Friday, December 16, 2005

The New America Foundation again

As I noted in an earlier post, the New America Foundation recently issued an interesting tax reform plan, a but bolder and more novel than what the Tax Reform Panel was able to do, although flawed by the peculiar administrative idea of subjecting taxpayers both to an income tax and to a progressive consumption tax. Having everyone file two returns instead of just one is not an idea I would expect to go anywhere. But still, the NAF is trying a bit harder than most other groups in Washington these days.

Now the NAF has issued a "Nonpartisan Social Security Reform Plan," devised by Maya Maguineas of the NAF plus economists Jeffrey Liebman and Andrew Samwick. Although some in the liberal blogosphere have been experiencing heart palpitations because both Liebman and Samwick have worked with conservative eminence grise Martin Feldstein, in fact Liebman is on the Democratic side of the aisle and worked for the Clinton Administration, while Samwick lines up on the Republican side (albeit with principle, not hackery) and worked for the current Bush Administration.

The NAF plan tries to balance left and right policy preferences by providing a mix of benefit cuts, revenue increases, and mandatory individual accounts that are funded half through new taxes and half through diversion of a slice (1.5%) of the existing Social Security payroll tax. King Solomon and slicing the baby in half, you see. But in fact this is the sort of plan that deserves attention, and the most serious one out there, so far as I am aware, other than the Peter Diamond-Peter Orszag plan that tries to be similarly balanced but leaves out the accounts and presumably has no prospects for acceptance on the right.

Liberal bloggers have been attacking the plan, however, because it has the accounts with a bit of a Social Security payroll tax diversion to help fund them. So to some of them it might as well be the Bush plan all over again.

It's funny how arbitrary details can affect people's perception of things. The NAF plan replaces two-thirds of the diverted payroll tax revenue through a progressive increase to the payroll tax (raising the ceiling on the tax, not the rate). So, if they changed the sequence of the cash flows, they could almost fully fund the accounts through the new taxes. This would probably cause the plan to be perceived differently, even though in substance it would be exactly the same.

Samwick has sounded a bit touchy, perhaps understandably so (none of us likes to be trashed) in discussing the plan in his own blog. Among other things, he says that the mandatory accounts with a bit of payroll tax diversion are indispensable to get conservative support for the plan, including his. But alas, getting rid of them may be indispensable to liberal support for the plan, and no plan has a chance politically without both liberal and conservative support. (When I speak of a plan having a chance, I mean several years down the road - obvously nothing is possible now.)

It's a shame that the symbolism of individual accounts and payroll tax diversion matters more than the substance of Social Security reform, to many on both the left and the right. In fact, whether or not there are individual accounts is really more of a fiscal language or descriptive detail than one with important economic substance. More on that at some future time.

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For what it's worth, the NAF plan is much better balanced between tax increases/benefit cuts than Diamond-Orszag. NAF is roughly half tax increases (when the mandatory account contribs are included) and half benefit reductions, which is as good a definition of the political center as any. Diamond-Orszag gets the great majority of its improvements in solvency from tax increases (about 85%, based on the SSA analysis of the plan). That may be a bigger reason D-O isn't very viable politically.

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