Making "Fiscal Space" for the Clinton Agenda
POLICIES FOR THE NEXT ADMINISTRATION. PART 8: FEDERAL BUDGET
This is the eighth in a series on the major policy ideas — from Left and Right — that should guide the next presidential administration's agenda. (For the opposing view, see James C. Capretta, "Fiscal Policy After the Election.")
Hillary Clinton’s agenda of investing in people and infrastructure is an important step to righting America’s economic ship. And, to her credit, her agenda is generally offset by proposals to close tax loopholes and tax hikes on higher income individuals. But it is very unlikely that Congress will sign on to over a trillion in new spending to be paid for solely with new taxes and a small increase in the deficit, even if Democrats somehow regain control not only of the Senate, but also the House. That’s why, if elected, Mrs. Clinton will need to embrace the moment and work to enact a comprehensive deficit reduction package (including tax and entitlement reform) that will create the “fiscal space” for her investment agenda.
Fortunately, once this election is over, the fiscal policy debate is likely to reignite and get a lot hotter, creating a window for a big budget deal that could also serve as a vehicle for her policy agenda. The continuing resolution keeping the federal government open will expire in early December, likely to be followed by another short-term extension to get the government through the Inauguration. In February, the new president will submit the administration’s annual budget for 2018. Then comes March and the expiration date for the debt-ceiling deal cut in 2015. Finally, come October 1 2017, sequestration will rear its ugly head again when the two-year budget cap increase runs out.
On top of all this, the budget-deficit situation is starting to go south again — and fast. After declining from a high of $1.4 trillion after the financial crisis to $439 billion in 2015, federal deficits will jump back up to the $600 billion range for the next several years, predicts the Congressional Budget Office (CBO). Then sometime after 2019, entitlement spending, defense, and interest on the debt will devour all the tax revenue collected by the federal government. By 2026, CBO projects the deficit will reach $1 trillion annually and the federal debt will rise from $14.1 trillion to hit $23.1 trillion.
For Hillary Clinton, who is increasingly expected to be the next president, these budget flashpoints present both challenges and opportunities.
Mrs. Clinton has proposed about $1.4 trillion in new initiatives. Her platform contains a number of important initiatives including a $300 billion down payment to get our roads, railways, sewers, electrical grids, and airports back in working condition; $350 billion to make community college free and help reduce student-debt burdens; $300 billion to expand paid family leave; and $200 billion to increase early childhood education and childcare.
The current administration’s playbook has been to press for new spending in the context of existing fiscal parameters: limiting cuts to the smallest part of the budget pie (discretionary spending); not linking sweeping tax reform to higher revenues; and avoiding a discussion of how to make important entitlements, such as Social Security, Medicare, and Medicaid, sustainable and more progressive. If President Clinton follows suit, her sweeping progressing agenda will likely be marginalized — or, even worse, never materialize at all.
If, on the other hand, President Clinton ties her agenda to a plan to cut the deficit and reform the tax code, she might be able to win the funding she wants and America needs.
That’s not to say getting a budget agreement with Republicans will be easy. But hopefully chastened by the defeat of Donald Trump and other anti-government extremists, Republicans will be ready to move beyond the Grover Norquist pledge to never, ever raise taxes and onto more fertile political ground.
In prior bipartisan budget deals, Republicans have demanded at least $1 in spending cuts for every $1 in additional tax revenue. Assuming a similar construct, President Clinton would need to cut total spending by 2.5 percent to stabilize the debt as a share of GDP and pay for her new initiatives. To balance the budget and fund her priorities, she would need to cut total spending by 7 percent.
Where can the money be found for these spending cuts? There are certainly some programs in the discretionary budget (spending that requires Congress to act annually) that no longer serve a purpose. But the real savings is in entitlements (spending that is on auto-pilot). This means: doubling down on the cost-savings measures in Obamacare as well as adopting some Republican ideas, including malpractice reform; saving Social Security in a way that increases benefits for low-income families and ensures adequate retirement security for all; and going after agricultural subsidies that have long outlived their usefulness.
The prospects for tax reform certainly look like the most promising starting point for the new administration — a real opportunity to find revenues to finance important investments in people and infrastructure.
If there is such a thing as “low-hanging fruit” in Washington these days, corporate tax reform is the sweetest tasting option. Both Republicans and Democrats recognize that U.S. corporate tax rates are too high. And the current U.S. system — which imposes those high rates on the foreign income of U.S.-based multinationals while deferring taxes until firms reinvest their profits at home or distribute them to shareholders — simply isn’t working.
A corporate-tax reform package that could split the difference between the Obama administration’s budget and the proposal put forth by former Republican Ways and Means chair Dave Camp would be a win for Democrats and Republicans. That proposal includes a lower statutory rate, fixes for the out-of-date and poorly interpreted transfer pricing rules, deferral of taxes on income earned overseas, income stripping using intercompany debt, and movement towards a territorial system.
For Democrats, corporate reform would create an economic environment where more U.S. firms would keep or bring back their profits to the U.S., helping to boost economic growth and provide new revenues for infrastructure. For Republicans, a lower statutory rate would fulfill their commitment to lower tax rates and allow them to claim a victory. An agreement on corporate-tax reform could also help to create some trust between the two parties. The relationships developed from reaching an agreement could be built on and used on other fiscal issues.
The Clinton administration would also be wise to revisit the tax-reform plan put forth by the bipartisan National Commission on Fiscal Responsibility and Reform (Simpson-Bowles). Known as the “Modified Zero Plan,” this plan captured the interest of Republicans and Democrats because of its ability to lower rates dramatically, simplify the tax code, enhance fairness and progressivity, and increase government revenues for deficit reduction. Highlights of the plan included: 1) eliminating or reforming the vast majority of the special preferences and tax expenditures in the tax code; 2) creating four super tax incentives: an enhanced Earned Income Tax Credit, a universal 401k/IRA; a new mortgage-tax incentive; and a charitable-giving tax credit; 3) lower marginal tax rates for all taxpayers; 4) reducing the number of tax rates to three; and 5) taxing capital gains and dividends at ordinary income rates.
By raising revenues by closing tax breaks that primarily benefit wealthier Americans, President Clinton would meet her goal of making those Americans who can afford to pay more, while also handing Republicans a victory by cutting marginal tax rates.
The budget debate has been almost non-existent this presidential campaign. That’s about to change once the election is in the books. With the expiration of the 2015 budget deals and the projected increase in the deficit, Hillary Clinton may have an opportunity to create the fiscal space needed in the budget to fund her progressive agenda. But to do so, she will need to support a serious deficit-reduction plan that includes entitlement and tax reform.
Author’s Recommended Reading:
Committee for a Responsible Federal Budget, “Interactive Tool: Reforming the Candidates' Fiscal Plans,” CRFB blog (October 2016).
National Commission on Fiscal Responsibility and Reform, “The Moment of Truth,” (December 2010).
Paul Weinstein Jr., “Give Our Kids a Break: How Three-Year Degrees Can Cut the Cost of College,” Progressive Policy Institute (September 2014).
Paul Weinstein and Marc Goldwein, “Less is More: The Modified Zero Plan for Tax Reform,” Progressive Policy Institute (April 2011).
(Read the response by James C. Capretta.)