For the Supercommittee, No Deal Is Better Than a Bad Deal

November 11, 2011 at 3:30 pm

As the supercommittee’s November 23 deadline approaches, some commentators contend that failure to reach an agreement would have serious adverse ramifications for financial markets and the economy.  These concerns are largely misplaced, according to a new analysis from economists at Goldman Sachs Research, Q&A on the Super Committee (November 9, 2011).

  • A debt “downgrade seems unlikely,” Goldman writes. “If the super committee reaches its November 23 deadline without any agreement, the process concludes. While this would be far from ideal and could weigh on sentiment, the practical near-term repercussions seem limited.  There would be no near term fiscal consequences, but automatic spending cuts would take effect from January 2013. At this point there is little reason to believe that either S&P or Moody’s would downgrade solely based on a failure to agree.  Both rating agencies have indicated that while a stalemate in the super committee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic cuts if not through the super committee, so their fiscal outlook should remain unchanged.”
  • The medium-term deficit outlook will change “only modestly, if at all,” Goldman continues. “The super committee process presents an important opportunity to reduce the longer term imbalance between the expected growth in entitlement programs and the revenues used to finance them and other government spending.  However, a “grand bargain” to resolve this imbalance appears to be a low probability this year.  Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.  While $1.2 trillion represents a meaningful amount of deficit reduction, it is important to keep in mind that the same amount of deficit reduction would occur even if the super committee deadlocked and automatic spending cuts took effect.  So while a great deal of attention is being paid to the super committee, it is unlikely that deficit projections will change substantially following their agreement.”

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Plan from Toomey, Other Republicans Not a First Step Toward Balanced Deficit Reduction

November 10, 2011 at 6:13 pm

We issued an analysis today of the recent proposal by several Republican members of Congress’ deficit-reduction “Supercommittee.”  Here’s the opening:

Senator Pat Toomey and other Republicans on the Joint Select Committee on Deficit Reduction (“Supercommittee”) portray their new offer to raise close to $300 billion in revenues (under a plan to reduce deficits by about $1.5 trillion over ten years) as a significant concession, and some observers have suggested it represents a welcome first step toward a balanced deficit reduction plan to put the budget on a sustainable path.  But a closer examination of the proposal raises grave concerns and indicates that, in fact, it adds little balance.

It uses savings from closing tax loopholes and narrowing other tax expenditures mainly to set tax rates permanently at levels well below those of President Bush’s tax cuts, and to make permanent both the highly preferential treatment of capital gains and dividend income under the Bush tax cuts and the temporary hollowing out of the estate tax for estates of the wealthiest one-quarter of 1 percent of Americans that Congress enacted in late 2010.  Consequently, the proposal seems designed to make only a modest revenue contribution toward deficit reduction and then to take revenues off the table for the larger rounds of deficit reduction that must follow.  Moreover, even while yielding modest savings, the revenue component would make the package less balanced by conferring large new tax cuts on the wealthiest Americans while forcing low- and middle-income Americans to bear most of the plan’s budget cuts as well as its tax increases.

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Without the Safety Net, More Than a Quarter of Americans Would Have Been Poor Last Year

November 9, 2011 at 4:28 pm

I pointed out earlier this week that six recession-fighting initiatives enacted in 2009 and 2010 kept nearly 7 million people out of poverty in 2010 — under an alternative measure of poverty that takes into account the impact of government benefit programs and taxes.

Our report also shows that if the government safety net as a whole — these temporary initiatives (all were featured in the 2009 Recovery Act) plus safety-net policies already in place when the recession hit — hadn’t existed in 2010, the poverty rate would have been 28.6 percent, nearly twice the actual 15.5 percent (see graph).

Poverty Rate Would Have Been Nearly Twice as High in 2010 Without the Safety Net

This shows the powerful anti-poverty impact of policies ranging from tax credits like the Earned Income Tax Credit and Child Tax Credit to unemployment insurance, SNAP (food stamps), Social Security, Supplemental Security Income, veterans’ benefits, public assistance (including Temporary Assistance for Needy Families), and housing assistance.

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New Poverty Measure Shows Government’s Anti-Poverty Impact

November 9, 2011 at 11:52 am

[This commentary, on the experimental measure of poverty that the Census Bureau released this week, first appeared in Spotlight on Poverty and Opportunity.]

The Census Bureau’s release of the Supplemental Poverty Measure (SPM) makes clear, in a way that the traditional poverty measure cannot, that federal and state programs significantly reduce the extent and depth of poverty.

The official measure counts only cash income and does not include in-kind benefits or tax credits, whereas the SPM captures a much broader array of safety net programs. The SPM shows that on an ongoing basis, but especially in response to this recession, the Earned Income Tax Credit kept approximately six million above the poverty line in 2010, and the Supplemental Nutrition Assistance Program (formerly food stamps) kept more than four million above the poverty line. This provides proof that these programs help protect American families from poverty caused by low pay, job loss, disability, old age, and other vulnerabilities and misfortune that President Franklin Roosevelt called the “vicissitudes of life.” Such findings come when many benefits are under attack, and they serve as a powerful antidote to the myth that this assistance can be cut without significant harm. Policymakers should take heed and extend or protect these polices.

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A Permanent Corporate Tax Holiday at an Even Lower Rate?

November 8, 2011 at 3:39 pm

Even as the business community spends millions of dollars lobbying Congress for a large, temporary tax cut on foreign profits that corporations repatriate to the United States, Republicans on the House Ways and Means Committee are proposing a larger, permanent tax cut on those profits.

So if you think a repatriation holiday is a bad idea (and evidence from a range of independent studies shows you’re right), then the GOP proposal to adopt a territorial system of international taxation is an even worse idea — a “repatriation holiday on steroids,” as former Joint Tax Committee chief of staff Edward Kleinbard puts it.

Under a repatriation holiday, corporations would get a bargain-basement tax rate of 5.25 percent on repatriated profits, compared to the regular 35 percent rate they pay on domestic profits.  Proponents claim this would create domestic jobs and economic growth.  But, that didn’t happen when Congress enacted a holiday in 2004, and Wall Street analysts like Goldman Sachs have concluded that another holiday would have only minimal economic impact.

Also, as the Joint Tax Committee and others have pointed out, another repatriation holiday would add billions to deficits.

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