Fiscal Cliff Imminent: Where We’re Heading

Robert Greenstein is the founder and president of the Center on Budget and Policy Priorities, one of the nation’s premier policy organizations focusing on fiscal policy that affects low and moderate-income families and individuals. Greenstein is considered an expert on the federal budget and tax policy, among a variety of other policy issues.

Both candidates stated during the presidential campaign that they would seek to simplify the tax code. In your opinion, is there a need to do this? What is the first thing that the new president should be targeting?

Simplifying the tax code and reducing the number of tax breaks, sometimes called loopholes, is very desirable. However, I would argue that we have an unsustainable fiscal situation, particularly after the economy recovers, and the biggest need is to raise more revenue. We also need changes in spending programs. Both need to contribute to deficit reductions.

Simplifying the tax code in a way that raises revenue would serve both purposes. My one concern is that, while it’s easy to talk about raising large amounts of money in the abstract by curbing tax loopholes and reforming the tax code, when you write legislation, it isn’t in the abstract. You have to ask how you are changing the mortgage interest deduction or the charitable deduction. When policymakers move from the abstract to confronting individual specific tax preferences in the code, it gets much harder politically.

Is raising revenues from tax increases or cutting spending a more feasible way to address the current budget deficit? Do you see a resurrection of the Simpson-Bowles Plan or something similar in the future?

We’re going to have to put pretty much the whole budget on the table. There needs to be a major revenue contribution to deficit reduction, as well as on the spending side. We’ve already taken about $1.5 trillion in cuts that will be made over the coming 10 years. There has not yet been any contribution on the revenue side.

A good place to start is by looking at the Bush tax cuts for people with very high incomes. The Bush tax cuts were made in 2001 at a time when we had budget surpluses as far as the eye can see and when policymakers were, amazingly enough, worried that the budget surpluses were too large. It’s now clear we couldn’t afford the Bush tax cuts—they were a mistake.

I think we really should revisit much or even all of the tax cuts enacted in 2001 and 2003. When you look at the tax code that was in place in the late 1990s, the latter Clinton years, that was a period when we had some of the strongest economic growth we’ve had in a quarter century. The tax code of that period did not destroy the economy, but we do have serious mid-term and long-term deficit problems, that if not addressed will ultimately impair the economy.

Besides partisan differences in Congress, what do you perceive to be obstacles in properly addressing the deficit?

The partisan differences are big obstacles, but even more problematic is ideological opposition to any changes in revenues at all. Many things are in the tax code and the budget in part due to the influence of various lobbyists and campaign contributors. Then there’s an interesting set of questions regarding the two biggest programs for people that are older: Social Security and Medicare. On the one hand, I think it’s critical to maintain the current structure of the programs. By the same token, while it isn’t true that either program is going bankrupt, both programs need some changes to shore them up for the long term.

In my view, those changes should involve both additional revenues for Social Security and Medicare and some modifications in the benefits structure, such as asking more affluent beneficiaries to pay a little more for Medicare or maybe receiving somewhat lower Social Security benefits. Everything I just mentioned meets huge political obstacles for different reasons for both parties.

Republicans want all the changes in Social Security and Medicare to be done on the benefits cuts side, with no revenue contribution, which I think would ultimately harm up to 50 percent of the Social Security beneficiaries who live on less than $25,000 a year. On the other side, there’s an argument that there shouldn’t be any changes in Medicare or Social Security benefits at all. I think there will need to be some changes, particularly for the people who are the most affluent and can most afford it.

What types of revenue-raising tax reforms would you recommend, and which entitlement programs do you recommend being cut? 

I would start by letting the Bush tax cuts for people with incomes over $250,000 a year expire at the end of this year. I would extend the other Bush tax cuts for maybe two years, though not permanently. I would let the others lapse as the economy recovers. I would also look at the most egregious tax breaks in the code, such as the one that lets various people in financial markets on Wall Street and elsewhere pay taxes on money they manage, but don’t invest themselves, at a much lower rate than the average person.

On the spending side, we ought to be reforming the farm price support programs. I do think we can ask higher-income Medicare beneficiaries to pay a bit higher premiums. Medicare, which is now paying more for various drugs than the Medicaid program does, could get lower prices for drugs that are prescribed for its beneficiaries.

Your Center seeks to ensure that the policies of our country are taking into consideration low-income families and individuals.  What do you think should be done to improve our nation’s non-entitlement welfare programs?

Among other things, there were some important improvements in the Earned Income Tax Credit and the child tax credit for low-income working families that were enacted in 2009. They are scheduled to expire at the end of this year. Those I would extend, and I would probably make them permanent. They are having very significant effects in reducing poverty, they encourage work, and they are good policy.

In the area of the Medicaid program, I think the single most important issue right now is effective implementation of the provisions of the health reform law. For the first time in our history, almost everybody who is poor would be eligible for health insurance through Medicaid. Because of the Supreme Court decision on the Affordable Care Act, each state can decide whether to adopt and implement that provision of the health reform law.

Additionally, the part of the basic welfare program that is supposed to encourage people to go into the labor market is not effectively designed. The employment-related services that states are allowed to offer are restricted much too heavily by rigid federal rules, and the way that it is now set up works best for those people with the most education and skills.

The people we need to worry about are the people with the much greater barriers to employment, those who do not have enough job-related skills. They need more intensive work, and may have other issues such as mental health problems or substance abuse. We need to reform our programs to allow state and local officials to tailor employment and education-related interventions to enable this population to enter and stay in the labor market.

It’s going to be very difficult to expand all but a tiny number of programs. Most things will stay at the current levels or be cut. Given the level of poverty and inequality in the country, I would not like to see poverty programs cut. One of my biggest fears is that because people with low incomes do not make campaign contributions, do not have lobbies, and vote in lower percentages than people with higher income levels, they may be the easiest to cut in a budget battle.

Feature Photo: cc/(401(K) 2012)