Wednesday, November 10, 2010

Entitlement Commission's preliminary report

It's available here. Just ignore the words on the title page that say "Draft Document - Do Not Quote, Cite, or Release" along with the bit on the top of each page that says "Draft - Do Not Cite." Everyone else out there is ignoring these words, after all (and I don't happen to know if what we have here is a trial balloon or a leak).

Also, apparently at most 4 of the 18 commissioners have been willing to say at this point that they accept the report.

Initial reactions that I've come across run the expected gamut. The Committee for a Responsible Federal Budget calls it "remarkable and a significant step towards sound fiscal policy." Elsewhere, the words "Catfood Commission" are being deployed again, on the theory that the Commission aims to reduce seniors to eating catfood, even though its proposed Social Security cuts would be progressive (reducing benefits at upper income ranges but raising them at the bottom).

There's much to quarrel with in the report, including its proposing various arbitrary rules of thumb that one certainly wouldn't have in a rational political process (e.g., revenue must be capped at 21% of GDP, rather than depending on a full assessment of costs and benefits; various meat axe spending freezes or caps that likewise can only, albeit plausibly, be defended on the ground that a more nuanced approach wouldn't work politically).

Also, a big critique of the plan on the left that may well be correct politically could be stated as follows. Even to the extent that politicians on the left and right alike genuinely plan to solve the fiscal problem, they're engaged in a chicken game regarding whose oxen get gored first and the most. If we (reasonably) posit that the people on the right are pretty much unwilling at this point to make any concessions on the tax side, then those on the left might be tactically mistaken to give any ground too soon on entitlements growth and the like. Hence the talk, for example by Brad DeLong, that establishing the Commission was an "unforced error" by the Obama Administration.

All that said, however, there's a lot to be said for this proposal substantively (whether or not it will succeed politically in moving things in a positive direction). For example, it discusses:

(1) cutting military along with other discretionary spending. In my view, much U.S. military spending and activity has not just zero but negative social value from a U.S. national welfare standpoint.

(2) significant income tax base-broadening, with elimination of tax expenditures paying for significantly lower rates (while still permitting some net revenue-raising),

(3) making Social Security not just a slower-growing program but potentially a more progressive one, and

(4) measures to address unsustainable healthcare growth.

One smallish point - addressed, however, to my current research interests - is that the report refers to replacing the current worldwide U.S. international tax system with a territorial or exemption system for foreign source income. Fine, and I'm writing a book that ultimately albeit conditionally endorses this, but it would be a huge mistake to do this without (a) taxing away U.S. companies' transition gain with respect to the as yet unrepatriated foreign earnings that they accumulated under our existing worldwide regime, and (b) improving the source rules for U.S. versus foreign source income, given that the worldwide tax currently functions as a constraint on U.S. (but not foreign) multinationals' ability to shift reported net income out of the U.S.

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