by 2021 for the highway trust fund without raising gasoline taxes.
Where Do Health Care Savings Come From?
It claims $117 billion in additional federal health care
savings over 10 years by assuming that health care spending per capita grows no faster than
economic growth (GDP) plus one percent. The new health care law already requires the
Independent Payment Advisory Board (IPAB) to cut Medicare spending growth per beneficiary to
achieve this growth rate starting in 2020. CBO currently projects that Medicare spending will stay
within that growth rate through 2021.2 Therefore, it is unclear how the savings are derived.
economic growth (GDP) plus one percent. The new health care law already requires the
Independent Payment Advisory Board (IPAB) to cut Medicare spending growth per beneficiary to
achieve this growth rate starting in 2020. CBO currently projects that Medicare spending will stay
within that growth rate through 2021.2 Therefore, it is unclear how the savings are derived.
Also, if there are savings to be achieved, there is no enforcement mechanism for achieving them
since the plan would “require action by Congress and the President” to limit growth to these levels.
Current law requires the President to submit a plan and Congress to enact legislation to make
additional savings in Medicare that the President and Congress have ignored
since the plan would “require action by Congress and the President” to limit growth to these levels.
Current law requires the President to submit a plan and Congress to enact legislation to make
additional savings in Medicare that the President and Congress have ignored
Where are the Missing Mandatory Savings?
The plan lists $516 billion in mandatory savings forCommittees to achieve (including program integrity savings and savings from modifying the CPI), but then claims $641 billion in mandatory savings, leaving $125 billion in missing savings.
Pathway or Roadblocks to Social Security Reform? While the plan seems to be a well‐intentionedeffort to move Social Security reform forward, it sets out procedures that could derail both Social
Security reform and additional spending savings called for in the plan. First, it does not allow a
Social Security reform bill to proceed until the Senate has gotten 60 votes to pass additional deficit
reduction. Second, it blocks the additional deficit reduction bill if the Senate does not get 60 votes
to pass the Social Security bill.
Social Security reform bill to proceed until the Senate has gotten 60 votes to pass additional deficit
reduction. Second, it blocks the additional deficit reduction bill if the Senate does not get 60 votes
to pass the Social Security bill.
Potential for Promising Reforms
Tax Reform. It acknowledges the need for tax reform, proposes a top rate of not more than 29% and
as low as 23%. It calls for the reduction of the top corporate tax rate to at least 29% and as low as
23%. It recognizes the current tax code’s complexity and high marginal tax rates hinders economic
and job growth. It calls for the tax code to be reformed to move to a territorial system. It calls for
any unanticipated additional revenues from economic growth to be used to lower tax rates or
deficit reduction, and not used for higher spending. While a laudable proposal, it appears to have
no mechanism to ensure this result. To achieve this objective would require, at a minimum, a cap
on total spending and ideally a cap on revenues as well.
23%. It recognizes the current tax code’s complexity and high marginal tax rates hinders economic
and job growth. It calls for the tax code to be reformed to move to a territorial system. It calls for
any unanticipated additional revenues from economic growth to be used to lower tax rates or
deficit reduction, and not used for higher spending. While a laudable proposal, it appears to have
no mechanism to ensure this result. To achieve this objective would require, at a minimum, a cap
on total spending and ideally a cap on revenues as well.
Spending Caps.
It proposes to reinstate statutory caps on discretionary spending. It also sets out a
budget reconciliation process for committees to achieve mandatory spending savings and if those the House gain two‐thirds margin to waive spending limits.
Other Positive Signs:
‐ It repeals the CLASS Act, a misguided proposal included in the new health care law.
‐ It calls for medical malpractice reform.
‐ It calls for reforming the current process for “emergency spending” (though the reforms are
unspecified
footnotes
1
In the security category the Gang of Six reduced the security category by $886 billion. Department of Defense (DOD) spending
comprises approximately 85% of the security category. The Gang of Six also proposes a firewall that requires this $886 billion is cut
from security spending.
2
In his April 13th
budget framework, the President has proposed to require the IPAB to reduce per beneficiary growth to GDP plus
0.5% of GDP beginning in 2018
Other Positive Signs:
‐ It repeals the CLASS Act, a misguided proposal included in the new health care law.
‐ It calls for medical malpractice reform.
‐ It calls for reforming the current process for “emergency spending” (though the reforms are
unspecified
footnotes
1
In the security category the Gang of Six reduced the security category by $886 billion. Department of Defense (DOD) spending
comprises approximately 85% of the security category. The Gang of Six also proposes a firewall that requires this $886 billion is cut
from security spending.
2
In his April 13th
budget framework, the President has proposed to require the IPAB to reduce per beneficiary growth to GDP plus
0.5% of GDP beginning in 2018
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