issue: Tax

PPI EVENT: Tax Reform Now

Posted on by The Progressive Policy Institute

With April 15 just around the corner, PPI and Moment of Truth, and a bipartisan cast of U.S. Senators, are joining forces to call for the most sweeping overhaul of federal taxes since 1986.

Moment of Truth was formed by Fiscal Commission co-chairs Erskine Bowles and Sen. Alan Simpson to build momentum behind the commission’s deficit reduction plan. At the heart of that plan is the “modified zero plan,” which would eliminate or scale back tax expenditures, and use the savings to cut individual and corporate tax rates, as well as budget deficits.

In addition to Sen. Michael Bennet (D-Colo.), a leading voice for restoring fiscal responsibility in Washington, Sens. Ron Wyden (D-Ore.) and Daniel Coats (R-Ind.) will be on hand to discuss their new bill, which would also close tax loopholes to finance lower rates and deficits.

Both approaches embrace the “broaden the tax base, bring down tax rates” logic of the last great tax reform in 1986. PPI also will release a new report by Paul Weinstein, a key architect of the “modified zero plan,” on how the plan sparked a bipartisan breakthrough on the commission, and on how the plan could be further refined and strengthened.

The April 12 forum, to be held at Johns Hopkins University’s Washington campus, will also feature prominent budget and tax experts. Click here to see the whole program and RSVP.

More Regulatory Overreach at the FCC

Posted on by The Progressive Policy Institute

Imagine that you had an industry where customer satisfaction was increasing faster than any other part of the economy. Now imagine that the same industry showed rising real investment, even during the worst recession in 75 years. Finally, imagine that industry charged falling prices for both consumers and businesses.

But of course, that industry is not imaginary: The telecom industry, and in particular the wireless sector, has outperformed the rest of the economy on key measures such as customer satisfaction, investment, and price. Moreover, at a time when President Obama is calling for more innovation, the wireless industry has produced more genuine new products and services than anyone else.

So given the great performance of the industry during this tough period, why the heck does the Federal Communications Commission keep imposing additional regulations on wireless providers? The latest case of regulatory overreach: On April 7, the FCC issued an order forcing the big wireless providers to sign ‘data-roaming’ agreements with smaller carriers. In effect, the smaller carriers can now tell their customers that they could have data service all over the U.S., free-riding on the mammoth investments by the big carriers. In addition, the FCC made it clear that it is willing to set the price for each data roaming agreement if it doesn’t like what the big carriers are offering–effectively reinstituting price regulation for the most dynamic sector of the economy.

This aggressive regulatory move by the FCC follow its enactment of confusing ‘net neutrality regulations’ in December 2010, an 87-page order that raises more questions than it resolves. And then coming down the road is the ‘bill shock’ regulation. In order to address the rather rare and fixable problem of a surprisingly high bill, this regulation would force providers to spend scarce investment dollars on revamping their billing system rather than building out their networks.

In many ways, enacting this series of regulations is like throwing pebbles in a stream. One pebble doesn’t make much of a difference, but throwing enough pebbles in the stream can dam it up.

Frankly, the degree of regulation that the FCC wants to impose is more appropriate to a failing industry rather than one which is demonstrably successful and growing. Let’s just run through the performance of the telecom/wireless industry over the past five years. According to the American Customer Satisfaction Index, satisfaction with wireless service has increased by 14% over the past five years, by far the biggest jump of any industry.

Now let’s look at investment. The data on investment is somewhat fuzzier than for satisfaction, since the government’s figures on industry investment only run through 2009, and merges the telecom and broadcasting industries.

But here’s what we see: In the telecom/broadcasting industry, real investment in equipment and software is up 30% since 2005, despite the turbulence of the financial crisis. By contrast, overall private sector real investment in equipment and software is down 8% over the same period.

And then of course the price of wireless service keeps falling. The latest figures from the Bureau of Labor Statistics say that consumer wireless prices are down 6% since 2011, and business wireless prices are down a lot more.

Right now the FCC has the good fortune to preside over one of the few growing industries in the economy. If the commissioners genuinely want to support innovation and growth, they should stop throwing regulatory pebbles into the stream.

Crossposted at Mandel on Innovation and Growth

Next Up: Tax Reform

Posted on by The Progressive Policy Institute

Averting a government shutdown was only the first of a series of gates Congress must clear in this year’s downhill slalom of fiscal politics. Even sharper turns lie ahead – raising the debt ceiling, and approving next year’s federal budget.

In mid-May, the U.S. Treasury will bump up against the limit of its legal authority to borrow money to finance the federal government’s operations and service its debts. Republicans have served notice that they see the coming vote to raise the debt limit as another opportunity to extort deeper cuts in federal spending for next year.

The stakes in this game of fiscal chicken, however, are infinitely higher. Without a debt limit hike, the United States, for the first time in its history, would be forced to slash hundreds of billions in spending, or more likely, default on its obligations. Are GOP leaders really willing to let the Tea Party turn America into Argentina?

More likely they’re bluffing. Still, it wouldn’t be a bad thing if the debt ceiling vote becomes an action-forcing mechanism for serious negotiations to cut future deficits and stabilize the national debt. By “serious” I mean pragmatic and bipartisan, qualities you can only find nowadays by crossing the Capitol from the House to the Senate.

The House this week will probably pass some version of Budget Committee Chairman Paul Ryan’s proposed budget. It’s an ideological document, not a plausible point of departure for horse trading. By taking taxes off the table, Ryan panders to GOP taxophobia and ensures no Democratic support for his plan. And that plan is a distributional horror, concentrating all the pain of deficit reduction on middle- and lower-income Americans, while giving the most fortunate a free pass.

That’s why all eyes are on the “Gang of Six,” a bipartisan group of Senators who are trying to forge consensus around the Fiscal Commission’s deficit reduction plan. Its centerpiece is a call for a sweeping overhaul of tax expenditures, with the savings dedicated both to buying down individual and corporate tax rates and cutting federal deficits. PPI will co-host a public forum on tax reform tomorrow featuring Sens. Micheal Bennet (D-Colo.), Dan Coats (R-Ind.), and Ron Wyden (D-Ore.), as well as prominent budget and tax experts.

And President Obama, who seems to have gone on walkabout, returns to the fiscal fray Wednesday with a major speech on the need for cutting entitlement spending, especially for Medicare and Medicaid. The unsustainable growth of these huge “mandatory” programs – not the domestic spending targeted by House Republicans in the shutdown battle – is the real driver of federal spending and debt.

A decisive intervention at this stage by the President is crucial, since many Democrats are as deeply in denial about the need for entitlement reform as Republicans are when it comes to raising enough tax revenue to finance government. Many liberals, irate over the $38 billion in domestic spending cuts Democrats were forced to swallow to keep the government open, are demanding that Obama stop compromising and take up the ideological cudgels against Republicans. They want a full-throated defense of progressive government. But that requires action against entitlement spending, which is inexorably soaking up tax dollars and squeezing domestic programs that progressives rightly want to protect.

It also means showing the public that Democrats can responsibly manage the nation’s finances and restore fiscal discipline, even as they shield progressive priorities from chainsaw wielding Republicans. Obama’s challenge is to nudge, prod and cajole both sides toward a grand political bargain for shared sacrifice, built around tax and entitlement reform.

On the other hand, both Obama and Ryan have punted on the other big entitlement program, Social Security. It isn’t as big a problem as Medicare and Medicaid, but it must be on the table too because it’s adding to the nation’s overall debts. What’s more, it’s easily fixable. The Fiscal Commission pointed the way with sensible reforms, backed by Senate Democrats and Republicans, for raising the retirement age to match increases in longevity, and trimming future benefits for wealthy retirees.

The next step, however, should be tax reform. If the two parties can coalesce behind a plan similar to the Fiscal Commission’s, they could assure a balanced approach to deficit reduction, and build trust for the hard work of entitlement reform.

Tax Reform Now: Cutting Rates and Deficits

Posted on by The Progressive Policy Institute

You are cordially invited to join the Progressive Policy Institute and the Moment of Truth Project for a special event

Tax Reform Now: Cutting Rates and Deficits

Speakers:

Sen. Michael Bennet (D-CO)
Sen. Ron Wyden (D-OR)
Sen. Daniel Coats (R-IN) (invited)
Dave Cote, National Commission on Fiscal Responsibility and Reform
Will Marshall, Progressive Policy Institute


Panel 1: Reforming the Tax Code: The Case for the Modified Zero Plan
Diane Rogers, Concord Coalition
Paul Weinstein, Progressive Policy Institute and Johns Hopkins University
Alan Viard, American Enterprise Institute
Howard Gleckman, Tax Policy Center (Moderator)

Panel 2: Enforcing Reform: Designing Tax Expenditure Fail-safes and Triggers
Leonard Burman, Syracuse University
Marc Goldwein, Committee for a Responsible Federal Budget
Joseph Minarik, Committee for Economic Development
Derek Thompson, The Atlantic (Moderator)

Date:
Tuesday, April 12, 2011
10 a.m.–1:30 p.m.
Lunch will be served

Location:
The Johns Hopkins University, DC Campus
1717 Massachusetts Ave. NW, Washington, DC
Lecture Hall LL7

To RSVP, contact Conor McKay at mckay@newamerica.net.

Space is limited. RSVP required.

Please join us for an event focused on the urgent need for comprehensive reform of the U.S. tax code. Guest speakers include Senators Michael Bennet (D-CO) and Ron Wyden (D-OR) and Dave Cote, Chairman and CEO of Honeywell International.

The event will also feature a panel on comprehensive tax reform, which will discuss the Fiscal Commission’s “Zero Plan” which dramatically lowers rates, broadens the tax base, and reduces the deficit. A second panel will discuss possible fail-safes and triggers designed to cut tax expenditures across the board in order to force action on reform. The event will also mark the release of a new PPI report by Paul Weinstein and Marc Goldwein entitled “Less is More: The Modified Zero Plan for Tax Reform.” This paper offers an in depth analysis of the Fiscal Commission’s “Zero” and “Modified Zero” tax reform plans.

This event is cosponsored by The Progressive Policy Institute and The Moment of Truth project, and is being hosted by the Center for Advance Governmental Studies at The Johns Hopkins University.

To RSVP, contact Conor McKay at mckay@newamerica.net.

Why Grumbling About GE’s Taxes Misses the Point

Posted on by The Progressive Policy Institute

Recent reports of GE’s artful dodge of U.S. income tax liability are the perfect curtain raisers for the annual tax filing ritual. Yet another example of the injustice of our tax code! Time for a flat tax! No more loopholes for fat cats! Put aside GE’s tax lawyers’ interpretation of the tax code. What is more important than the furor over the story is that it represents yet another missed opportunity for a rational debate and another lost chance to design tax policies to spur innovation, global competitiveness, and growth.

When it comes to tax policy, the left usually lumps the rich and corporations together as villains who should pay up. They argue the tax code is not progressive enough and one way to make it so is to go after the plutocratic moneyed interests.

Inadvertently, the left makes a legitimate point lumping wealthy individuals and corporations together. But it is not because corporations and wealthy individuals are two distinct entities with common traits. Rather it is because a corporation is individual people – some rich, some poor. A corporation is a legal construct but it actually an amalgamation of employees and shareholders bonded by a desire to take in more than what is spent producing whatever it provides to the market. When corporations benefit from tax cuts, guess who benefits. It is not a data file sitting in some computer in Delaware but investors, employees, and consumers.

As for progressivity, the left also makes a fair point as we have seen income disparity widen in the last 30 years. But we aren’t going to close income gaps by going after corporations. Rather we need to abolish the tax cuts on individual dividend payments instituted almost a decade and raise the top marginal rates on individual income to mid-1990s levels. But don’t shake down corporations. In today’s globalized, highly-competitive market, we can ill afford to raise money from companies facing competitors whose countries are cutting, not raising, corporate taxes.

The U.S. now has one of the highest effective corporate tax rates of any OECD company. In other words, not only is the rate U.S. corporations pay (on average 39 percent) high, but the actual rate they pay after deductions and credit is also extremely high, notwithstanding some individual companies who may not pay much in any particular year. The high corporate tax rate is not making our companies stronger and inducing domestic investment. Quite the opposite.

Meanwhile, many of those on the right and in the center have an almost messianic devotion to the notion of broadening the tax base and lowering rates by getting rid of a host of deductions, credits, and exemptions. For them, simplicity is the golden rule. They want to tax every company and every activity the same way. But as philosopher Alfred North Whitehead stated, “seek simplicity but distrust it.”

There’s a simple reason not to treat everything companies do the same: the impacts on jobs and growth are not the same. That’s why, for example, virtually every academic study on the issue finds that giving companies a tax credit for research and development they do here in the United States is good effective policy. It’s the same for tax credits for investment in new capital equipment and software. There’s also a good reason not to treat all industries the same.

The simple fact is that industries like grocery stores, electric utilities and car dealers do not compete globally while industries like steel, pharmaceuticals, and electronics do. While the former provide needed services if we raise their taxes they are not going to build fewer grocery stores, electric wires, or car dealerships. But if we raise the taxes of steel companies, drug companies and electronics companies they will do the rational thing that any company would do: move production to the nations that tax them less. Currently, the former industries pay significantly higher effective tax rates than the last three. And that is exactly how it should be. This is why many state’s tax code favors manufacturing and high tech firms. It’s why most countries’ tax code does the same thing. They realize that jobs depend on the health of their companies that are in competition with firms outside their borders.

So, as you get ready to file your taxes, don’t grumble about GE. Turn your anger toward a polarized, irrational, and tired debate in Washington that is aimed at leveraging votes instead of creating the kind of innovative, productive, and globally competitive economic activity that American workers so desperately need.

A Comparative Look at Income Inequality

Posted on by The Progressive Policy Institute

What would it mean for theories of U.S. income inequality growth if the U.S experience has been similar to that everywhere else?

Yet again and again [economists and other researchers not named Hacker or Pierson] have found themselves at dead ends or have missed crucial evidence.  After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.

All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics.

– Jacob Hacker and Paul Pierson, Winner Take All Politics

Here’s a chart showing trends in the share of income received by the top one percent for all the modern industrialized nations for which data is available going back to the early twentieth century:

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The data is from a new website created by several of the leading scholars studying inequality with tax data.  The American trend, the thick black line, is from the much cited work of Thomas Piketty and Emmanuel Saez, which is part of this new database.

From 1910 to 1970, American inequality trends follow the broad international pattern, and inequality levels are in the middle of the pack.  That’s basically still true from 1970 to 1986:

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It’s rising a bit over the period, but only by a percentage point.  Note I’m keeping the scale of the charts the same for each one.  Here’s the chart for 1988 to 2006:

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Uh-oh.  Now we look like our inequality levels are higher than everywhere else.  What happened?  1986 to 1988 happened, as is evident from the 1970-2006 trend:

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Wow, that’s a four percentage point increase in two years—three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000.  Huh. There are two possibilities here.  One is that the data is right.  You can see where I’m going here.

It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase).  And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.

Hmmm…which possibility is more likely? Let’s look at another chart showing the trends just for the northern hemisphere Anglophone countries, to which I’ll add a new line:

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OK, from about 1940 to 1986, these trends line up strikingly, then the U.S. trend goes AWOL.  However, let’s instead assume the post-1986 U.S. trend is an artifact of the 1986 tax reform.  First, let’s increase the top one percent share from 1986 to 1988 by the same rate that it increased in the U.K.  Then let’s let the top share in the U.S. increase by the same rate that it actually did from 1988 to 2006, but from the new, lower 1988 level.  The result is the revised line above.  This makes the U.S. trend and level consistent with not just the U.K., but Canada.
Of course, if the 1988 to 2006 top share levels are more accurate in the U.S. after 1988 than before 1986, then rather than lowering the post-1986 trend, we should raise the pre-1988 trend.  That would make U.S. levels uniformly higher than in the U.K. and Canada.  But of course, the measured U.K. and Canadian top share levels may also be artificially low due to tax avoidance.  And of course, the common trend over the three countries would remain.

So, to review, when the post-1986 U.S. trend is corrected, the U.S. experience with inequality over the past 100 years is broadly consistent with the rest of the modern world.  Here’s the summary chart for 1910-2006, with the revised U.S. trend.

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Comparing levels is more difficult, but many recent cross-national comparisons related to inequality are about why trends differ.  What these five charts clarify is that explanations for the recent rise in American inequality that focus on uniquely American causes—such as greater political muscle-flexing among corporations and the mega-rich—are insufficient (and unnecessary).

Update: I’ve received several responses offline that it’s going to far to say the experience of the U.S. is like that “everywhere else” and that it is really only like the other Anglophone countries. To some extent, that’s a fair criticism. But of 15 countries shown here, only Germany, the Netherlands, and Switzerland haven’t experienced an increase in inequality since 1980. And the increases in Norway and Finland are as big or bigger than in the U.S., U.K., and Canada. Sweden’s increase is also nearly as great in relative terms (starting from a much lower level of course). But even if this is a story about the U.S., U.K., and Canada or the Anglophone countries versus the rest of the world, that’s still a problem for Hacker’s and Pierson’s U.S.-centric theory.

This piece is cross-posted at Scott Winship’s blog

Wingnut Watch: The Ideological Crusade Behind the Budget Battles

Posted on by The Progressive Policy Institute

In Washington and around the country, conservatives are going on the anti-spending warpath, delighting the Tea Party base with tough talk and confrontational tactics.  The amazing scenes from Madison, engineered by new Wisconsin Gov. Scott Walker, are emboldening GOPers elsewhere (notably in Ohio and Indiana) to go to the barricades in demanding pay and benefit concessions, if not actual suicide, from public employees and their unions.  And in Congress, a government shutdown is beginning to look like a virtual certainty, quite possibly accompanied by the drama of a debt limit collision.

The internal conservative debate on these subjects is being heavily dominated by those counseling “no retreat,” and laboring mightily to explain why a hard-core approach that threatens the daily functioning of government won’t turn out as it did for the short-lived Republican Revolution of the mid-1990s.

But amidst all the dramatics over spending, it’s increasingly obvious that conservatives have a lot of other fish to fry, and are using their demands for big cutbacks in public-sector spending to impose policies and priorities that have little or nothing to do with money.

This is most obvious in Wisconsin, where Walker’s demands go beyond pay and benefit concessions from public employees and aim at severely restricting collective bargaining rights.  Walker and his defenders, of course, claim that no path of budget austerity is compatible with the existence of strong public employee unions.  That’s another way of saying it’s possible to relate all sorts of ideological objectives as having an impact on spending. Interestingly, two Republican governors close to this particular fire, Indiana’s Mitch Daniels and Florida’s Rick Scott (the latter state is not close geographically to Wisconsin, but is similar in the scope of its gubernatorially-induced budget crisis) have conspicuously parted ways with Walker on demanding non-financial concessions from public employee unions.

An even more obvious ideological aspect of state budget “crises” is the determination of nearly all GOP governors to cut taxes and/or create new corporate subsidies even as they claim there’s just no money for spending they don’t particularly favor in the first place.  Walker, in particular, is insisting on both tax cuts and new “economic development incentives” (e.g., public concessions for companies moving into the state) that have significantly worsened the fiscal situation.  So, too, has Florida’s Scott, who is also demanding a major new private school voucher initiative.

The overlap of ideological and fiscal priorities is even more obvious in Washington.  The FY 2011 continuing appropriations resolution passed by the House last weekend is loaded with long-time conservative hobby-horses, including an end to public broadcasting, severe cutbacks in funding for bank regulators and food inspectors, plus an unprecedented assault on federal support for family planning services, including a total ban on use of federal money by Planned Parenthood and an end to the Title X program that funds many clinics dispensing contraceptives.  Echoing the confrontations in Madison, the bill also slashed funding for the National Labor Relations Board by one-third, and 176 House Republicans voted to kill the NLRB altogether.  Meanwhile, Republicans are leaving the Pentagon budget largely alone.

Since the House CR is primarily symbolic, the real tale of the tape will be in the internal priorities Republicans set in negotiations with Senate Democrats and the White House.  But GOP leaders are under intense pressure from the large majority of its Members from the arch-conservative Republican Study Group, and from Tea Party-oriented freshmen, to use budget cuts to completely change the scope as well as the size of the federal government.

Most interestingly, there is a growing sense that House conservatives and the right-wing chattering classes are increasingly favoring a federal government shutdown (which will happen on March 4 if no agreement is reached on the CR or on a short-term stopgap, which Republicans say they will oppose unless it incorporate major spending cuts) not just as a negotiating tactic, but as an end in itself.  Highly influential anti-tax lobbyist Grover Norquist has been explicit about what he sees as the political advantage Republicans would derive from a shutdown: “Obama will be less popular if — in the service of overspending and wasting people’s money — he closes the government down, as opposed to now, when he’s just wasting people’s money.”

More to the point, Republican leaders would like to get rid of the RINO label as soon as possible and earn the trust of Tea Party types. It’s even possible that they are powerless to act otherwise (particularly given the example set by Walker in Wisconsin) or will be forced to engineer a shutdown in order to head off the more economically-consequential defeat of a debt limit measure.

In any event, conservatives are busy reassuring GOP pols that a shutdown won’t produce the sort of political damage the brief 1995 shutdown incurred.  They are typically blaming the 1995 setback on Newt Gingrich’s clumsiness, Bill Clinton’s diabolical political skills, the post-Oklahoma City backlash against government-hating, the malice of the pre-Fox “liberal media”—all ingredients that are missing from today’s impending confrontation.  All these psychological factors should be kept in mind in assessing what happens before, on, and after March 4.

Small Spending Cuts’ Big Impact on America in the Middle East

Posted on by The Progressive Policy Institute

Now is the winter of discontent for Middle East dictators. A great political awakening is roiling the region – which makes this exactly the wrong moment to weaken America’s ability to help people struggling to free themselves.

House Republicans, however, are determined to do just that. Oblivious to the growing democratic ferment in the Muslim world, they voted last week to cut funding for U.S. diplomacy and assistance by some $4.4 billion, along with a haircut for the National Endowment for Democracy (or NED, and full disclosure: Will Marshall is a member of NED’s board). Although it usually flies under policy-makers’ radar, the NED is America’s premier instrument for assisting democratic transitions in long-closed societies.

To be fair, President Obama’s new budget proposes an even deeper cut (12 percent versus the GOP’s six percent) in the NED’s already miniscule $118 million budget, though it wouldn’t take effect until next year.

These changes were tucked deep in the giant, $61 billion package of 2011 spending reductions the House approved last week in a frenzy of misplaced fiscal probity. We hope the Senate doesn’t overlook them as it tries to salvage something sensible from the House package and continue funding the federal government. If you want to establish your bona fides as a resolute budget cutter and enemy of big deficits, domestic spending isn’t the place to look for serious savings. The real money is in the big middle class entitlement programs and in tax expenditures, backdoor spending programs that cost the federal government over $1 trillion a year.

We are fiscal hawks, but these untimely cuts in democracy assistance illustrate the perfect folly of trying to balance the budget on the back of domestic discretionary spending, which accounts for only 13 percent of total federal outlays. They are too small to make an appreciable dent in America’s $1.6 trillion deficit, but they would curtail our ability to support the spread of America’s democratic ideals in the Middle East and elsewhere.

The NED was established in 1983 under the bipartisan auspices of Ronald Reagan and Democratic Rep. Dante Fascell of Florida. They believed the United States needed a non-official way to lend a helping hand to homegrown reformers. Funneling support through a non-government entity like the NED rather than the State Department or USAID makes it hard for autocrats to tar recipients as tools of American policy.

Since its inception, NED has backed virtually every significant struggle for freedom in the world. It helped ease democratic political transitions in Poland, Chile, South Africa, Nigeria and Russia. Crucially, it nurtures political dissidents from Burma to Cuba, including Nobel Laureate Liu Xiaobo in China, as well as countless lesser-known but equally courageous champions of human rights and democracy.

The NED and its core institutes are active in the Middle East and North Africa, although its nearly $22 million in annual grants to the region now seems wholly inadequate. In Egypt, for example, its micro-grants support youth participation in government, workers’ rights and – presciently, in light of the crucial role Twitter and Facebook played in drawing crowds to Cairo’s Tahrir square – digital media workshops for young people. In Yemen, another flash point, the NED supports young entrepreneurs and helps human rights and women’s empowerment groups build capacity.

Facing a snap vote in just six months, Egypt is ill-prepared for a democratic transition. It has no organized opposition parties and its civic groups, non-governmental organizations, and democratic institutions are—to be generous—underdeveloped. This is no time to be denying U.S. policy-makers the tools they need to help. But seeding the ground for democracy in the Middle East is a long game. Whatever the outcome in Egypt, we need a sustained and strengthened effort to help local reformers throughout the region put in place the building blocks of an independent civil society and functioning democracy.

That is the NED’s mission, and it needs more resources, not fewer. If our political leaders really want to show they are serious about whittling down America’s monstrous debts, they ought to follow Willie Sutton’s advice and go where the money is.

Obama’s Minimalist Budget

Posted on by The Progressive Policy Institute

President Obama’s new budget is a highly tactical exercise in fiscal minimalism. It proposes just enough spending cuts to be plausible, while putting off the critical work of tax and entitlement reform. Its unspoken premise seems to be: Given the ax-wielding frenzy that grips House Republicans, the best the White House can do now is to frame the fiscal debate on terms favorable to progressives.

The President’s $3.7 trillion budget would trim federal deficits by just over $1 trillion over the next decade. To the chagrin of liberals, the budget proposes to reach this total through a formula of two-thirds spending cuts, one-third tax cuts, rather than a 50-50 split. Also, it limits military spending growth without cutting specific programs. Meanwhile, the blueprint freezes discretionary spending for five years, and cuts over 150 programs, for $25 billion in budget savings next year. In short, the toughest discipline falls on domestic spending, so expect howls of betrayal from the left.

For all that, however, the Obama proposal would still leave us with deficits over 3 percent of GDP in 2020, while doing nothing to brake the runaway growth of costs for Medicare, Medicaid or Social Security, which account for 40 percent of the budget. These costs, propelled by soaring health care prices and demographics, and growing automatically each year, are what drive our nation’s long-term debt crisis.

The new budget does stabilize the national debt, but at a level – 77 percent of GDP – that most economists believe is well above what’s good for our fiscal health. It’s getting panned by deficit hawks. “This budget fails to meet the Administration’s own fiscal target, it fails to tackle the largest problem areas of the budget, and it fails to bring the debt down to an acceptable level,” said Maya MacGuineas of the Committee for a Responsible Federal Budget.

Over the weekend, GOP leaders lambasted Obama for not embracing the much more robust and comprehensive recommendations of his own Fiscal Commission. Its plan would cut deficits by $4 trillion by 2020, make big reductions in tax expenditures, and trim future Social Security and Medicare benefits for the well-off. Bear in mind that, even as they criticize the President’s fiscal pusillanimity, House Republicans have rejected the Fiscal Commission blueprint, oppose tax increases of any kind, and are engaged in an Alphonse-and-Gaston routine with the White House over who should go first on entitlement reform.

Nonetheless, the Commission’s Democratic co-chairman, Erskine Bowles, also expressed disappointment that the President hasn’t used its work as the point of departure for a serious push to restore fiscal stability in Washington. He accurately called the President’s proposal “nowhere near where they will have to go to resolve our fiscal nightmare.”

The administration apparently is calculating that its modest deficit-reduction proposal has several tactical advantages. First, it may better reflect the public’s actual appetite for fiscal restraint. The same polls that show strong public support for reining in public deficits also find majorities opposed to major program cuts. Second, and relatedly, the White House wants to contrast its moderate approach to GOP austerity zealots, who have launched a single-minded jihad against government spending. Once the public tumbles to the implications of the GOP’s demands for $100 billion in domestic program cuts now, Democrats reason, they will recoil and demand a more balanced approach that includes defense cuts and tax hikes.

That seems likely. Republicans have convinced themselves that most Americans share their goal of shrinking government by cutting off its credit card. “The country’s biggest challenge, domestically speaking, no doubt about it, is a debt crisis,” House Budget Committee Chair Paul Ryan said this weekend.

But progressives believe that Americans – especially the independents and moderates who abandoned Democrats in the midterm election – are even more concerned about the scarcity of good jobs and America’s eroding competitiveness. More than fiscal stringency, they are looking to their leaders for a hopeful plan to jumpstart the stalled U.S. job machine.

The President’s budget accordingly makes room for significant new public investments, especially in infrastructure, innovation, and education. He wants to spend $53 billion over the next six years on high speed rail, and invest $50 billion in capitalizing a National Infrastructure Bank. The GOP’s knee-jerk dismissal of such strategic investments as just more government waste is wrong as a matter of economics, and it leaves conservatives without a credible theory for how they would rekindle economic growth.

So maybe Obama is right to stand back and give Republicans all the fiscal rope they need to hang themselves from the tree of uncompromising budget austerity. But his Fiscal Commission, which labored diligently and successfully to find some fiscal common ground between the parties, especially on scaling back tax expenditures, deserves better from him. And sooner rather than later, the President will have to step up and lead on entitlement reform, a national imperative that can no longer be safely deferred.

The President’s New “Better Buildings Initiative” Builds on a PPI Memo

Posted on by The Progressive Policy Institute

President Barack Obama today announced a major new policy agenda to improve energy efficiency in commercial buildings by 20 percent by 2020, and it looks like he’s been reading PPI’s memos.

Last November, PPI released a policy memo calling on the President to support commercial retrofits as a key to powering America’s economic recovery. It called for a “targeted set of short- and long-term policies to spur jobs and drive investment in retrofitting commercial buildings”. With one in four construction workers unemployed, an aggressive plan to upgrade commercial buildings will not only create jobs, but it will also make small businesses more competitive.

The President’s new Better Buildings Initiative (announced on today’s visit to Penn State University to spotlight the school’s recently developed “Energy Innovation Hub”) is a signal of support for commercial retrofits as a driver of America’s economic recovery. The White House estimates that this will generate energy savings of $40 billion by 2020 for American businesses.

To meet this goal, the President proposed a number of policy actions. The most significant is to change the existing “Energy Efficient Commercial Building Tax Deduction” into a tax credit. Currently, the tax code provides an incentive to building owners for retrofitting buildings through a tax deduction of $1.80 per square foot.

Bipartisan support for the tax deduction already exists. Recent legislation from Senators Bingaman (D-NM) and Snowe (R-ME) on energy tax incentives would increase the deduction to $3.00 per square foot. Groups such as Rebuilding America, a broad-based coalition of labor, business, utilities, manufacturers, and policy groups, support updating the commercial building tax deduction to make it more usable for existing buildings. Rebuilding America issued a press release saluting the President’s Better Buildings Initiative.

Other elements of the Better Buildings Initiative include a ramp up of energy efficiency financing opportunities for commercial retrofits, with support from the Small Business Administration; a competitive grant program at the state and local level called “Race to Green”; an initiative to encourage CEOs and universities to commit to increase the energy efficiency of their buildings, called the “Better Buildings Challenge”; and a Building Technology Extension Program.

Jones Lang LaSalle, the nation’s second-largest commercial property manager, called the President’s proposal “exactly what’s needed to jump-start major energy and carbon reduction initiatives and to create jobs and efficiencies that enhance our global competitiveness.” (A White House fact sheet is available here.)

The President’s announcement on commercial retrofits sets the stage for renewed efforts in Congress to pass clean energy legislation. This will be part of deliberations in Congress over the President’s Budget. Over the past year, energy efficiency policy has garnered the support of Republicans and moderate Democrats alike. The Better Buildings Initiative goes a long way to outline a strategy for innovation and competitiveness in America and should be supported in the debate over the President’s Budget.

State of the Union on High-Speed Rail: How to Pay for Fast Trains

Posted on by The Progressive Policy Institute

In setting a national goal of providing high-speed train service to 80 percent of Americans by 2035, President Obama challenged himself and Congress to come up with a way to finance the biggest transportation program since the Interstate Highway System.

The president called on Congress to “redouble” efforts to rebuild the nation’s transportation infrastructure and advance high-speed rail (HSR) even as it cuts elsewhere. He framed the issue as part of our generation’s “Sputnik moment” where the world has changed and government investment is needed to generate growth and stimulate private innovation.

“We do big things,” he said, wrapping HSR in the mantle of other federal initiatives, such as Transcontinental Railroad initiated by Abraham Lincoln and the highway system inaugurated by Dwight Eisenhower, that transformed American life.

Obama can start by submitting to Congress a radically reformed six-year surface transportation appropriations bill to replace the expiring act known as SAFETEA-LU, as we argued in a recent memo.

SAFETEA-LU has already been lambasted by Congress’ own advisory group, the National Surface Transportation Policy and Revenue Study Commission, as directionless and dysfunctional.

The commission has pointed out that $24 billion was appropriated to more than 5,000 congressional “earmarks.” That means that each member of Congress got to pick an average of 10 projects for their districts without any outside review. Such earmarking has made highway funding a poster child of the kind of pork-barrel spending that House leaders – and many Tea Party-backed House Republicans – vow to slash.

So here’s the President’s chance to cut government waste while securing long-term HSR funding. The new bill should allow money collected through the Highway Trust Fund to flow to HSR. Eliminating earmarks and such peripheral programs as Safe Routes to Schools could free up $5 billion a year for rail construction – or $30 billion over the bill’s lifetime – without requiring an increase in the federal gas tax, which is an anathema to Congressional Republicans.

The administration should also think of creative ways to leverage public monies to seed private capital for HSR construction. It was great to hear the president allude in his speech to private investment as a way to finance his rail program. We need to hear more as Secretary of Transportation Ray LaHood develops tangible ways to leverage private capital, including capital promised by foreign train builders.

Using federal money to seed private-sector investment has long been advocated by John Mica (R-Fla.), the new chair of the House Transportation and Infrastructure Committee. Mica, who is responsible for drafting the next surface transportation bill, could be a constructive partner with the Obama administration.

Mica supports “true” high-speed rail as a transformational technology and has been critical of the administration’s allocations of federal stimulus funds to higher-speed conventional rail projects.

We have shared his concern that the administration, in its first round of grants a year ago, spread funds that would marginally improve passenger train speeds on shared track with freight railroads. Since then, the administration has placed much more emphasis on getting a dedicated high-speed route under construction between Tampa and Orlando and jumpstarting California’s high-speed line between Los Angeles and San Francisco.

Mica wants to use private capital to underwrite high-speed rail development in the Northeast Corridor. He is holding a hearing today in Manhattan where he will take testimony from New York Mayor Michael Bloomberg, former Pennsylvania governor Ed Rendell, Thomas Hart of the U.S. High Speed Rail Association and Petra Todorovich of the Business Alliance for Northeast Mobility.

Obama demonstrated on Tuesday his commitment to the vision of high-speed rail. Mica can turn this vision into funded reality in a divided government. And Ray LaHood, a former Republican congressman who knows Mica quite well, says he is open to finding common ground. How these gentlemen interact over the next six months will bear close attention.

Obama’s Approval Numbers Creep Up: How Can He Build on This?

Posted on by The Progressive Policy Institute

About a month ago, in the wake of a the great tax-cut compromise, I wrote a post entitled “Why Obama’s Approval Numbers Are About to Creep Up.” At the time, I reasoned that the tax cut deal was popular, Obama was playing to his strength as a broker of compromise, and a little public disagreement with the hard left might help him among political independents and moderates.

At the time, his approval rating was hovering around 47 percent. A month later, the latest AP-GfK Poll has it at 53 percent, the highest it’s been since March 2010, right before the healthcare debate kicked into high gear. More importantly for Democrats, 53 percent of Americans now rate them favorably, compared to 45 percent who view them unfavorably, almost an exact reverse of where voters were on Election Day.

But Republicans are also doing better. Last fall, only 29 percent approved of Republicans in Congress, but now that number is up to 36 percent. And Congress’s overall approval ratings, which fell to the teens at the end of last year, are back up to 26 percent.

So, in the wake of a lame-duck Congress in which some serious stuff was accomplished, it seems that Americans feel a little better about their leaders generally. It’s also possible that without the vitriolic attacks ad of campaign season invading everybody’s space, there’s a little bit of an inevitable bounce.

But the main takeaway point is that this is good news for Obama and the Democrats. As a new Gallup Poll highlights, across the political spectrum, every group except “very conservative” (even just plain old conservative) thinks that it is more important to compromise than to stick to beliefs. On this question, by the way, moderates look almost identical to both the “liberal” and “very liberal” group.

Hopefully, the Arizona tragedy will have at least some staying power as a wake-up call to the dangers of political extremism, and continue shine a favorable light on Obama’s talents as adult-in-the-room.

However, the challenge for Obama remains to do more than just get all the kids to play nice with each other. He also still needs to lay out a galvanizing positive vision to get voters excited, as he did in his campaign. These are anxious times, and anxious times are fertile ground for the politics of blame and anger, especially absent any optimism for the future.

Obama and the Democrats are gaining back a little political momentum, and the spirit of problem-solving is enjoying a mini-renaissance. Great. But let’s capitalize on this. It needs to be a starting point for working toward solutions to the generational problems that our nation faces, like solving our looming deficit crisis or restructuring the economy for the 21st century. You’ll be hearing more from us on this subject soon.

GOP: Soft on Deficits

Posted on by The Progressive Policy Institute

Republicans talk a big game on fiscal responsibility, but don’t be fooled: Today’s GOP has gone soft on budget deficits.

This week, the new House Republican majority adopted rules aimed at controlling federal spending. That sounds innocuous enough, but a closer look at the new rules reveals the GOP’s dirty little secret: in their zeal to shrink government, Republicans have abandoned the fight to rein in America’s colossal budget deficits.

This year’s budget deficit is estimated to be about $1.7 trillion. Since House leaders adamantly oppose raising taxes to close the gap, they’d have to make epic cuts in federal spending to make even a modest dent in the deficit. But as the New York Times reports, House GOP leaders already are backing off on their promise to hack $100 billion out of domestic spending this fiscal year. Since Republicans also insist on sparing the Pentagon from the budget ax, that would have meant draconic cuts (between 20-30 percent) in domestic programs. Sobered GOP leaders are now talking about cuts in the $50 billion range.

The assertion, pressed most vehemently by Tea Party types, that fiscal discipline can be restored through spending cuts alone is new. Don’t forget that Ronald Reagan signed 11 major tax increases, including a whopper in 1988 amounting to 2.7 percent of GDP. George Bush’s willingness to boost taxes (and tax rates) as part of his 1990 budget helped set America on a course toward the budget surpluses later achieved on Bill Clinton’s watch.

By taking taxes off the table, House Republicans are breaking with their own party’s tradition of fiscal rectitude and saying, in effect, they don’t care all that much about deficits. Evidently for this curious new breed of fiscal “conservative,” expanding deficits in pursuit of smaller government is no vice.

That’s the real message sent by the new rules adopted Wednesday, which seem calculated to lock in big deficits as far as the eye can see.

Most egregious, for example, is their new “cutgo” rule. Under existing “paygo” rules, new tax cuts or spending increases must be offset with tax increases and/or spending cuts. Cutgo, in contrast, says that any new spending must be paid for by spending cuts alone, and it exempts tax cuts from offsets altogether. In other words, their costs will simply be added to the deficit. Similarly, changes in budget reconciliation rules would bar spending increases in reconciliation bills, but allow tax cuts. Expect a torrent of new tax expenditures as lawmakers realize that they can dole out new tax favors without the bother of paying for them.

If the new rules weaken fiscal discipline on the tax side of the federal budget, they do strengthen constrains on the spending side. For instance, they include a new point of order on legislation which increases mandatory spending at any point over the next four decades. They also repeal the “Gephardt Rule,” which allows lawmakers to avoid an on-the-record vote on raising the debt ceiling. The Committee for a Responsible Federal Budget offers a detailed analysis of the new rules here.

Unfortunately, the overall effect of the new rules will be to undermine serious bipartisan negotiations to curb both federal spending and deficits. The Senate, still controlled by Democrats, rightly will reject the GOP’s transparent bid to force all the painful decisions to the spending side of the ledger. As a slew of recent reports by bipartisan fiscal commissions show, there’s no plausible way to deal with America’s debt explosion without closing tax loopholes and raising revenues. Even such hard-core fiscal conservatives as Sen. Tom Coburn (R-OK) recognize the need to curb tax expenditures. By impeding the search for common ground on fiscal issues, the House GOP’s anti-tax fundamentalism only delays the inevitable day of reckoning, at enormous cost to the nation’s economic prospects and the public’s confidence in their government’s ability to solve urgent problems.

Unlike House Republicans, U.S. voters think deficits matter, not just the level of public spending. This is especially true of independents, who abandoned Democrats in last year’s midterm elections in part because of their spendthrift ways. To these voters, big deficits connote not just chronic mismanagement of the nation’s economy, but also a breakdown in political responsibility in Washington.

That’s why President Obama and progressives should miss no opportunity to drive home the reality that Republicans are now the party of big deficits.

Will 2011 Be a Banner Year for IT Hiring?

Posted on by The Progressive Policy Institute

The water is building up behind the dam.  More and more, it’s looking like 2011 could be a banner year for IT hiring…isn’t that amazing?

The key piece of evidence:  Online help-wanted ads for computer and mathematical occupations are up 56% over a year ago, and well over their pre-bust peak.  That’s according to data from The Conference Board. *

 

This category of help-wanted ads includes companies looking for the full range of IT occupations: computer software engineers, computer support specialists, network administrators, web developers, computer programmers and the like.**

On one level, this rise in labor demand is not surprising, since  the communications boom–including mobile, video, social networking, online shopping, and  all sorts of other applications–is driving a commensurate boom in IT spending.   With business spending on computers, software, and communications equipment is now almost 10% above pre-bust levels,  it’s no wonder that companies have an absolute crying need for more skilled IT workers.

So far, however, businesses have been holding off from actual hiring. Data from the BLS suggests that the number of people actually employed in IT occupations has not risen as fast as the want ads.  Employment in computer and mathematical occupations now stands at 3.4 million, well below its recent peak.

My intepretation, though, is that the hiring pressure is gotten strong enough to break the dam, especially with Obama having just signed the new tax bill. Companies have just been waiting to make sure that  the global economy doesn’t fall back into a deep funk again, and a hefty dose of fiscal stimulus is just the thing.

I’m predicting a big jump in IT hiring as soon as the new year starts…and it’s about time.

*The labor demand data is from The Conference Board Help Wanted OnLine (HWOL) data series, https://www.conference-board.org/data/helpwantedonline.cfm

This piece is cross-posted at Mandel on Innovation and Growth

Needed: A ‘Global-Compatible’ Tax System

Posted on by The Progressive Policy Institute

President Obama is thinking about a broad overhaul of the income tax system, closing loopholes and lowering rates. (“Obama Weighs Tax Overhaul in Bid to Address Debt”).

But in today’s global economy, any attempt to ‘fix’ the U.S. income tax system is fundamentally doomed. Financial and product markets are so deeply globally integrated that multinationals and wealthy individuals can easily  recognize their income in lower-tax countries, if they choose.

One simple statistic: In 2009 40% of U.S. imports and exports was ‘related-party trade’ –”trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies.” That means companies are effectively trading with themselves, so they can choose which side of the transaction books the profits.

To put it another way, the global economy is the biggest loophole of all, and it can’t be closed without layer after layer of intrusive rules and regulations.  In a global economy, you can’t have a simple income tax system.

What we need is a ‘global-compatible’ tax system: That is, a tax system which acknowledges the existence of a global economy, so it doesn’t continually need to be patched to close loopholes.

The best global-compatible tax system that I know of is the value-added tax. The value-added tax, as the name suggests, taxes the value added in a country, not the income. Equally important, A VAT  taxes imports but not exports.  As a result,  it offers far less chances for gaming the system.

Now, countries can still compete on their level of VAT. Moreover, there are a lot of controversial issues that can seriously affect competitiveness. These include: How to make the VAT progressive; whether medical care and housing should be exempt; how to treat capital investment and R&D spending; and so on. Big important questions, but ultimately solvable.

If you want tax simplicity and fairness, global-compatible is key.

This piece is cross-posted at Mandel on Innovation and Growth

In Praise of Comprehensive Tax Reform

Posted on by The Progressive Policy Institute

The current debate over the tax-cut compromise hammered out by President Obama and Republicans in Congress raises the obvious question: If the bill passes (and that’s certainly not a sure bet at this point, as left and right harden their positions), what will happen in 2012?

Today’s New York Times offers an answer:

…Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.

The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

If this is indeed the plan that is forming, it’s good news. There has been a steady drumbeat of support in the Washington wonkosphere for comprehensive tax reform. It’s a no-brainer, really: simplifying the tax code by eliminating the thicket of deductions, exceptions, and loopholes that has come to overwhelm our system will allow government to lower rates even as revenues stay the same.

An Obama Administration push for tax reform also gives it a powerful political weapon approaching the 2012 elections. The message would be: “Forget the Bush tax cuts – they’re expiring. In their place is the Obama tax reform plan.” Though claiming reform is “the only way Obama can win in 2012” might be a little hyperbolic, William Galston is right to say that such a pivot “would enable him to move back on offense and to become the transformative leader he clearly wants to be.”

What should comprehensive tax reform look like? The administration and the Hill could do worse than start with the Wyden-Gregg tax reform plan, which would leave the tax code with three brackets (15, 25, and 35 percent), impose a flat corporate tax rate of 24 percent, and triple the standard deduction, while eliminating a whole host of loopholes and deductions. The plan is expected to cut the average taxpayer’s and corporation’s tax burden while keeping revenue steady.

Next year marks the 25th anniversary of the Tax Reform Act of 1986, a landmark achievement. The massive bill simplified the code and lowered rates, and won bipartisan support. (Here is yet another deflation of the Tea Party’s mythical Reagan: Wouldn’t you know it, Reagan worked with the other party and reached compromise.) The sprawling lawn that is the tax code has been left alone since then, and it is now overgrown. An Obama campaign to simplify the tax code is not the only good policy—it’s good politics.