Symposium | First Principles: Arguing the Economy

Three Fights We Can Win

By Elaine Kamarck

Tagged EconomicsJobsSocial SecurityTaxes

There are many things progressives need to do in the long term to win the economic argument against conservatives. But what about the short term? What about right now? The battle of ideas plays out over years. In the meantime, our side needs some wins. It can score some—even in the current climate—provided we stop thinking in grandiose terms.

When it comes to public policy, small is beautiful. This goes against the grain of current thinking and practice in left-of-center politics. Among Democrats, the recent fashion has been to draft mammoth, “comprehensive” bills—bills that routinely run into the thousands of pages and that attempt to solve every problem known to mankind. This trend puts progressive politicians in direct conflict with the public they seek to serve. For the two most important things to know about the American public of the past few decades are: they distrust government, especially the federal government; and conservatives outnumber liberals by two-to-one.

Mammoth, “comprehensive” change is so murky and fraught with uncertainty that the public is predisposed to turn against it. It’s difficult for a member of Congress to walk into a town-hall meeting and persuade people that there really aren’t death panels in the health-care bill while brandishing a 1,000-page monstrosity in front of skeptical voters. Complexity breeds suspicion in a country where 40 percent of the population is ideologically opposed to government, and 70 to 80 percent at any given time in recent history don’t trust it.

In a nation where distrust of government is stubbornly and persistently high, the only way for progressives to achieve the kind of change that we believe is in the public interest is to enact it in incremental steps, so that the public can understand and appreciate the change. So in the spirit of a new progressive incrementalism, here are three battles that progressives should fight in the next Congress to put our fiscal and economic house in order: create jobs by cutting the payroll tax and replacing the revenue lost with a carbon tax; bring the Social Security trust fund closer to balance by changing the formula for Social Security benefits so that, in the future, well-off people will get somewhat smaller benefits than under the current formula; and reduce the deficit by creating a tax expenditure budget.

Jobs: A Payroll Tax Cut/Carbon Tax Bargain

For the foreseeable future the biggest problem facing the American economy will be jobs. Good ideas for job creation are few and far between—and whatever good ideas there are may not even be enacted given our highly polarized politics. But one job-creating idea that’s consistent with the incrementalist spirit was included in the tax-cut deal President Obama reached with Republicans: a payroll tax cut. And the idea I propose here is a simple bargain: When the payroll tax cut is set to elapse a year from now, we should extend it—and replace the lost revenue with a new tax on carbon.

Why a payroll tax cut? A payroll tax is a tax on jobs. A 2007-2008 study by the progressive organization Get America Working! looked at 22 Organization for Economic Cooperation and Development economies and concluded that the higher the payroll tax, the higher the unemployment rates. A 2010 study by the Congressional Budget Office looked at policy options that have effects on output and employment, and found that three out of the six options studied that could be expected to have an impact on employment involved reductions in the payroll tax.

This is why the 2-percent payroll tax cut President Obama signed into law in December is a good idea. But while it was widely hailed as an important bit of stimulus, concerns persist. Many wonder what will happen when the one-year window for the cut elapses. Will members of either party have the guts to increase it back to 6.2 percent for individuals? In fact, if the job situation stays as stubbornly bad as it currently is, there will most likely be pressure to keep the cuts—if not impose deeper ones. You can see the train wreck coming: more pressure to cut payroll taxes just as we need more Social Security funds for retiring baby boomers.

This is where my bargain comes in. Instead of raising the payroll tax, preserve the cuts and impose another revenue-raising measure: a carbon tax. This proposal accomplishes several things. Keeping payroll taxes at the lower level will stimulate job creation. The revenue raised from the carbon tax can be used to shore up the Social Security trust fund and more than compensate for the lost revenue from the payroll tax cut. Pricing carbon also achieves a goal that has eluded environmentalists for a decade and will start us on the long road to scaling back our greenhouse gas emissions. Moreover, it will curb our reliance on foreign oil and increase our energy security. And, no less important, a carbon tax will also finally bring about the green jobs that will usher in our next economy. Indeed, think of the payroll tax cut/carbon tax bargain as a two-pronged job-creation measure.

The idea has the benefit of being easy to explain to voters. In essence, we would stop taxing work and start taxing carbon. And far from a tax increase, it’s a tax shift. In the short run, what would be more popular than a cut in payroll taxes? And what could be better for the fight against terrorism than cutting the tether to oil states? And for an Administration that has been trying to create jobs, price carbon, and shore up Social Security, what better way to accomplish all those objectives than to trade payroll tax cuts for a carbon tax?

Entitlements: Making Social Security Solvent

My second proposal addresses the question of Social Security itself, which takes up a huge portion of the budget. In President Obama’s 2011 budget, Social Security outlays account for $738 billion—equal to the entire amount spent on national defense in the midst of two wars.

Currently, Social Security benefits are calculated using a formula based on wages. Some proposals over the years have sought to change the formula and base it on prices instead, which has the effect of reducing benefits. The essence of this idea, known as “progressive price indexing,” is that using different price indexes to calculate Social Security benefits will yield different benefit levels.

A very sensible proposal would base the calculation of Social Security benefits on a person’s lifetime earning average. Those on the lower end of the income ladder will get more, those on the higher end will get less. This makes a huge amount of sense for one simple reason: Poor people may have the urge to save for their retirement, but they don’t have the money and so they don’t save. In their retirement, they rely on Social Security, as opposed to the wealthy, who have the means to save for retirement.

So my idea would go like this: Calculate Social Security for the bottom 50 percent of the income distribution based on wages, as is currently done. Then, alter the benefit formula for each ten percent of earners above 50 percent. For instance, say your lifetime earnings put you above 60 percent of all Americans. A portion of your benefit calculation would include prices instead of wages. If your lifetime earnings put you above 90 percent or more of all Americans (lucky you), your benefit calculation would be based primarily on prices not wages. The result? Bill Gates’ upstairs maid will get the same Social Security benefit as she would today; Bill Gates would still get Social Security, but his benefits would be lower than they would without any changes in the formula.

Again, this would be simple to explain to the public. People who have the means to save for their retirement do so, and the government currently gives them all sorts of tax advantages for saving. For them, Social Security is a supplement to their retirement. But for Americans at the bottom of the income distribution, Social Security is their retirement.

Progressives shouldn’t dismiss this idea because it first appeared in a proposal made by Robert Pozen as part of the George W. Bush plan to privatize Social Security. Severed from privatization, it can stand alone as a good idea. Pozen started the formula changes for benefits for those whose average lifetime earnings put them above 30 percent of the population—a threshold that would have hurt many working people. Change the threshold to 50 percent and gradually alter the formula, and we will save money and add some progressivity to the benefits.

There are those who worry that progressive price indexing will transform Social Security into a welfare program, which would cause it to lose support among the upper-middle class and the wealthy. But under this plan, the system would still be universal and the wealthy would still get Social Security checks. It’s hard to see that a change this subtle would be sufficient to undermine the most popular program in American history.

Deficits: Getting a Handle on Tax Expenditures

My final proposal deals with those extremely popular and extremely regressive things known as “tax expenditures.” Per the nonpartisan Tax Policy Center, tax expenditures are “revenue losses attributable to various exclusions, exemptions, deductions, nonrefundable credits, deferrals and preferential rates in the tax code.” Progressives are fond of attacking corporate tax loopholes, but the biggest tax loopholes actually benefit the middle and upper-middle classes in America.

Not surprisingly, tax expenditures have become a very popular means of legislation in the past few decades because, among other things, they don’t show up on any budget, and thus lawmakers can’t be accused of being big spenders. And they have been politically difficult to cut because two of the biggest tax expenditures benefit the upper-middle class: those for the mortgage-interest deduction and for employer-provided health care. (Poor people rent and don’t tend to have employer-based health care.) All these very popular things add up to more than a trillion-dollar “budget.” Budget is in quotes because, in fact, there is no budget at all for tax expenditures, one reason why they have grown so large.

Congress should make tax expenditures part of the formal budget process, an idea that has been argued persuasively by Sima J. Gandhi at the Center for American Progress. Absent reform, lawmakers will continue to legislate through the tax code. Once there is a tax expenditure budget, it can be cut. But the cuts will have to be gradual. Tax expenditures underpin large parts of the economy. For example, it would be a bad idea to suddenly cut the mortgage-interest tax deduction in the midst of such a weak housing market. But if all tax expenditures were considered in a formal way, they could be subjected to across-the-board cuts.

Because the tax expenditure “budget” is comprised of things that progressives as well as conservatives love, gradually decreasing the entire budget over a period of time would bring much needed revenue into the Treasury without the need for tax increases. Furthermore, Congress would not get bogged down in a debate over the individual merits of each tax expenditure. It would be hard to take on each tax expenditure individually—every one of them is supported by a powerful business interest or by a large portion of the public. That’s why Congress needs to start counting the total in the budget process and move on from there.

Finally, here’s one minor idea to help with the deficit: a productivity goal for the public sector. It is worth noting here that there is little money to be saved on the discretionary side of the budget, something that we need to remind the public of at all times. But that is not to say that that portion of the budget should not be held to a productivity goal. In the private sector, companies are under nonstop pressure to generate more with less. The public sector should be held to the same standard.

There is one crucial difference between private and public spheres: Workers in the government do not get the rewards from their efforts to increase efficiency because at the end of every year they are forced to give any money they don’t spend back to the Treasury. My proposal is simple: Allow government agencies to roll over a portion of any savings from one year to the next as long as those savings are spent on productivity-enhancing activities in the following year. As it is, civil servants rush to spend everything in their budget at the end of the fiscal year, fearful that if they give anything back they will not receive an increased appropriation in the next year. But if agencies knew that they would have to meet a productivity goal every year, and that they could keep some of the money saved, a wasteful cycle in discretionary spending would be stopped.

The idea would also be in keeping with the overarching approach that progressives should pursue in these next two years of divided government. We need to return to an era of clear, straightforward, and bipartisan legislation so that every citizen can understand what the trade-offs are. This is the real secret to the series of painful choices before us. No grand ideas, no 1,000-page bills. The entire political establishment needs some successes if they are to convince the country to entrust them with greater responsibility. How about some common sense, fairness, and an approach to governing that takes it one step at a time?

From the Symposium

First Principles: Arguing the Economy

No debate is more fundamental in politics than economics. It's the sun; everything else revolves around it. This debate has never been more important than it is today. As the economy slowly rouses itself from its long slumber, it's vital...

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Elaine Kamarck is the Director of the Management and Leadership Initiative at Brookings. As a senior staffer in the Clinton White House, she created the National Performance Review, the largest government reform effort in the last half of the twentieth century.

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