Reischauer “Strongly Opposes” House Bill to Inflate Cost of Federal Credit Programs

January 24, 2012 at 1:48 pm

We’ve issued an analysis explaining the serious problems with a bill before the House to change the federal accounting of direct loans and loan guarantees, which would artificially inflate the cost of federal credit programs.  Meanwhile, Robert Reischauer, former director of the Congressional Budget Office and outgoing president of the Urban Institute — and a CBPP board member — sent the following letter to Rep. Chris Van Hollen (D-MD) explaining his opposition to the bill.

The Honorable Chris Van Hollen                                           January 23, 2012

1707 Longworth H.O.B.

Washington, D.C. 20515

Dear Representative Van Hollen,

I am writing in response to your request for my views on the desirability of adopting “fair value accounting” of federal direct loan and loan guarantee costs in the budget as proposed in H.R. 3581.  I strongly oppose such a change.

The accounting convention used since enactment of the Credit Reform Act of 1990 already reflects the risk that borrowers will default on their loans or loan guarantees.  Under Credit Reform, costs already are based on the expected actual cash flows from the direct loans and guarantees (with an adjustment to account for the timing of the cash flows).  H.R. 3581 proposes to place an additional budgetary cost on top of the actual cash flows.  This additional cost is supposed to reflect a cost to society that stems from the fact that, even if the cash flows turn out to be exactly as estimated, the possibility that the credit programs would cost more (or less) than estimated imposes a cost on a risk-averse public.  Under the proposal, this extra cost would be the difference between the currently estimated cost of direct loans and loan guarantees to the federal government and the cost of those loans and loan guarantees if the private market were providing them.

A society’s aversion to risk may be an appropriate factor for policymakers to take into account in a cost-benefit assessment of any spending or tax proposal but adding a cost to the budget does not make sense. Nor is it clear that the cost of societal risk aversion should be based on individual or institutional risk which is what the private market reflects. Inclusion of a risk aversion cost for credit programs would be inconsistent with the treatment of other programs in the budget (many of which have costs that are at least as uncertain as the costs of credit programs–for instance, many agriculture programs and Medicare)–and would add a cost element from a traditional cost-benefit analysis without adding anything based on the corresponding benefit side of such an analysis. It would also make budget accounting less straightforward and transparent.

H.R. 3581 represents a misguided attempt to mold budget accounting to facilitate a cost-benefit analysis, with the result that neither the budget nor the cost-benefit analysis would serve their intended purposes well.

I would be glad to discuss these issues in more detail if you would like.

With best wishes.

Robert D. Reischauer

Proposed Changes in Congressional Budget Process Wouldn’t Help Fiscal Discipline

January 24, 2012 at 1:27 pm

House committees this week will consider a series of changes to the congressional budget process that proponents — including Budget Committee Chairman Paul Ryan (R-WI)— say will promote fiscal responsibility; the full House is expected to vote on these bills beginning next week.  We have produced analyses of four of the bills thus far, explaining why they would mark a step backward for the budget process:

  • The Legally Binding Budget Act (H.R. 3575) would bar Congress from considering annual appropriations bills — or any other legislation that would affect the budget — until Congress has passed, and the President has signed, a joint budget resolution for the fiscal year.  This change would likely delay the consideration of appropriations bills and could lead to efforts to combine major legislation into a single massive annual budget bill and bypass most congressional committees.
  • The Biennial Budgeting and Enhanced Oversight Act (H.R. 3577) would move the federal budget from an annual to a biennial cycle and make other changes in the budget process.   While proponents claim that biennial budgeting will lead to more thoughtful and deliberative budgeting, its disadvantages are likely to outweigh its advantages.
  • The Baseline Reform Act (H.R. 3578) would require the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) to assume, in constructing budget “baselines” that project funding levels for future years, that future annual appropriations will remain frozen indefinitely, with no adjustment for inflation.  This change could weaken fiscal discipline and would establish an unrealistic and misleading benchmark against which to measure changes in funding.
  • The Budget and Accounting Transparency Act (H.R. 3581) would require CBO and OMB to add an extra amount to the budgetary cost that they show for federal loan and guarantee programs, based on the additional amount that private lenders would charge if they, rather than the federal government, issued the loans and loan guarantees.   This proposal is not based on any claim that current estimates of the federal outlays and receipts associated with credit programs understate the actual federal costs of those programs.  Quite the contrary, the legislation would artificially inflate the programs’ estimated budgetary cost and overstate federal deficits.

Tax Preference for Capital Gains Doesn’t Make Sense

January 23, 2012 at 5:20 pm

Great blog posts by our colleague Jared Bernstein and by Syracuse University professor Len Burman explain why the preferential tax treatment for capital gains — the gains from selling stocks, bonds, and other assets, which face a top tax rate of 15 percent, well below the top rates for ordinary income — is unjustified.

In two posts, Bernstein demonstrates that there is no convincing evidence that the preferential capital gains rate encourages investment or productivity growth.  First, he shows that there is no clear correlation between the capital gains rate and the amount of real business investment.  Then, he shows that the size of the difference between the capital gains rate and top ordinary income tax rate does not correlate with either real investment or investment growth.

Preferential Tax Rates for Capital Gains and Dividends Mostly Benefit the Very Wealthy

Len Burman explains that the preferential capital gains rate fails miserably on other grounds as well, such as equity and efficiency:

  • Citing Tax Policy Center data, Burman explains that fully 97 percent of reported gains in 2010 went to millionaires.

    That’s one reason why, as we show in this chart, tax rates for capital gains and dividends are highly regressive, lifting after-tax incomes by a tiny fraction of a percent for the vast majority of households but by about 8 percent for the top 0.1 percent of households.

    And, as we’ve explained, the preference is a reason why the current tax code violates the so-called “Buffett Rule” – that people making more than $1 million a year shouldn’t pay taxes at a lower rate than middle-income families.  High-income taxpayers who receive a large share of their income from capital gains and dividends taxed at the preferential rates benefit much more from those rates than other taxpayers do.  Consequently, a significant group of them pay a lower share of their incomes in federal income and payroll tax than do many middle-income Americans.

  • Burman also notes that “taxing capital gains at much lower rates than other income creates a ginormous loophole that leads to a tremendous amount of inefficient tax shelter activity,” as filers seek to reclassify other income as capital gains.

At a time when we need to raise revenues responsibly to help address long-term deficits, the preferential tax treatment of capital gains — which costs the Treasury billions of dollars each year — makes no sense.

Romney Proposals Would Slash Nondefense Programs

January 23, 2012 at 12:13 pm

Mitt Romney’s budget proposals would require cutting nondefense discretionary spending to levels not seen in decades, our new analysis finds.  Here’s the opening:

Romney Proposals Would Require Massive Cuts in Nondefense ProgramsPresidential candidate Mitt Romney’s proposals to cap total spending, boost defense spending, cut taxes, and balance the budget would require extraordinarily large cuts in nondefense programs.  If policymakers cut all nondefense programs by the same percentage, the cuts would measure 21 percent in 2016 and 36 percent in 2021.  If policymakers exempted Social Security from the cuts and then cut all other nondefense programs by the same percentage, the cuts would rise to 30 percent in 2016 and 54 percent in 2021.

For nondefense discretionary programs, these cuts would come on top of the 17-percent cut already in law due to the discretionary funding caps of the Budget Control Act that Congress enacted last August and the automatic cuts (or “sequestration”) scheduled to start in January 2013.  Our estimates of the depth of cuts that the Romney proposals would require are consistent with what Governor Romney himself has said about the required cuts.

These cuts are far deeper than those that House Budget Committee Chairman Paul Ryan’s (R-WI) austere budget plan would require.  They would shrink nondefense discretionary spending — which, over the past 30 years, has averaged 3.7 percent of gross domestic product (GDP) and never fallen below 3.2 percent  — to just 1.7 percent of GDP by 2021.

Click here for the full report.

In Case You Missed It…

January 20, 2012 at 4:32 pm

This week on Off the Charts, we focused on the federal budget and taxes, state budgets, and food assistance.

  • On the federal budget and taxes, Richard Kogan outlined three things that Congress should remember as it prepares to vote on freezing the debt limit.  

    Chuck Marr graded the corporate tax reform provisions of a report from the President’s Council on Jobs and Competitiveness. 

    Hannah Shaw explained why Congress should not allow states to use unemployment insurance funds for other purposes.
  • On state budgets, Phil Oliff pointed out that Missouri governor Jay Nixon’s plan to close his state’s shortfall through spending cuts alone, including large cuts in higher education, is misguided.  

    Michael Leachman lauded Rhode Island’s decision to post online the official estimates of how much money proposed legislation would cost — or save — the state.
  • On food assistance, Stacy Dean listed five important facts about the Supplemental Nutrition Assistance Program (SNAP) and Dottie Rosenbaum highlighted our recently updated papers on the program.

In other news, we released reports on a harmful proposed change to the unemployment insurance system and the problems with biennial budgeting.