6. ARGUING FIRST PRINCIPLES

    1. Warren E. Buffett, “Stop Coddling the Super-Rich,” The New York Times, August 14, 2011.

    2. John Boehner, Address to the Economic Club of New York, May 9, 2011, available at http://www.speaker.gov/News/DocumentSingle.aspx?Document ID=240370.

    3. Ezra Klein, “The Budget Deals of Reagan, Bush, Clinton and Obama, in One Chart,” Ezra Klein’s Wonkblog, The Washington Post, July 7, 2011.

    4. Carl Hulse, “Long Battle on Debt Ending as Senate Set for Final Vote,” The New York Times, August 1, 2011.

    5. Carl Hulse, “Budget Talks Near Collapse as G.O.P. Leader Quits,” The New York Times, June 23, 2011.

    6. Nate Silver, “G.O.P.’s No-Tax Stance Is Outside Political Mainstream,” FiveThirtyEight (blog), The New York Times, July 13, 2011.

    7. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, vol. 1 (Oliver D. Cooke, 1804), p. 349.

    8. This book is not the place for an extended discussion of whether market forces provide more effective discipline for private companies than political forces do for politicians and regulatory agencies. Obviously, neither is perfect. In general, we think that a public company is constrained to maximize profits more tightly than, say, a regulatory agency is constrained to follow the public interest or even to conform to the preferences of a majority of the population.

    9. The CBO estimates that, averaged across all workers, the former impact (substitution effect) outweighs the latter impact (income effect). It estimates a total wage elasticity of 0.129, meaning that a 10 percent increase in after-tax wages and after-tax income will cause a 1.29 percent increase in hours worked. CBO, The Effect of Tax Changes on Labor Supply in CBO’s Microsimulation Tax Model, April 2007, p. 6.

  10. In practice, this effect is small and may even be negative. Leonard E. Burman, The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (Brookings Institution Press, 1999), pp. 55–58.

  11. The larger distortion in the taxed part of the economy is not compensated for by lower distortion in the untaxed part of the economy. According to basic supply and demand curves, the deadweight loss to society of a tax is proportional to the square of the amount of the tax. So if the economy is divided into two halves, A and B, a 20 percent tax on A and no tax on B will produce a greater deadweight loss than a 10 percent tax on each.

  12. Jesse Drucker, “The Tax Haven That’s Saving Google Billions,” Bloomberg Businessweek, October 21, 2010.

  13. Mark Zandi, an economist who has advised both Republicans and Democrats, estimated the multipliers for permanent tax cuts at 0.29–0.48, temporary tax cuts at 0.27–1.29, and spending increases at 1.36–1.73. Mark Zandi, “A Second Quick Boost from Government Could Spark Recovery,” excerpts of testimony before the House Small Business Committee, July 24, 2008, available at http://www.economy.com/mark​-zandi/documents/Small%20Business_7_24_08.pdf. However, multipliers depend on many factors, so it is impossible to generalize about the relative impact of tax and spending changes. For a compilation of many estimates, see Antonio Spilimbergo, Steve Symansky, and Martin Schindler, “Fiscal Multipliers,” IMF Staff Position Note SPN/09/11, May 20, 2009.

  14. GDP data are from BEA, National Income and Product Accounts, Table 1.1.1. Tax rates are from Citizens for Tax Justice, “Top Federal Income Tax Rates Since 1913,” November 2011, available at http://www.ctj.org/pdf/regcg.pdf, and include relevant payroll taxes.

  15. Emmanuel Saez, Joel Slemrod, and Seth Giertz review many empirical studies and conclude, “the best available estimates [of the long-run elasticity of taxable income] range from 0.12 to 0.40.” Emmanuel Saez, Joel Slemrod, and Seth H. Giertz, “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review,” August 7, 2010, available at http://elsa.berkeley.edu/~saez/saez-slemrod-giertzJEL10round2.pdf, p. 49. The elasticity of labor supply is close to zero for working-age men, and so taxable income responds to changes in tax rates through other channels such as increased charitable giving, increased tax avoidance, etc. Ibid., pp. 1–2. At the high end of the income distribution, “there is no compelling evidence to date of real economic responses to tax rates”; instead, behavioral responses consist entirely of timing and avoidance. Ibid., pp. 49–50.

  16. Excluding years when the top capital gains rate was exactly 25 percent (1947–1967, covering the bulk of the postwar boom), a rate above 25 percent is associated with GDP growth of 3.0 percent while a rate below 25 percent is associated with GDP growth of 3.2 percent. If we include the recent recession, average growth for years with a rate below 25 percent drops to 2.7 percent. Capital gains rates do not significantly affect GDP growth with a lag, either. Burman, note 10, above, p. 81.

  17. Ibid., pp. 55–63.

  18. An analysis by the Joint Committee on Taxation in 2005 (when both houses of Congress were controlled by Republicans) found that reducing individual income tax rates or increasing personal exemptions would both reduce long-term economic growth if they were not offset elsewhere in the budget. Joint Committee on Taxation, Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief, JCX-4–05, March 1, 2005, p. 9. See also Eric M. Leeper and Shu-Chun Susan Yang, “Dynamic Scoring: Alternative Financing Schemes,” Journal of Public Economics 92 (2008): 159–82, pp. 166–69. A recent paper by Christina Romer and David Romer, which attempts to disentangle tax changes from concurrent confounding factors, finds that “exogenous” tax increases in general reduce economic output, but increasing taxes to reduce a deficit tends to increase economic output. Christina D. Romer and David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review 100 ( June 2010): 763–801, pp. 780–87.

  19. There is an immense academic literature on the capture of governmental actors by private sector interests, with roots in political science and economics, dating back at least to Samuel P. Huntington, “The Marasmus of the ICC: The Commission, the Railroads, and the Public Interest,” Yale Law Journal 61 (1952): 467–509; and George J. Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science 2 (1971): 3–21. To summarize, politicians and regulators often (though not always) do what special interests want them to do, not what is in the public interest.

  20. U.S. Department of Agriculture Economic Research Service, “Farm and Commodity Policy,” available at http://www.ers.usda.gov/Briefing/FarmPolicy/; U.S. Energy Information Administration, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010, July 2011; Jim Wolf, “House Defies Veto Threat, Funds 2nd F-35 Engine,” Reuters, May 27, 2010.

  21. For example, benefiting more from tax expenditures does not make people more likely to regard the tax system as fair. Suzanne Mettler, The Submerged State: How Invisible Government Policies Undermine American Democracy (University of Chicago Press, 2011), pp. 43–44.

  22. Government Accountability Office, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11–318SP, March 2011.

  23. Buffett himself has argued for significantly higher taxes on people like him. Buffett, note 1, above.

  24. Frank Newport, “Americans Want New Debt Supercommittee to Compromise,” Gallup, August 10, 2011.

  25. Washington Post–ABC News poll, “Broad Opposition to Medicare Cuts Marks GOP’s Risks in the Debt Debate,” April 20, 2011, available at http://www.langerresearch.com/​uploads/1122a2%20Debt%20Debate.pdf; Steven Thomma, “Poll: Best Way to Fight Deficits: Raise Taxes on the Rich,” McClatchy, April 18, 2011; Jim Rutenberg and Megan Thee-Brenan, “Nation’s Mood at Lowest Level in Two Years, Poll Shows,” The New York Times, April 21, 2011; CNN/ORC Poll, conducted August 5–7, 2011, available at http://i2.cdn.turner.com/cnn/2011​/images/08/09/poll.aug10.pdf.

  26. John Rawls, A Theory of Justice (Belknap Press, 1971), p. 302.

  27. In Sweden, the top wealth quintile owns 36 percent of all wealth; in the United States, the corresponding figure is 84 percent. Michael I. Norton and Dan Ariely, “Building a Better America—One Wealth Quintile at a Time,” Perspectives on Psychological Science 6, no. 1 (2011): 9–12, p. 10. One counterargument is that people simply are not good at interpreting numerical distributions of wealth across five quintiles. In a second step, however, Norton and Ariely asked participants to estimate what the current U.S. wealth distribution is and what the ideal wealth distribution would be. In this exercise, participants overwhelmingly said that the wealth distribution should be more equal than it is today.

  28. Matthew DiCarlo, “Do Americans Think Government Should Reduce Income Inequality?,” Shanker Blog, October 24, 2011. DiCarlo cites General Social Survey data going back to the mid-1970s.

  29. Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” CESifo Working Paper 3548, August 2011, pp. 8–9.

  30. House Budget Committee, The Path to Prosperity: Restoring America’s Promise: Fiscal Year 2012 Budget Resolution, pp. 46–47; CBO, Long-Term Analysis of a Budget Proposal by Chairman Ryan, April 5, 2011, pp. 7–9.

  31. “If I were president right now, I would go to Congress with a new system for unemployment, which would have specific accounts from which people could withdraw their own funds. And I would not put in place a continuation of the current plan.” Andrew Malcolm, “The Ames Republican Debate Transcript: Everything They Said That You Missed,” Top of the Ticket (blog), The Los Angeles Times, August 13, 2011. See also Suzy Khimm, “Romney Thinks Workers Should Pay for Their Own Unemployment Benefits,” Ezra Klein’s Wonkblog, The Washington Post, August 12, 2011.

  32. According to CBO analysis, under the House Budget Committee’s Medicare plan, by 2030, beneficiaries would be paying 68 percent of their health care costs in premiums and other out-of-pocket costs. CBO, Long-Term Analysis of a Budget Proposal by Chairman Ryan, April 5, 2011, Figure 1, p. 22.

  33. The insurance company can protect itself by offering a payout in nominal terms, as in a standard life insurance policy, but then you aren’t protected against inflation risk. If the insurer offers a real payout (as in health insurance, for example, where the benefit takes the form of actual health care services), then it is vulnerable to inflation risk.

  34. Actually, according to the director of national intelligence, our primary security concern is “the global economic crisis and its geopolitical implications.” Dennis C. Blair, Annual Threat Assessment of the Intelligence Community for the Senate Select Committee on Intelligence, February 12, 2009, p. 2. The first traditional national security threat identified in this report, however, was extremist terrorist groups; the next was instability in the Middle East and Southwest Asia.

  35. Stockholm International Peace Research Institute, “Background Paper on SIPRI Military Expenditures Data, 2010,” April 11, 2011.

  36. The Special Operations Command budget is about $10 billion. Andrew Feickert and Thomas K. Livingston, U.S. Special Operations Forces (SOF): Background and Issues for Congress, Congressional Research Service Report for Congress, December 3, 2010. The total intelligence budget was less than $30 billion in the late 1990s, but has grown to $80 billion today. Central Intelligence Agency, FAQs, available at https://www.cia.gov/about-cia/faqs/index.html; Pam Benson, “US Spy Spending Revealed for First Time, Tops $80 Billion,” CNN, October 28, 2010.

  37. Gordon Adams and Cindy Williams, Buying National Security: How America Plans and Pays for Its Global Role and Safety at Home (Routledge, 2010), p. 1.

  38. United States Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010, Current Population Reports P60–239, September 2011, Table 8, p. 26.

  39. Central Intelligence Agency, The World Factbook, Infant Mortality Rate, available at https://www.cia.gov/library/publications/​the-world-factbook/rankorder/2091rank.html. The thirty-four countries are those identified as advanced economies by the IMF; the three countries trailing the United States are Slovakia, Estonia, and Cyprus. Overall, the United States’ performance on health care quality indicators is middling to bad. Gerard F. Anderson and Bianca K. Frogner, “Health Spending in OECD Countries: Obtaining Value per Dollar,” Health Affairs 27, no. 6 (November-December 2008): 1718–27, Exhibit 4, p. 1725. See also David A. Squires, “The U.S. Health System in Perspective: A Comparison of Twelve Industrialized Nations,” Issues in International Health Policy, Commonwealth Fund, July 2011, p. 11.

  40. Of the thirty-four “advanced economies” as defined by the IMF, the United States has the third highest level of disability-adjusted life years (DALYs) as measured by the World Health Organization. DALYs measure both years lost due to premature death and effective years lost to disability. World Health Organization, Global Burden of Disease, available at http://www.who.int/healthinfo​/global_burden_disease/en/. Of the thirty-four advanced economies, the WHO does not provide data for Hong Kong or Taiwan; the United States ranked third of the remaining countries, surpassed only by Estonia and Slovakia. Data are age-standardized to account for different age distributions across countries.

  41. Diane Geng, “GM vs. Toyota: By the Numbers,” NPR, December 19, 2005.

  42. See Ronald Lee and Andrew Mason, “The Price of Maturity,” Finance & Development 48, no. 2 ( June 2011): 6–11.

  43. Figures are for households where the head of household is age 57–66. Jesse Bricker, Brian Bucks, Arthur Kennickell, Traci Mach, and Kevin Moore, “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009,” Federal Reserve Board Finance and Economics Discussion Series Working Paper 2011–17, March 2011, Appendix Tables 2A, 2B.

  44. Most elderly Americans qualify for Social Security benefits. For Social Security beneficiaries reaching retirement age in 2005, Social Security was the largest source of income for all income quintiles except the top quintile, where it was barely edged out by income from assets. Andrew G. Biggs and Glenn R. Springstead, “Alternate Measures of Replacement Rates for Social Security Benefits and Retirement Income,” Social Security Bulletin 68, no. 2 (2008), Table 5, p. 11.

  45. See IPCC, “Summary for Policymakers,” in M. L. Parry, O. F. Canziani, J. P. Palutikof, P. J. van der Linden, and C. E. Hanson, eds., Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, 2007): 7–22.

  46. On the social cost of carbon (the cost that is not captured by market prices), see G. W. Yohe, R. D. Lasco, Q. K. Ahmad, N. W. Arnell, S. J. Cohen, C. Hope, A. C. Janetos, and R. T. Perez, “Perspectives on Climate Change and Sustainability,” chapter 20 in Parry et al., note 45, above, pp. 821–24.

  47. On the costs of asthma due to pollution, see Sylvia J. Brandt, Laura Perez, Nino Künzli, Fred Lurmann, and Rob McConnell, “Costs of Childhood Asthma Due to Traffic-Related Pollution,” European Respiratory Journal (forthcoming).

  48. Note that this is different from a simple projection showing that the national debt will climb indefinitely under current policy. Today, projections show ever-climbing levels of debt, yet even thirty-year interest rates are relatively low. This implies that investors expect current policy to change.

  49. Jonathan D. Ostry, Atish R. Ghosh, Jun I. Kim, and Mahvash S. Qureshi, “Fiscal Space,” IMF Staff Position Note SPN/10/11, September 1, 2010, Table 3, p. 14. They estimate the level to which each country’s debt naturally converges, given that country’s past history of responding to changes in debt levels. The median level of general government debt varies between 50.2 percent and 62.6 percent of GDP, depending on assumptions. This corresponds to a somewhat lower level of net central government debt, the metric we generally use throughout this book.

  50. These are the only four advanced economies, by the IMF’s definition, whose net general government debt will exceed 100 percent of GDP in the wake of the financial crisis and recession. IMF, World Economic Outlook Database, April 2011.

  51. OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Table 7.1.

  52. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-2, pp. 4–5.

  53. The CBO, for example, projects that real economic growth will remain relatively weak through 2013 (2.6 percent in 2012, 1.7 percent in 2013). Ibid., Supplemental Material: Detailed Economic Projections, CY 2011–2021; Actual Data, 1950–2009 (xls), available at http://cbo.gov/doc.cfm?index=12316.

  54. These estimates are from our projections discussed in chapter 4; for further details, see the Appendix.

  55. For simplicity, our projections assume that the 3 percentage points of deficit reduction occur entirely in 2022 and apply to all years thereafter. In practice, any structural changes to the federal budget should be phased in over time. A permanent change of 3 percent of GDP, phased in during the years before and after 2022, would have roughly the same effect on the national debt.

  56. A smaller reduction in annual deficits would also bring the debt below 50 percent of GDP by 2030, but the national debt would start rising quickly almost immediately thereafter. A reduction of 3 percentage points would keep the national debt below 50 percent of GDP into the 2050s.

7. WHERE DO WE GO FROM HERE?

    1. “A Billion Here, a Billion There . . . ,” Dirksen Center, available at http://www.dirksencenter.org/print_emd_billionhere.htm.

    2. See, for example (roughly arranged from right to left): House Budget Committee, The Path to Prosperity: Restoring America’s Promise: Fiscal Year 2012 Budget Resolution; “A Bipartisan Plan to Reduce Our Nation’s Deficits,” available at http://www.washingtonpost.com/r/2010–2019/WashingtonPost/2011/07/19 /National-Politics/Graphics/Gang_of_Six_Document.pdf (the “Gang of Six” plan); National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010 (the “Obama fiscal commission” plan); Bipartisan Policy Center Debt Reduction Task Force, Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System, November 2010 (“Domenici-Rivlin”); OMB, Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction, September 2011 (President Obama’s proposal to the deficit reduction “supercommittee”); Congressional Progressive Caucus, The People’s Budget: Fiscal Year 2012; James Crotty, “The Great Austerity War: What Caused the Deficit Crisis and Who Should Pay to Fix It?,” Political Economy Research Institute Working Paper 260, June 2011.

    3. This estimate is from our baseline projection introduced in chapter 4 and discussed in detail in the Appendix. In this case, the impact of extending tax cuts that would otherwise expire is based on CBO estimates from CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-8, pp. 26–27.

    4. The personal exemption is a flat amount that all taxpayers can use to reduce their taxable income; before 2001, it was phased out for high-income taxpayers. Taxpayers can reduce their taxable income using either the standard deduction (a flat amount) or by itemizing their actual deductions, such as mortgage interest and charitable contributions; before 2001, the amount of allowable itemized deductions was reduced for high-income taxpayers.

    5. Contrary to the claims of some supporters, the Bush tax cuts did not lead to an increase in tax revenues. See the discussion in chapter 3.

    6. See the discussion in chapter 3.

    7. William G. Gale and Peter R. Orszag, “Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent,” Brookings Institution, August 2004.

    8. Douglas W. Elmendorf, “The Economic Outlook and Fiscal Policy Choices,” testimony before the Senate Budget Committee, September 28, 2010, pp. 29–32.

    9. For example, in 2010, the CBO estimated that extending the income and estate tax cuts through 2011 would create 1 to 4 years of full-time employment per million dollars of budgetary cost through 2015. By comparison, increasing unemployment benefits would create 6 to 15 years of employment per million dollars, infrastructure investments would create 4 to 10 years, aid to states would create 3 to 9 years, and payroll tax cuts would create 4 to 11 years. Ibid., Table 1, p. 22.

  10. In 2010, when Congress faced the same situation, the CBO estimated that extending some or all of the tax cuts, for two years or permanently, would reduce real GNP (gross national product) in 2020, relative to letting the tax cuts expire under then-current law. Ibid., Table 4, p. 31.

  11. The Obama plan lists the ten-year cost of extending all of the income tax cuts, including indexing the alternative minimum tax for inflation, at $3.9 trillion; allowing the tax cuts to expire for high-income taxpayers and increasing the estate tax would bring in only $0.9 trillion. OMB, note 2, above, Tables S-4, S-5, pp. 58–64.

  12. Grover G. Norquist, “Read My Lips: No New Taxes,” The New York Times, July 21, 2011.

  13. CBO, The Budget and Economic Outlook: An Update, August 2011, Supplemental Material: Expiring Tax Provisions (xls), available at http://cbo.gov/doc.cfm?index=12316. The 2021 cost of accelerated depreciation is $13.8 billion; the 2021 cost of the tax break for foreign income (“Subpart F for Active Financing Income”) is $10.1 billion. No other expiring provision has a 2021 cost that exceeds $10 billion.

  14. We begin with our projection for the scenario in which the income and estate tax cuts are made permanent (discussed in the Appendix) and adjust it by making all other tax cuts permanent, using the revenue estimate in CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-8, pp. 26–27.

  15. A similar bonus depreciation provision, established in 2002, was allowed to expire at the end of 2004. Tax Policy Center, “Quick Facts: Bonus Depreciation and 100 Percent Expensing,” available at http://www.taxpolicycenter.org /taxtopics/Bonus-Depreciation-and-100-Percent-Expensing.cfm. In addition, the ethanol tax credit actually did expire at the end of 2011.

  16. The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, Table VI.F4, pp. 187–88, intermediate scenario.

  17. Ibid., p. 3. Social Security’s long-term solvency is measured on a seventy-five-year horizon. The last time the system was calibrated, in 1983, Social Security had about three decades of surpluses to look forward to, so those surpluses could be balanced against deficits for the rest of the seventy-five-year period. Today, we still have those surpluses, now accumulated in the Social Security trust funds, to balance against deficits for the next few decades; after that point, however, we have deficits extending indefinitely. The CBO estimates the seventy-five-year deficit at only 1.6–2.0 percent of taxable payroll, depending on assumptions. CBO, 2011 Long-Term Budget Outlook, June 2011, p. 54. A lower deficit means that fewer or smaller adjustments will be necessary to bring the program into balance.

  18. The CBO suggests no fewer than thirty options. CBO, Social Security Policy Options, July 2010. For a much more detailed and thorough plan than ours, see Peter A. Diamond and Peter R. Orszag, Saving Social Security: A Balanced Approach, revised ed. (Brookings Institution Press, 2005).

  19. The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, pp. 114–15.

  20. CBO, Social Security Policy Options, July 2010, Table 2, pp. 33–38. In this case, “taxable payroll” refers to the amount of earnings subject to the payroll tax under current law. The CBO estimates that this change would improve the program’s balance by 0.2 percent of seventy-five-year GDP, which is equivalent to about 0.5–0.6 percent of seventy-five-year taxable payroll.

  21. Most of the system’s overall progressivity is due to the disability and survivor’s insurance programs. CBO, “Is Social Security Progressive?,” Economic and Budget Issue Brief, December 15, 2006. Social Security is progressive even after accounting for the fact that higher earners tend to live longer and therefore collect retirement benefits for more years.

  22. CBO, Social Security Policy Options, July 2010, p. 31.

  23. Ibid., Table 2, pp. 33–38.

  24. Dawn Nuschler, Alison M. Shelton, and John J. Topoleski, Social Security: Mandatory Coverage of New State and Local Government Employees, Congressional Research Service Report for Congress, July 25, 2011, p. 1.

  25. The Congressional Research Service estimated, using projections from 2010, that immediately expanding Social Security to cover all newly hired state and local employees would eliminate 9 percent of a total seventy-five-year funding gap of 1.92 percent of taxable payroll. Ibid., Table 2, p. 7.

  26. The CBO estimates that a 1 percentage point increase in the payroll tax would reduce the seventy-five-year gap by 0.3 percent of seventy-five-year GDP. CBO, Social Security Policy Options, July 2010, Table 2, pp. 33–38. Combining an increase in the payroll tax rate with an increase in the taxable maximum earnings also has a small positive interaction effect.

  27. Social Security Online, Monthly Statistical Snapshot, July 2011, Table 2.

  28. As mentioned in chapter 6, as of 2009, only 63 percent of households that were close to retirement (head of household age 55–64) had any retirement accounts; of those households, the median value of those accounts was $86,000. Jesse Bricker, Brian Bucks, Arthur Kennickell, Traci Mach, and Kevin Moore, “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009,” Federal Reserve Board Finance and Economics Discussion Series 2011–17, March 2011, available at http://www.federalreserve.gov/​econresdata/scf/scf_2009p.htm, Appendix Tables 2A, 2B.

  29. The four changes above would together reduce the seventy-five-year deficit by about 2.3 percent of taxable payroll.

  30. For our three proposed changes other than expanding the program to newly hired state and local government employees, see CBO, Social Security Policy Options, July 2010, Supplemental Material: Year-by-Year Data for Changes to Social Security Finances Under Various Options with Scheduled Benefits, available at http://cbo.gov/doc.cfm?index=11580. For our fourth proposed change, see CBO, Reducing the Deficit: Spending and Revenue Options, March 2011, pp. 171–72.

  31. After seventy-five years, the program would be running an annual deficit of about 0.3 percent of GDP. Under current law, the program deficit in 2084 is projected at 1.4 percent of GDP. Our four proposals would reduce that deficit by 1.1 percent of GDP: 0.3 percent for the payroll tax increase, 0.2 percent for raising the cap on taxable payroll, and 0.6 percent for indexing the full retirement age to longevity. Ibid. Covering all state and local government employees would have no appreciable impact by 2084.

  32. United States Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010, Current Population Reports P60–239, September 2011, Table 8, p. 26.

  33. Deborah Thorne and Elizabeth Warren, “Get Sick, Go Broke,” chapter 3 in Jacob S. Hacker, ed., Health at Risk: America’s Ailing Health System—And How to Heal It (Columbia University Press, 2008), pp. 68, 73–74.

  34. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-4, pp. 18–19; CBO, 2011 Long-Term Budget Outlook, June 2011, Supplemental Material: Data Underlying Scenarios and Figures, available at http://cbo.gov/doc.cfm?index=12212 (alternative fiscal scenario).

  35. Shifting costs from the government to the private sector could be good in the long run if it were to cause health care providers to deliver better services at lower costs. Our point is that limiting government health care spending in itself does not address the larger problem of high costs.

  36. Gerard F. Anderson and Bianca K. Frogner, “Health Spending in OECD Countries: Obtaining Value per Dollar,” Health Affairs 27, no. 6 (2008): 1718–27; Elliott Fisher, David Goodman, Jonathan Skinner, and Kristen Bronner, “Health Care Spending, Quality, and Outcomes: More Isn’t Always Better,” Dartmouth Atlas Project Topic Brief, February 27, 2009; Jonathan Skinner and Elliott S. Fisher, “Reflections on Geographic Variation in U.S. Health Care,” Dartmouth Institute for Health Policy and Clinical Practice, May 12, 2010.

  37. Milton C. Weinstein and Jonathan A. Skinner, “Comparative Effectiveness and Health Care Spending—Implications for Reform,” The New England Journal of Medicine 362 (2010): 460–65, p. 463.

  38. On cost savings, see R. Sean Morrison, Joan D. Penrod, J. Brian Cassel, Melissa Caust-Ellenbogen, Ann Litke, Lynn Spragens, and Diane E. Meier, “Cost Savings Associated with US Hospital Palliative Care Consultation Programs,” Archives of Internal Medicine 168, no. 16 (2008): 1783–90; R. Sean Morrison, Jessica Dietrich, Susan Ladwig, Timothy Quill, Joseph Sacco, John Tangeman, and Diane E. Meier, “Palliative Care Consultation Teams Cut Hospital Costs for Medicaid Beneficiaries,” Health Affairs 30, no. 3 (2011): 454–63. On quality of life and outcomes, see Jennifer S. Temel, Joseph A. Greer, Alona Muzikansky, Emily R. Gallagher, Sonal Admane, Vicki A. Jackson, Constance M. Dahlin, Craig D. Blinderman, Juliet Jacobsen, William F. Pirl, J. Andrew Billings, and Thomas J. Lynch, “Early Palliative Care for Patients with Metastatic Non–Small-Cell Lung Cancer,” The New England Journal of Medicine 363 (2010): 733–42; David Casarett, Amy Pickard, F. Amos Bailey, Christine Ritchie, Christian Furman, Ken Rosenfeld, Scott Shreve, Zhen Chen, and Judy A. Shea, “Do Palliative Consultations Improve Patient Outcomes?,” Journal of the American Geriatric Society 56, no. 4 (April 2008): 593–99.

  39. Commonwealth Fund, International Profiles of Health Care Systems, June 2010.

  40. Potentially, private insurers could also administer the basic plan (in which case the federal government would pay them for each person they enroll). Theoretically, they could compete with each other by offering add-on benefits and by minimizing overhead costs. It’s not clear, however, that this would be preferable to having a single administrator.

  41. Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), people who leave their jobs must be allowed to buy group insurance through their former employers (for a limited period), but have to pay the entire premium themselves.

  42. Lower supply, however, is currently associated with lower costs and equivalent health outcomes. Fisher et al., note 36, above, p. 2.

  43. See ibid., p. 4; Atul Gawande, “The Hot Spotters,” The New Yorker, January 24, 2011.

  44. This estimate for the employer health care exclusion includes both income tax and payroll tax impacts. OMB, Fiscal Year 2012 Budget of the U.S. Government: Analytical Perspectives, Table 17-1, pp. 241–45.

  45. While the tax exclusion increases demand for health insurance policies, the relationship between more generous policies and higher actual spending is unclear. In particular, the people who account for the most health care spending may be insensitive to marginal costs (because their care is closely directed by physicians); alternatively, if people cut back on preventive care, they may end up incurring higher costs in the end. Analysts at the Urban Institute have estimated that reducing the tax exclusion would produce a relatively small reduction in total health care spending. John Holahan, Linda J. Blumberg, Stacey McMorrow, Stephen Zuckerman, Timothy Waidmann, and Karen Stockley, “Containing the Growth of Spending in the U.S. Health System,” Urban Institute Health Policy Center, October 2011, pp. 11–13. Still, eliminating the tax exclusion would certainly increase federal tax revenues.

  46. Eric J. Toder, Benjamin H. Harris, and Katherine Lim, “Distributional Effects of Tax Expenditures,” Tax Policy Center Research Report, July 21, 2009. Toder et al. estimate the distributional impact of the employer health plan exclusion, the deduction for self-employed health plans, and the itemized deduction for medical expenses together; the employer health plan exclusion, however, is far bigger than the other two. Eighty-five percent of people in the top income quintile have employer-sponsored health plans, compared to only 16 percent of people in the bottom quintile. Elise Gould, “Employer-Sponsored Health Insurance Erosion Accelerates in the Recession,” Economic Policy Institute Briefing Paper 283, November 16, 2010, Table 1, p. 5.

  47. Ron Wyden and Robert F. Bennett, “Working Across the Aisle for Health Reform,” The Washington Post, August 5, 2009. See also Jonathan Cohn, “Tax My Health Benefits. Please.,” The New Republic, March 17, 2009.

  48. That is, an insurer cannot refuse to renew your policy because of a change in your health status. (A policy can be rescinded if it was obtained fraudulently.) Insurers are also required to sell insurance policies to all people at the same price, except that they can adjust the price based on age, location, and whether or not you use tobacco. Kaiser Family Foundation, “Summary of New Health Reform Law,” April 19, 2011.

  49. Subsidies are available to families with incomes up to 400 percent of the federal poverty guidelines (about $89,000 for a family of four).

  50. As mentioned above, the employer health plan exclusion currently reduces tax revenues by 1.9 percent of GDP (rising to 2.0 percent in 2016 as health care becomes more expensive). Eliminating the exclusion, however, would probably lead employers to reduce the value of their health benefits, reducing potential tax revenues; on the other hand, this would be canceled out to the extent that lower health benefits were replaced by higher wages. As employers drop their health plans, more people would buy insurance on exchanges and therefore be eligible for subsidies from the federal government. In addition, the Affordable Care Act already imposes a 40 percent excise tax, beginning in 2018, on health plans worth more than a threshold amount, with the threshold designed to grow more slowly than health care costs. By 2021, this tax is projected to bring in only 0.1 percent of GDP—a small part of the value of the employer health plan exclusion. Douglas W. Elmendorf, “CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010,” Testimony before the Health Subcommittee of the House Energy and Commerce Committee, March 30, 2011, Table 2, p. 14.

  51. See Robert Pear, “Medicaid Pays Less than Medicare for Many Prescription Drugs, U.S. Report Finds,” The New York Times, August 15, 2011.

  52. CBO, Reducing the Deficit, March 2011, pp. 54–55; OMB, note 2, above, Table S-5, pp. 59–64. We estimate the impact of the additional Obama administration proposals based on their projected savings in 2021; we exclude (from this calculation) proposals for greater cost sharing by beneficiaries, such as increasing Medicare premiums for high-income beneficiaries.

  53. General revenues—other taxes not dedicated to Medicare—currently fund about three-quarters of Part B and five-sixths of Part D. To the extent that the Medicare funding gap is not filled by dedicated revenues, it will be filled by general revenues.

  54. Premiums are currently about $100 per month, so if our proposal were currently in effect they would be about $120 per month. The revenue estimate is from CBO, Reducing the Deficit, March 2011, p. 51. The CBO estimates the impact of increasing premiums to 35 percent of program costs, so we divide its estimate by two.

  55. Technically speaking, the payroll tax revenues fund Medicare Part A, not Parts B and D. This could create the situation where Part A is well funded, but Parts B and D require ever-increasing transfers from general revenues. Looking at the federal budget as a whole, however, how money is accounted for within Medicare does not affect the size of the deficit or the national debt.

  56. Centers for Medicare and Medicaid Services, “NHE Summary Including Share of GDP, CY 1960–2009,” available at https://www.cms.gov/nationalhealth expend data/02_nationalhealthaccountshistorical.asp.

  57. We do not recommend raising the Medicare eligibility age because, for example, raising it to 67 would simply shift the burden of health care costs for 65- and 66-year-olds onto the private sector. This is different from Social Security because Medicare is binary (you have it or you don’t), while a higher normal retirement age for Social Security means that retirees can still choose to take benefits early, but those benefits will be slightly smaller.

  58. CBO, Reducing the Deficit, March 2011, pp. 197–98. The CBO estimates a revenue increase of 0.3 percent of GDP, but that estimate assumes that the surtax on high-income households is repealed. We are not recommending repealing that surtax, so the revenues from that surtax (0.2 percent of GDP) should be added to the CBO estimate. Joint Committee on Taxation, Estimated Revenue Effects of the Amendment in the Nature of a Substitute to H.R. 4872, as Amended, in Combination with the Revenue Effects of H.R. 3590, as Passed by the Senate, and Scheduled for Consideration by the House Committee on Rules, JCX-17–10, March 20, 2010, p. 2.

  59. Lawrence J. Korb, Laura Conley, and Alex Rothman, “A Historical Perspective on Defense Budgets,” Center for American Progress, July 6, 2011; OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tasks, Tables 3.1, 8.1, 8.3, 8.4; Stockholm International Peace Research Institute, “Background Paper on SIPRI Military Expenditures Data, 2010,” April 11, 2011. Whether defense spending should be measured in real (inflation-adjusted) dollars or as a share of GDP is open to debate. A share of GDP is appropriate for spending categories, such as Social Security, that are affected by population growth and improvements in standards of living. It is somewhat less appropriate for categories such as defense, where the cost of protecting our country depends less on population and on rising standards of living.

  60. Korb et al., note 59, above.

  61. Gary Schaub, Jr., and James Forsyth, Jr., “An Arsenal We Can All Live With,” The New York Times, May 23, 2010; Robert M. Gates, Remarks at the Navy League Sea-Air-Space Exposition, National Harbor, Maryland, May 3, 2010.

  62. Lawrence Korb, “Defense Needs to Play Its Part in the Deficit Debate,” The Huffington Post, July 28, 2011. The actual operations in Afghanistan and Iraq required additional spending on what is sometimes called “nation building,” but the point here is that the military had the capability to win these wars (or at least the conventional portion of those wars) despite relatively low spending levels.

  63. The administration projected $717.5 billion in budget authority for defense in 2021, or 2.9 percent of its projected GDP. OMB, Fiscal Year 2012 Budget of the U.S. Government, Table S-11, pp. 199–200. The CBO estimated that under the administration’s budget proposal, defense outlays would be 3.1 percent of GDP in 2021. CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012, April 2011, p. 12.

  64. Lawrence J. Korb, Sam Klug, and Alex Rothman, “Defense Cuts After the Debt Deal,” Center for American Progress, August 11, 2011; Sustainable Defense Task Force, Debt, Deficits, and Defense: A Way Forward, June 11, 2010; Tom Coburn, Back in Black: A Deficit Reduction Plan, July 2011, pp. 107–31. Modifying Tri-Care, the Defense Department’s health care system, was recommended by the Department’s Quadrennial Review of Military Compensation and would mainly affect retired service members who are eligible for employer-sponsored health care but elect Tri-Care instead. Sustainable Defense Task Force, Debt, Deficits, and Defense, p. 26.

  65. Pam Benson, “US Spy Spending Revealed for First Time, Tops $80 Billion,” CNN, October 28, 2010.

  66. See Dana Priest and William M. Arkin, “A Hidden World, Growing Beyond Control,” The Washington Post, July 19, 2010; Gordon Adams and Cindy Williams, Buying National Security: How America Plans and Pays for Its Global Role and Safety at Home (Routledge, 2010), chapter 6.

  67. Gilbert E. Metcalf and David Weisbach, “The Design of a Carbon Tax,” Harvard Environmental Law Review 33 (2009): 499–556, pp. 504–8.

  68. Ibid., p. 501.

  69. See G. W. Yohe, R. D. Lasco, Q. K. Ahmad, N. W. Arnell, S. J. Cohen, C. Hope, A. C. Janetos, and R. T. Perez, “Perspectives on Climate Change and Sustainability,” chapter 20 in M. L. Parry, O. F. Canziani, J. P. Palutikof, P. J. van der Linden, and C. E. Hanson, eds., Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, 2007), pp. 821–24. Estimates range at least between $3 and $95 per ton of carbon dioxide. Gilbert E. Metcalf, “Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions,” Review of Environmental Economics and Policy 3, no. 1 (2009): 63–83, p. 64.

  70. “Summary for Policymakers,” in B. Metz, O. R. Davidson, P. R. Bosch, R. Dave, and L. A. Meyer, eds., Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, 2007), p. 19. A 2007 estimate by researchers at MIT shows that the price should be set at $18 per ton of carbon dioxide and should grow at a real rate of 4 percent per year. Metcalf, note 69, above, p. 64.

  71. See, for example, Metcalf, note 69, above, p. 65 ($15 in 2005 dollars, or $18 in 2015); CBO, Reducing the Deficit, March 2011, pp. 205–6 ($20 in 2012); Robert N. Stavins, “A Meaningful U.S. Cap-and-Trade System to Address Climate Change,” Harvard Environmental Law Review 32 (2008): 293–371, pp. 333–34 ($18 in 2005 dollars, or $22 in 2015, in “stabilize” scenario). The CBO and Stavins proposals are for a cap-and-trade system (in which companies have to buy emissions permits, which trade on an open market), not a direct carbon tax, but the two have similar economic effects, as discussed below. Note that $20 per ton of carbon dioxide is equivalent to $73 per ton of carbon. See Metcalf, note 69, above, p. 65, note 2.

  72. Twenty dollars per metric ton works out to 2 cents per kilogram of carbon dioxide; a gallon of gasoline produces 8.8 kilograms of carbon dioxide. Environmental Protection Agency, “Emission Facts: Average Carbon Dioxide Emissions Resulting from Gasoline and Diesel Fuel,” EPA420-F-05–001, February 2005. The increase in gasoline prices due to the carbon tax would be slightly offset by lower oil prices resulting from lower demand for oil. See Stavins, note 71, above, p. 334.

  73. Metcalf estimates 2015 emissions of 7,050 tons of carbon dioxide equivalents with a tax of $18.40 per ton ($15 in 2005 dollars), which would yield revenues of $130 billion, or 0.7 percent of GDP. Metcalf, note 69, above, p. 66. The CBO estimates revenues beginning at 0.6 percent of GDP in 2012 and growing by 0.1 percentage point by 2021. CBO, Reducing the Deficit, March 2011, pp. 205–6. Stavins estimates potential revenues of $119 billion (2005 dollars) in 2015, or 0.8 percent of GDP, growing to 0.9 percent of GDP by 2020. Stavins, note 71, above, p. 336 and Table 10.

  74. According to one estimate, a carbon tax would effectively cost households in the bottom income decile 3.7 percent of their income, while costing households in the top decile only 0.8 percent of their income. Metcalf and Weisbach, note 67, above, Table B, p. 513.

  75. Everyone’s taxes should ideally go up by the same percentage, not by the same number of percentage points.

  76. Because many households do not pay income taxes, this would also require expansion of the earned income tax credit. People whose sole income is Social Security benefits do not benefit from the earned income tax credit, but their benefits are indexed for inflation and would automatically rise to account for higher energy costs due to a carbon tax.

  77. Metcalf and Weisbach, note 67, above, p. 502, note 11; CBO, Policy Options for Reducing CO2 Emissions, February 2008, pp. ix–xii; Stavins, note 71, above, pp. 348–53.

  78. For example, a cap would provide certainty about the total volume of emissions, but the tax rate for a direct tax could be adjusted over time to meet a given emissions target. On design features that can make these two approaches similar to each other, see Stavins, note 71, above, pp. 352–53. For another example, a cap-and-trade system is often thought to be more politically feasible because emission permits can be given (for free) to current emitters, during some initial transition period, in order to minimize their opposition to the plan. However, a similar outcome could be achieved by phasing in a carbon tax over time.

  79. Ian W. H. Parry and Kenneth A. Small, “Does Britain or the United States Have the Right Gasoline Tax?,” American Economic Review 95, no. 4 (September 2005): 1276–89, Table 1, p. 1283. Parry and Small estimate the optimal U.S. gasoline tax at $1.01 per gallon, of which only $0.05 is due to climate change effects (and therefore would be accounted for by a carbon tax), leaving $0.96 per gallon attributable to other externalities. (They estimate the social cost of carbon at only $25 per ton of carbon, or $7 per ton of carbon dioxide. Ibid., p. 1282.) Current gasoline taxes, including federal, state, and local taxes, are about $0.48 per gallon. CBO, Reducing the Deficit, March 2011, p. 191. Parry and Small’s estimate of the optimal gasoline tax is probably too low because a higher tax would cause people to shift from heavier to lighter vehicles, reducing fatalities in traffic accidents. An additional tax of $0.27 per gallon would be necessary simply to correct for the increase in average U.S. vehicle weight since 1989, and a higher tax would be necessary to correct for all weight-related externalities. Michael Anderson and Maximilian Auffhammer, “Pounds That Kill: The External Costs of Vehicle Weight,” NBER Working Paper 17170, June 2011, pp. 27–31.

  80. The CBO estimates that an increase of 25 cents per gallon would increase revenues by 0.2 percent of GDP, but that amount would decline over time because of inflation and because drivers will shift to more efficient vehicles. Indexing the gasoline tax to inflation would solve the first problem but not the second. In addition, the revenue gain from a 50-cent increase should be less than double the revenue gain from a 25-cent increase. CBO, Reducing the Deficit, March 2011, pp. 191–92. A tax on miles driven is preferable to an increased gasoline tax because the latter would induce some people to drive just as much, only in more efficient cars, but a mileage tax would be considerably more difficult to administer.

  81. See Robert Pirog, The Role of Federal Gasoline Excise Taxes in Public Policy, Congressional Research Service Report for Congress, April 15, 2010, p. 6.

  82. Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, paperback ed. (Vintage, 2011), chapter 7.

  83. See ibid., Epilogue.

  84. See, for example, Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive,” Rock Center for Corporate Governance at Stanford University Working Paper 86, March 23, 2011.

  85. See Douglas A. Shackelford, Daniel N. Shaviro, and Joel Slemrod, “Taxation and the Financial Sector,” National Tax Journal 63 (December 2010): 781–806, pp. 798–99; IMF Staff, “A Fair and Substantial Contribution by the Financial Sector,” chapter 1 in Stijn Claessens, Michael Keen, and Ceyla Pazarbasioglu, eds., Financial Sector Taxation: The IMF’s Report to the G-20 and Background Material (IMF, 2010), pp. 11–16.

  86. The proceeds from such a fee will depend on the tax rate. In early 2010, President Obama proposed a fee of 0.15 percent of total liabilities for any financial institution with more than $50 billion in assets. This fee would bring in about 0.05 percent of GDP per year. CBO, Reducing the Deficit, March 2011, pp. 201–2. Economists at the IMF estimate that the too-big-to-fail subsidy could be corrected for with a fee of 0.1–0.5 percent of total assets. Kenichi Ueda and Beatrice Weder di Mauro, “The Value of the Too-Big-to-Fail Subsidy to Financial Institutions,” chapter 6 in Claessens et al., eds., note 85, above, p. 115. A fee levied at 0.3 percent of total liabilities, the approximate midpoint of this range, would bring in 0.1 percent of GDP each year.

  87. Michael Keen, Russell Krelove, and John Norregaard, “The Financial Activities Tax,” chapter 7 in Claessens et al., eds., note 85, above. Keen, Krelove, and Norregaard discuss three types of financial activities taxes; we focus on the third, which they label “FAT3.” See also Shackelford et al., note 85, above, pp. 799–800; Shaviro, “Tax Reform Implications of the Risk of a U.S. Budget Catastrophe,” working paper, September 1, 2011, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924852, pp. 23–24.

  88. See Shackelford et al., note 85, above, pp. 781–82.

  89. Keen et al., note 87, above, Table 1, p. 139. Keen et al. estimate the tax base for FAT3 at 0.7 percent of GDP and for FAT2 at 2.8 percent. The difference between FAT2 and FAT3 is that the latter only taxes profits above a higher threshold (measured as return on average equity). So the tax base for the financial activities tax will depend on where this threshold is set.

  90. The role of Fannie and Freddie in the financial crisis has been debated endlessly. For our brief perspective, see Johnson and Kwak, note 82, above, pp. 144–46. For a more detailed and updated review of the debate, see David Min, “Why Wallison Is Wrong About the Genesis of the U.S. Housing Crisis,” Center for American Progress, July 2011.

  91. For a similar but further-reaching proposal, see John Hempton, “What to Do with Fannie and Freddie,” Bronte Capital (blog), January 24, 2011. In 2011, the Obama administration proposed increasing the guarantee fees by 10 basis points, or 10 one-hundredths of a percentage point, and estimated that this would reduce deficits by $3.6 billion in 2020. OMB, note 2, above, pp. 21–22.

  92. CBO, Reducing the Deficit, March 2011, pp. 28–29. The CBO estimated that fixing the loan limit at $417,000 and not adjusting it in the future would reduce the deficit by $0.5 billion in 2020; lowering the limit further would increase the amount of deficit reduction.

  93. Environmental Working Group, Farm Subsidy Database, available at http://farm.ewg.org/. Farm subsidies vary from year to year based on natural and market conditions. From 2001 through 2010, they ranged from $14 billion to $24 billion.

  94. U.S. Department of Agriculture Economic Research Service, “Farm and Commodity Policy,” available at http://www.ers.usda.gov/Briefing/FarmPolicy/.

  95. On the downstream impact of farm subsidies, see Alicia Harvie and Timothy A. Wise, “Sweetening the Pot: Implicit Subsidies to Corn Sweeteners and the U.S. Obesity Epidemic,” Global Development and Environment Institute Policy Brief 09–01, Tufts University, February 2009.

  96. See Timothy A. Wise, “Agricultural Dumping Under NAFTA: Estimating the Costs of U.S. Agricultural Policies to Mexican Producers,” Global Development and Environment Institute Working Paper 09–08, Tufts University, December 2009.

  97. Michael Grunwald, “Why the U.S. Is Also Giving Brazilians Farm Subsidies,” Time, April 9, 2010.

  98. Gilbert M. Gaul, Sarah Cohen, and Dan Morgan, “Federal Subsidies Turn Farms into Big Business,” The Washington Post, December 21, 2006; Gilbert M. Gaul, Sarah Cohen, and Dan Morgan, “Farm Program Pays $1.3 Billion to People Who Don’t Farm,” The Washington Post, July 2, 2006.

  99. President Obama in 2011 proposed a set of changes that would reduce spending by $5 billion in 2020. OMB, note 2, above, pp. 17–18. Completely eliminating all agricultural subsidies would reduce spending by about $15–20 billion in 2020.

100. CBO, Reducing the Deficit, March 2011, pp. 111–12. The $4 billion and $2 billion figures are for budget authority, not outlays. With capital-intensive spending projects, outlays often lag behind budget authority, although the two are generally similar in the long run.

101. Ibid., p. 110; OMB, note 2, above, pp. 22–23. The CBO and OMB estimate that higher security fees would raise about $2 billion per year by 2020. OMB estimates that higher fees for air traffic control services would raise another $1 billion.

102. Government Accountability Office, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue, March 2011, GAO-11-318SP, pp. 211–13. This GAO report identifying wasteful federal government spending was mandated by the Statutory Pay-As-You-Go Act of 2010, Public Law 111–139, 124 Stat. 8, § 21.

103. Ibid., pp. 215–17.

104. OECD Programme for International Student Assessment, PISA 2009 Results: Executive Summary (OECD, 2010), Figure 1, p. 8. The United States ranked fourteenth in reading.

105. Sabrina Tavernise, “Soaring Poverty Casts Spotlight on ‘Lost Decade,’ ” The New York Times, September 13, 2011.

106. Alisha Coleman-Jensen, Mark Nord, Margaret Andrews, and Steven Carlson, Household Food Security in the United States in 2010, U.S. Department of Agriculture Economic Research Service, Economic Research Report 125, September 2011, Table 1A, p. 6.

107. See notes 91, 92, and 99, above.

108. Fannie Mae, Freddie Mac, and most agricultural subsidies count as mandatory spending because they do not require annual appropriations by Congress.

109. William G. Gale and Benjamin H. Harris, “Reforming Taxes and Raising Revenue: Part of the Fiscal Solution,” Brookings Institution, May 2011, pp. 12–13. $1.2 trillion is the sum of all the tax expenditures identified by OMB. Eliminating all tax expenditures would increase revenues by more or less than $1.2 trillion because of behavioral responses and interaction effects. In at least some cases, interaction effects would cause the total revenue gain to exceed the sum of the individual revenue gains. Ibid., p. 13.

110. Martin Feldstein, “The ‘Tax Expenditure’ Solution for Our National Debt,” The Wall Street Journal, July 20, 2010.

111. See Daniel N. Shaviro, “1986-Style Tax Reform: A Good Idea Whose Time Has Passed,” Tax Notes (May 23, 2011): 817–42, pp. 828–30.

112. OMB, note 44, above, Table 17-3, pp. 252–55.

113. In 2009, households making more than $100,000 saved $53 billion because of the mortgage interest deduction; all other households saved only $24 billion. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010–2014, JCS-3–10, December 15, 2010, Table 3, pp. 55–60.

114. William G. Gale, Jonathan Gruber, and Seth Stephens-Davidowitz, “Encouraging Homeownership Through the Tax Code,” Tax Notes ( June 18, 2007): 1171–89, pp. 1179–81. Empirical research has shown that the deduction has no significant effect on the homeownership rate. Edward L. Glaeser and Jesse M. Shapiro, “The Benefits of the Home Mortgage Interest Deduction,” in James M. Poterba, ed., Tax Policy and the Economy, vol. 17 (MIT Press, 2003): 37–82, pp. 76–80.

115. National Association of Realtors, “Latest Existing-Home Sales Information,” press release, September 21, 2011, Local Market Data.

116. CBO, Reducing the Deficit, March 2011, pp. 146–47. The 0.2 percent figure is based on the projected revenue increase for 2020. The revenue increase grows to 0.3 percent of GDP over the next decade because the $400,000 cap is decreasing in real terms.

117. OMB, note 44, above, Table 17-1, Addendum: Aid to State and Local Governments.

118. Because the interest on state and local bonds is tax-exempt, their issuers can pay lower interest rates than those on corporate bonds of equivalent risk. In practice, state and local bonds pay interest rates about 25 percent lower than rates on comparable corporate bonds; this is the subsidy that is received by state and local governments. That means that anyone whose marginal tax rate is higher than 25 percent gets a tax break in addition to the subsidy to state and local governments. Michael J. Graetz and Deborah H. Schenk, Federal Income Taxation: Principles and Policies, 6th ed. (Foundation Press, 2008), pp. 224–25.

119. The revenue increase would take several years to phase in since the new policy would apply only to newly issued bonds. See CBO, Reducing the Deficit, March 2011, pp. 163–64. Note that the CBO scores the effects of replacing the tax exemption with a 15 percent subsidy. Maintaining the level of subsidy to state and local governments would probably require a larger subsidy percentage, producing correspondingly smaller revenue increases.

120. OMB, note 44, above, Table 17-1, lines 59, 172.

121. This tax expenditure currently costs $74 billion, which is almost 0.5 percent of GDP. Ibid. Eliminating it and using half the proceeds for direct subsidies would increase revenues by about 0.2 percent of GDP.

122. In 2009, the largest recipients of charitable donations were religious organizations (33 percent of all contributions) and educational organizations (13 percent). Kennard T. Wing, Katie L. Roeger, and Thomas H. Pollak, The Nonprofit Sector in Brief: Public Charities, Giving, and Volunteering, 2010, Urban Institute, 2010, Table 4, p. 6.

123. Frank J. Sammartino, “Options for Changing the Tax Treatment of Charitable Giving,” testimony before the Senate Finance Committee, October 18, 2011, Table 1, p. 2. Alternatively, converting the donation to a 15 percent tax credit and keeping the floor at 2 percent of adjusted gross income would increase revenues by 0.2 percent of GDP while reducing total charitable contributions by less than 5 percent. Ibid.

124. This problem, among others, is caused by the realization requirement: the rule that you don’t have to pay taxes on the appreciation of an asset until you sell that asset. If you own stock that gains $1,000 in value, you are now $1,000 richer, but you do not have to pay tax on that $1,000 until you sell the stock.

125. On these and other issues with capital gains taxation, see Gerald Auten, “Capital Gains Taxation,” in Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, eds., The Encyclopedia of Taxation and Tax Policy (Urban Institute Press, 1999): 48–51.

126. Citizens for Tax Justice, “Top Federal Income Tax Rates Since 1913,” November 2011, available at http://www.ctj.org/pdf/regcg.pdf.

127. Tax Policy Center, Table T11-0266, Tax Benefits of the Preferential Rates on Capital Gains and Qualified Dividends, Baseline: Current Law; Distribution of Federal Tax Change by Cash Income Level, 2011, available at http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3148. These figures are somewhat misleading because the fact of realizing capital gains in a given year itself increases household income in that year. Over the ten-year period from 1979 through 1988, however, the top 1 percent of households still received 57 percent of all capital gains, which means that they received more than 57 percent of the benefits of lower tax rates on capital gains (because their ordinary income tax rates were higher than average). CBO, Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains, May 1997, Table 5, p. 16.

128. Leonard E. Burman, The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (Brookings Institution Press, 1999), pp. 65–66.

129. The Tax Reform Act of 1986 set the top income tax rate—the marginal rate that applied to the highest incomes—at 28 percent and eliminated prior preferences for capital gains. A phase-out provision applying to upper-income taxpayers meant that, for certain income ranges, the marginal rate was as high as 33 percent, but once income exceeded those ranges, the marginal rate fell back to 28 percent. Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-10–87, pp. 20–21, 178–79.

130. We do not attempt here to correct the many other inefficiencies in the capital gains taxation system. One additional suggestion, however, is to allow a tax credit for corporate taxes that have already been paid on profits distributed to shareholders as dividends.

131. See Burman, note 128, above, pp. 60–63. In particular, differences in capital gains tax rates across states seem to have no significant impact on capital gains.

132. Eliminating the tax preferences in the 2003 tax cut (reverting to pre-2003 rates) would increase tax revenues by $32 billion in 2016. CBO, The Budget and Economic Outlook: An Update, August 2011, Supplemental Material, Expiring Tax Provisions (xls), available at http://www.cbo.gov/doc.cfm?index=12316. Eliminating the tax preferences in pre-2003 law (increasing the maximum capital gains tax rate from 20 percent to 39.6 percent) would increase tax revenues by $70 billion in 2016 (static estimate). OMB, note 44, above, Table 17-1, pp. 241–45, line 71. We estimate that increasing the rate from 20 percent to 28 percent (not 39.6 percent) would increase revenues by about two-fifths of $70 billion, or $28 billion, for a total increase of $60 billion, or slightly over 0.3 percent of GDP in 2016.

133. OMB, note 44, above, Table 17-1, pp. 241–45, line 73. In 2012, $61 billion was 0.4 percent of GDP. The $61 billion OMB estimate, however, assumes a maximum capital gains tax rate of 20 percent, while our previous proposal would increase this rate to 28 percent.

134. The tax expenditure currently costs about 0.2 percent of GDP. Ibid., Table 17-1, pp. 241–45, line 61. Allowing a $100,000 exclusion reduces the potential revenue gain. Our proposed maximum rate of 28 percent, however, increases the potential revenue gain.

135. That is, the earned income tax credit reflects the judgment that the working poor should pay less income tax, or even negative income tax (to compensate for the fact that earnings from working reduce their eligibility for welfare programs), and is therefore similar to a graduated rate structure; the child tax credit reflects the judgment that families with more children should pay less income tax, and is therefore similar to personal exemptions (which are generally not thought of as a tax expenditure). See Shaviro, note 111, above, p. 823.

136. National Commission on Fiscal Responsibility and Reform, note 2, above, pp. 29–31.

137. Martin Feldstein, Daniel Feenberg, and Maya MacGuineas, “Capping Individual Tax Expenditure Benefits,” Tax Notes (May 2, 2011): 505–9, p. 506. Their proposal covers the employer health plan exclusion, itemized deductions, and a few tax credits; it does not include tax expenditures that encourage saving, such as the lower tax rates on capital gains and dividends.

138. Ibid., Table 1, p. 507.

139. CBO, Reducing the Deficit, March 2011, pp. 151–52.

140. Identifying and counting business tax breaks is a complicated endeavor. The tax expenditures listed by the OMB, added together, reduce corporate income taxes by $109 billion in 2012. OMB, note 44, above, Table 17-2, pp. 246–51. However, we exclude tax expenditures that only exist relative to the normal tax baseline, not the reference tax law baseline. For example, immediate expensing of research and experimentation expenditures (ibid., pp. 257–58) counts as a tax expenditure relative to true economic depreciation, but there is no practical way to implement true economic depreciation in the tax code. We exclude benefits to corporations that we have already discussed under the topic of individual income tax expenditures, such as the exemption for interest on state and local bonds. We include the impact of business tax breaks on individual income tax receipts.

141. One way to eliminate the tax preference for debt is to allow companies to deduct the cost of their equity capital, but that would only reduce tax revenues. One way to harmonize our international tax system with those of other countries is to exempt foreign source income, but that would also reduce tax revenues. Other solutions are also possible, but there is no a priori reason to believe that successful structural corporate tax reform would increase tax revenues.

142. BEA, National Income and Product Accounts, Table 2.1. The Federal Reserve Flow of Funds Accounts use an alternative calculation of the savings rate. That series shows the same general trend, but with more year-to-year volatility.

143. On the role of household debt in the recent credit bubble and financial crisis, see Menzie D. Chinn and Jeffry A. Frieden, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (W. W. Norton, 2011), chapter 2; Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton University Press, 2010), chapter 1.

144. See, for example, William G. Gale and Benjamin H. Harris, “A VAT for the United States: Part of the Solution,” in The VAT Reader: What a Federal Consumption Tax Would Mean for America (Tax Analysts, 2011): 64–82, p. 68; Joseph Bankman and David A. Weisbach, “The Superiority of an Ideal Consumption Tax over an Ideal Income Tax,” Stanford Law Review 58 (March 2006): 1413–56, p. 1422; Daniel N. Shaviro, “Replacing the Income Tax with a Progressive Consumption Tax,” Tax Notes (April 5, 2004): 91–113, p. 92; Michael J. Graetz, “100 Million Unnecessary Returns: A Fresh Start for the U.S. Tax System,” Yale Law Journal 112 (2002): 261–310, pp. 300–301.

145. Martin A. Sullivan, “Introduction: Getting Acquainted with VAT,” in The VAT Reader, note 144, above: 7–14, p. 12. If an income tax and a consumption tax have the same rate, then each allows me to consume the same amount this year. If I save my money and spend it all next year, however, the income tax will leave me with less after-tax money for consumption than will the consumption tax; the income tax takes 10 percent of my wage income this year, so my interest income is 10 percent lower than under the consumption tax.

146. Kathryn James, “Exploring the Origins and Global Rise of VAT,” in The VAT Reader, note 144, above: 15–22, p. 15.

147. Eric Toder and Joseph Rosenberg, “Effects of Imposing a Value-Added Tax to Replace Payroll Taxes or Corporate Taxes,” Tax Policy Center, March 18, 2010, pp. 12–13. This estimate reflects the reduction in income and payroll taxes due to the value-added tax.

148. Jane G. Gravelle, “The Distributional Case Against a VAT,” in The VAT Reader, note 144, above: 102–11, Table 1, p. 103. Conceptually, if you rank households by how much they consume, a value-added tax turns out to be completely proportional (flat); if you rank them by how much they earn, a VAT is regressive; if you rank people by their lifetime income, a VAT becomes less regressive (because starving college students may consume a high percentage of their income, but those people will consume a lower percentage later in life). If you think of the VAT as a tax on businesses, then some of it must be allocated to capital, which also makes it less regressive. See ibid., pp. 104–10; Gale and Harris, note 144, above, pp. 70–72.

149. Figures are for households where the head of household is age 57–66. Jesse Bricker, Brian Bucks, Arthur Kennickell, Traci Mach, and Kevin Moore, “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009,” Federal Reserve Board Finance and Economics Discussion Series Working Paper 2011–17, March 2011, Appendix Tables 2A, 2B.

150. Brigitte C. Madrian and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics 116 (2001): 1149–1225; James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick, “For Better or for Worse: Default Effects and 401(k) Savings Behavior,” chapter 3 in David Wise, ed., Perspectives in the Economics of Aging (University of Chicago Press, 2004); John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, “The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States,” chapter 5 in Jeffrey Brown, Jeffrey Liebman, and David A. Wise, eds., Social Security Policy in a Changing Environment (University of Chicago Press, 2009). For a popular summary of retirement savings behavior and default options, see Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale University Press, 2008), chapter 6.

151. The federal government has the power to set rules for retirement plans because it controls the tax preferences enjoyed by those plans.

152. Thaler and Sunstein, note 150, above, p. 107; David I. Laibson, Andrea Repetto, and Jeremy Tobacman, “Self-Control and Saving for Retirement,” Brookings Papers on Economic Activity 1998, no. 1 (1998): 91–197, pp. 94–95.

153. The increase in the Social Security payroll tax does not affect the top marginal tax rate because the earnings subject to that tax will still be capped, although at a higher level. The 2001 tax cut lowered the top marginal rate by 4.6 percentage points. It is scheduled to increase by 0.9 percentage points (because of an increase in the Medicare payroll tax for high earners); our plan would increase it by another 1 percentage point. Theoretically, a value-added tax at a 5 percent rate would also reduce the incentive to work because the tax reduces the amount you can consume with the same amount of income. The marginal impact is smaller than 5 percentage points, however, since the highest-earning families consume a relatively small amount of their current income.

154. Congressional Progressive Caucus, note 2, above, p. 9.

155. House Budget Committee, note 2, above, pp. 46, 50.

156. National Commission on Fiscal Responsibility and Reform, note 2, above, pp. 41–42; Bipartisan Policy Center Debt Reduction Task Force, note 2, above, pp. 55–56; Committee for a Responsible Federal Budget, “10 Themes Emerging from the New Debt Reduction Plans,” November 23, 2010, p. 5. The Gang of Six deferred unspecified health savings to later legislation, but did promise to “maintain the essential health care services that the poor and elderly rely upon.” “A Bipartisan Plan to Reduce Our Nation’s Deficits,” note 2, above, p. 3.

157. “A Bipartisan Plan to Reduce Our Nation’s Deficits,” note 2, above, p. 3; National Commission on Fiscal Responsibility and Reform, note 2, above, p. 30; Bipartisan Policy Center Debt Reduction Task Force, note 2, above, p. 33; Committee for a Responsible Federal Budget, “Going Big Could Improve the Chances of Success,” October 21, 2011, p. 6.

158. “A Bipartisan Plan to Reduce Our Nation’s Deficits,” note 2, above, p. 4 ($1.5 trillion in tax reduction over ten years, relative to current law); Bipartisan Policy Center Debt Reduction Task Force, note 2, above, p. 30 ($435 billion in tax increases over 2012–2020, relative to a baseline in which all expiring tax cuts are extended); National Commission on Fiscal Responsibility and Reform, note 2, above, p. 30 ($180 billion dedicated to deficit reduction in 2020, relative to a baseline in which all expiring tax cuts are extended); Committee for a Responsible Federal Budget, note 157, above, p. 6 ($0.8–1.2 trillion in revenue increases over ten years, relative to a baseline in which all expiring tax cuts are extended). According to the CBO, the total impact of extending all expiring tax cuts is $4.7 tril- lion over 2012–2020 and $800 billion in 2020. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-8, pp. 26–27. So these proposals leave tax revenues only modestly higher than they would be if all expiring tax cuts were extended and far lower than they would be if those tax cuts were to expire.

CONCLUSION

    1. James Madison, Letter to W. T. Barry, August 4, 1822, in Gaillard Hunt, ed., The Writings of James Madison, Comprising His Public Papers and His Private Correspondence, Volume 9: 1819–1836 (G. P. Putnam’s Sons, 1910): 103–9, p. 103. Madison was prompted to this thought by appropriations for education made by the Kentucky legislature.

    2. See Bruce Bartlett, “I’d Rather Be an Unlucky Ducky,” Economix (blog), The New York Times, September 27, 2011.

    3. “When Wall Street Nearly Collapsed,” CNNMoney, available at http://money.cnn.com/galleries/​2009/fortune/0909/gallery.​witnesses_meltdown.fortune/index.html.

    4. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill (Simon & Schuster, 2004), p. 291.

TECHNICAL APPENDIX

    1. CBO, The Budget and Economic Outlook: An Update, August 2011, Table 1-2, pp. 4–5.

    2. Ibid., Table 1-8, pp. 26–27.

    3. Overseas contingency operations were specifically excluded from those caps. Douglas W. Elmendorf, Letter to John A. Boehner and Harry Reid, August 1, 2011, p. 2.

    4. On both changes, see CBO, The Budget and Economic Outlook: An Update, August 2011, p. 25.

    5. Ibid., Table 1-8, pp. 26–27.

    6. Ibid.

    7. We think this is reasonable for several reasons. One of the largest tax breaks, a bonus depreciation provision, is similar to one that was allowed to expire in 2004 after the economy had recovered from a recession. Tax Policy Center, “Quick Facts: Bonus Depreciation and 100 Percent Expensing,” available at http://www.taxpolicycenter.org/taxtopics/Bonus-Depreciation-and-100-Per cent-Expensing.cfm. Another large tax break, the ethanol tax credit, was allowed to expire at the end of 2011. More generally, the current political climate should make it harder for low-profile, industry-specific tax breaks to be extended than in the past.

    8. CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012, April 2011, Table 1-5, p. 14.

    9. CBO, 2011 Long-Term Budget Outlook, June 2011, pp. 2–7.

  10. On the reasons why revenues grow as a share of the economy under current law, see ibid., pp. 64–68. We use the growth rate from the 2009 alternative fiscal scenario because it assumes that the AMT is indexed for inflation but does not assume that revenues are constant as a share of GDP (the 2011 assumption). CBO, The Long-Term Budget Outlook, June 2009, Additional Info, available at http://cbo.gov/doc.cfm?index=10297 (see data for Figure 5-1).

  11. On the differences in health care spending in the two scenarios, see CBO, 2011 Long-Term Budget Outlook, June 2011, pp. 43–45.

  12. See ibid., Table 1-1, pp. 4–5.

  13. Other means of financing (OMF) reflects the difference between the cash outlays of government financing programs, such as student loans, and their budgetary cost; since most loans are paid back, the budgetary cost is just the estimated subsidy component of the loan. In a static economy, OMF should be zero, since loan repayments in any year will balance new loans advanced, except for loan losses, which are balanced by the budgetary cost. In a growing economy, OMF should be slightly positive.

  14. CBO, 2011 Long-Term Budget Outlook, June 2011, p. 24.

  15. We calculate the average growth rate from the annual data in ibid., Supplemental Material: Data Underlying Scenarios and Figures (Economic Variables Underlying the Long-Term Budget Projections). The report itself specifies an average growth rate of 2.2 percent over the 2022–2085 period. Ibid., p. 25.

  16. Ibid., p. 24.

  17. Ibid., Table 1-1, pp. 4–5.

  18. Ibid., p. 21.

  19. See ibid., pp. 21–22.

  20. CBO, The Budget and Economic Outlook: An Update, August 2011, p. 7.

  21. Technically speaking, it spreads the $1.2 trillion so that the nominal dollar change in the primary balance is the same in each year from 2013 through 2021. Ibid.

  22. Because the failure of the supercommittee became official as we were completing this book, we have not adjusted our projections by removing the estimated impact of the supercommittee and replacing it with the estimated impact of the automatic spending cuts. Since the total ten-year impact is the same, any change in our projections of the national debt would be minimal.

  23. According to the methodology used in the CBO’s long-term forecast, the automatic spending cuts would reduce discretionary spending in 2021 even further as a percentage of GDP; that reduction would become permanent under the assumption that “other spending” remains constant at its 2021 level.