Latest Attack on Health Reform Falls Flat

November 18, 2011 at 1:08 pm

Under the Affordable Care Act (ACA), low- and moderate-income people who don’t have access to public coverage or affordable employer-sponsored coverage will get tax credits to help them pay the premiums for private coverage.  Most states will set up regulated marketplaces called “exchanges” where consumers will shop for coverage.  But in any states that don’t, the ACA calls for operation of a federal exchange in order to ensure that people have affordable coverage options.

Now, however, some opponents of the health reform law are arguing that people in states with a federal exchange aren’t eligible for the premium tax credits and that the Treasury Department violated the ACA when it issued a proposed rule that would provide the credits to eligible taxpayers in all states.  This misguided argument runs directly counter to the ACA’s clear intent.

As health law and policy expert Timothy Jost has pointed out, the same provision of the ACA that authorizes premium tax credits for participants in the state exchanges also requires all exchanges  — state and federal — to report to the federal government on the amount of advance payments of premium credits that taxpayers receive.  That wouldn’t make any sense if people in a federal exchange weren’t eligible for the credits.

Nor would it make sense for families in, say, Louisiana, which is planning to have a federal exchange, to pay hundreds of dollars more in premiums each year than otherwise-identical families in other states such as Maryland, which is already planning its own exchange.

More importantly, the overall structure of the ACA is designed to ensure that all Americans have a path to affordable coverage, regardless of where they live.  That’s why it provides for a federal exchange to operate in any state that doesn’t set up its own exchange.

Despite claims to the contrary, Treasury unquestionably got it right.  The claim that Treasury has somehow exceeded its authority here is, sadly, just one more misleading attack on health reform.

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Chad Stone Testifies on Why Tax Reform is Not an Effective Tool for Speeding Up the Economic Recovery

November 17, 2011 at 5:11 pm

I testified before the Congressional Joint Economic Committee (JEC) at a hearing today examining how tax reform could help boost business investment and job creation.

Here are the highlights:

My reading of the economic evidence is that tax reform is unlikely to be an effective tool for speeding up economic growth in the short run.  Tax reform could be a useful tool for enhancing growth in the longer run, but only in the context of a sound overall program for achieving long-term fiscal stabilization and not if it is used as an excuse to avoid the revenue increases that must necessarily be a part of any credible, sustainable deficit-reduction plan…

[T]he major factor holding back investment and job creation in the current economy is weak sales due to inadequate aggregate demand and slow economic growth.  Policies that increase aggregate demand are the best short-term policies for creating a more favorable environment for investment and job creation, and tax reform policies typically operate on the supply side of the equation.  Measures like those in the President’s American Jobs Act are likely to be much more effective at boosting aggregate demand and closing the jobs deficit — without adding to the long-term budget deficit, because they are temporary…

[I]n the longer run…it makes sense to embrace an enduring principle of tax reform — that a broader tax base allows rates to be lower than a narrower tax base, but we also have to ensure we have enough revenue to pay for the things we want government to do — ranging from national defense to an adequate safety net.

You can read the full testimony here.

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Why Doing Nothing Would Reduce Deficits by $7.1 Trillion

November 17, 2011 at 2:02 pm

E. J. Dionne’s Washington Post column today cites my estimate that we could reduce deficits by $7.1 trillion over the next decade simply by letting various temporary tax and spending policies expire on schedule.

CBPP doesn’t favor letting all of these policies expire or using all of the savings for deficit reduction.  Still, the massive potential savings from inaction show why the nation would be better off if the “supercommittee” fails to reach a deficit-reduction deal than if it reaches a deal that is highly unbalanced and calls for the largest sacrifices from those least able to bear them.

Doing Nothing Would Reduce Deficits by $7.1 Trillion Over Ten Years

Below is the memo I sent E. J. Dionne explaining my $7.1 trillion estimate, which he has also reprinted in his blog.

Budget experts agree that federal budget deficits and debt will grow to unacceptable levels in coming years and decades if policymakers do not make changes in current policies.  What’s also true, but less widely discussed, is that, under current law, changes in current policies that would reduce deficits to acceptable levels will take place unless Congress intervenes to stop that from occurring.  That is, Congress can reduce deficits to acceptable levels simply by not passing certain new legislation.

The projections of growing deficits and debt under current policies assume that Congress will enact laws to extend a number of current tax and spending policies that are scheduled to expire.  They also assume that the Joint Select Committee on Deficit Reduction (the “Supercommittee”) will not produce $1.2 trillion in deficit reduction over 10 years and that Congress will then enact legislation to prevent the automatic across-the-board spending cuts (the “sequestration,” which is supposed to occur if the Joint Committee fails to achieve its goal) from taking effect.

What would happen, however, if Congress did not do any of those things? Deficits would be more than $7.1 trillion lower over the next 10 years, and the budget would be nearly balanced in 2021.  The savings from such inaction would be:

  • $3.3 trillion from letting temporary income and estate tax cuts enacted in 2001, 2003, 2009, and 2010 expire on schedule at the end of 2012 (presuming Congress also lets relief from the Alternative Minimum Tax expire, as noted below);
  • $0.8 trillion from allowing other temporary tax cuts (the “extenders” that Congress has regularly extended on a “temporary” basis) expire on schedule;
  • $0.3 trillion from letting cuts in Medicare physician reimbursements scheduled under current law (required under the Medicare Sustainable Growth Rate formula enacted in 1997, but which have been postponed since 2003) take effect;
  • $0.7 trillion from letting the temporary increase in the exemption amount under the Alternative Minimum Tax expire, thereby returning the exemption to the level in effect in 2001;
  • $1.2 trillion from letting the sequestration of spending required if the Joint Committee does not produce $1.2 trillion in deficit reduction take effect; and
  • $0.9 trillion in lower interest payments on the debt as a result of the deficit reduction achieved from not extending these current policies.

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The False “Family Analogy” Argument for a Balanced Budget Amendment

November 16, 2011 at 1:43 pm

Families must balance their budget every year, proponents of a constitutional balanced budget amendment often argue, so why shouldn’t the federal government?  This argument has several serious flaws, the most basic being that families often do not balance their budgets, for good reason.

A family that takes out a student loan to send a child to college, for example, might end up with a large “deficit” for that year — that is, it will spend more than it earns that year.  But a college education is a solid long-term investment that is likely to translate into significantly higher earnings over the child’s working career.

Similarly, a family that obtains a mortgage will almost certainly have a “deficit” for that year, but it will also have a house to live in.

Families also build up savings in good economic times and draw them down when times are tight to cover expenses that exceed their current incomes.

The proposed constitutional amendment would bar the federal government from such practices.  The federal government couldn’t borrow to finance investments that boost future economic growth, such as infrastructure improvements.  And if it ran a surplus one year, it couldn’t draw it down the next year to help balance the budget if the economy turned down.

In fact, even if a family financed a new house or a college education entirely out of savings – with no loans and no mortgage – that would still be prohibited “deficit financing” under the terms of the balanced budget amendment, because it is still a case of spending more in that year than the family earned in that year.

In short, a balanced budget amendment wouldn’t align federal budgeting practices with those of families.  It also would threaten serious economic harm, especially in recessions — and would harm family budgets by causing many Americans to lose their jobs, as Macroeconomic Advisers has explained.  It also would create a host of problems for Social Security, and other basic federal functions, as we’ve explained.


Some States Raising Taxes on Working-Poor Families

November 16, 2011 at 1:15 pm

As I explained yesterday, states’ progress in improving the tax treatment of low-income families stalled in 2010, and a few states — Michigan, New Jersey, and Wisconsin — have acted over the past couple of years to raise taxes on these families.

Worse, in each of these states, the tax increase on low-income residents helped to pay for new tax cuts for businesses and/or wealthy residents, essentially shifting incomes away from the people who need it most.

  • Michigan is cutting its Earned Income Tax Credit (EITC) by over two-thirds beginning in 2012.  Had this change been in place in 2010, two-parent families of four with incomes at the poverty line (about $22,300 for a family of that size) would have seen their taxes go up by $680.
  • New Jersey reduced its EITC by one-quarter beginning in 2010, raising taxes for two-parent families of four at the poverty line by $243.
  • Wisconsin is scaling back its EITC by over one-fifth for families with two or more children beginning in 2011.  Had this change been in place in 2010, two-parent families of four with poverty-level incomes would have seen their taxes go up by $146.

Raising taxes on low-income families increases poverty and harms some of the people hit hardest by the recession.  It also weakens the economy, since these people tend to spend every dollar they receive, largely for basics like housing.  Less money for low-income residents means less money circulating through states’ economies at a time when demand is already depressed.

Read more…