Capping War Costs Would Lock in Real Savings, Prevent Future Mischief

September 21, 2011 at 1:31 pm

The recent debt-ceiling deal limited the Pentagon’s non-war funding — but not its funding for the wars in Iraq and Afghanistan.  The President has now proposed to cap funding for the wars as well, and he counts $1 trillion in savings over ten years from doing so as part of his $4 trillion in total proposed budget savings.  Some maintain that the $1 trillion in war savings are “phony” or a “gimmick.” We ourselves previously suggested that the savings should be reflected in the budget “baseline” rather than counted as part of the total savings a deficit-reduction plan achieves.  Nevertheless, the President’s proposal itself is sound.

President Obama's Proposed Caps Would Substantially Cut War FundingLet’s take a closer look.

For starters, it’s worth noting that, in his controversial budget plan last spring, House Budget Committee Chairman Paul Ryan claimed as deficit reduction the very same $1 trillion in war savings and cited an estimate by the Congressional Budget Office (CBO) to back him up.  CBO says that the proposed cap on war costs produces savings of this size, relative to its official budget baseline.

To be sure, the plan to substantially reduce war expenditures does not represent a new Obama policy.  That’s why some argue that shrinking war costs should be built into the spending “baseline” instead of counted as savings from the baseline.

Rather than debate whether such savings should be built into the baseline, we should keep the following important points about capping war costs in mind:

  • Arguing about baselines is far less important than agreeing on policies to achieve the goal of stabilizing the debt as a share of the economy — a goal that the President’s proposal appears to achieve by 2014.  Whether the savings from limiting war funding are built into the baseline or counted as deficit reduction from a baseline that does not include them makes no difference to the bottom line — the spending, deficits, and debt resulting from the plan are the same in either case.  Whether one achieves, say, $4 trillion in savings from the official CBO baseline or $3 trillion in savings from a baseline that already assumes these savings and hence shows lower deficits, the end result is identical.  Moreover, the proposed cap on war spending will help to lock in planned war savings and increase prospects that those savings will materialize.
  • War spending is now lower than in 2008, but the proposed cap would reduce it further, as the graph below shows.  Spending substantially less than in the past is a spending reduction, even if not a new policy.
  • Locking in the war savings now, as the President proposes, prevents a later congressional proposal to enact $1 trillion in new tax cuts or new spending increases and “pay for” them by capping war costs, validated by a CBO cost estimate.  Better to dedicate the war savings to deficit reduction now, as the President proposes, even if you don’t consider them new savings.  His proposal thus prevents a future budget gimmick that would worsen our fiscal picture.
  • The President’s proposal advances the goal of fiscal responsibility in another important respect, as well.  As long as war costs remain uncapped, the Pentagon can classify various ongoing expenditures as “war costs” — and thereby increase its budget by more than the caps on “security” funding enacted in last month’s Budget Control Act would otherwise allow.  It is widely thought that the Pentagon did just that during the Bush years, when Congress did not look closely at “emergency” defense funding.  And National Journal Daily reported on September 20 that “Senate appropriators moved nearly $10 billion — more than a third of the cuts mandated by the Budget Control Act approved by Congress in August — from the Pentagon’s base budget to the separate accounts that pay for operations in Iraq and Afghanistan.”  Capping war costs now would help close this loophole; if it’s not done, Congress could well use the loophole to further shrink the savings that the Budget Control Act is supposed to produce.  Here, as well, the President’s proposal would forestall a gimmick that could otherwise be employed to make the fiscal picture worse.

The bottom line is that this is a sound proposal that advances the cause of fiscal responsibility and helps prevent future budget gimmicks that would set us backward.  That is far more important than a fruitless debate over which budget baseline to use and whether to “count” the reduced war expenditures as savings — especially since the President’s plan appears to reach the goal of stabilizing the debt regardless of which baseline one uses and whether one counts these as savings.

The Case for the Buffett Rule in One Chart

September 20, 2011 at 3:22 pm

This chart, based on data from the Tax Policy Center (TPC), sums up the case for the President’s proposed “Buffett Rule”: a significant group of very wealthy people pay a smaller share of their incomes in federal income and payroll taxes than large swaths of the middle class.

Typical Middle-Class Households Face Higher Tax Rates Than Some High Income Households

There are three reasons why: 1) a large share of the income of the very wealthy comes in the form of capital gains and dividends, which are taxed at a very low rate; 2) wealthy people pay payroll taxes at a much lower rate than the middle class, and 3) itemized deductions and some other tax expenditures provide much larger tax breaks for high-income people than ordinary households.

The President has called on Congress, as part of comprehensive tax reform, to make sure that no American making more than $1 million a year pays at a lower rate than middle-income families.

On the whole, the federal tax system is modestly progressive, meaning that, on average, high-income

taxpayers tend to pay more of their income in tax than low- and moderate-income households pay. But a significant group of high-income taxpayers — particularly those who derive the bulk of their income from capital investments — may pay taxes at a lower rate than many middle class families as the result of various tax preferences.

People with incomes between $50,000 and $75,000 who receive most of their income from their paychecks (as middle-class people generally do) pay 14.9 percent of their income in federal income and payroll taxes, according to TPC. This “effective tax rate” is higher than the comparable rate faced by those people with incomes over $1 million who receive more than a third of their income from capital gains and qualified dividends.

Millionaires who receive one-third to two-thirds of their income from these preferential sources face a 14.6 percent rate. Millionaires who derive more than two-thirds of their income from these sources face a 12.0 percent rate (see graph).

The gap in effective tax rates between millionaires and middle-income people is even bigger if you also count state and local taxes, which tend to be regressive.
Policymakers can address this situation in several different ways that would make the tax system fairer and also generate much-needed revenue. Most directly, in conjunction with tax reform, they could tax capital gains and dividends at the same rate as ordinary income. Alternatively, they could enact a surtax on millionaires or a more effective alternative minimum tax on wealthy individuals.This dynamic is at odds with the widely accepted notion that higher-income people should pay a larger share of their income in taxes than middle- and lower-income people do. It’s particularly troubling given the stunning rise in inequality over the past several decades. Incomes have skyrocketed for those at the very top while stagnating for lower- and middle-income families, especially for people without a college degree.

*This post was updated on September 30, 2011.

As Job-Based Health Coverage Weakens, Public Coverage Helps Fill the Gap

September 20, 2011 at 1:43 pm

As we’ve noted, Census Bureau figures released last week show that public programs like unemployment insurance kept millions of people out of poverty in 2010.  They also show that public health programs like Medicaid kept millions of people from becoming uninsured in 2010, as they expanded to help offset the continuing decline in job-based coverage.

Change in Health Insurance Coverage by Type of Coverage, 2001 to 2010Employer coverage has been eroding for a number of years, and this trend accelerated sharply in 2009 and 2010, due in part to steep job losses.  Only 58.6 percent of non-elderly people had employer coverage in 2010, down from 67.7 percent in 2001.

But over the same 2001-2010 period, Medicaid coverage rose significantly, from 11.0 percent of non-elderly people to 16.9 percent, and other forms of public coverage rose as well.  Otherwise, the share of the population with insurance would have fallen even more than it did (see graph).

Among children, the increase in public coverage (through Medicaid and the Children’s Health Insurance Program, or CHIP) over the past decade more than offset the decline in private coverage, so the total number of uninsured children went down.  Among non-elderly adults, the increase in public coverage wasn’t enough to offset the decline in private coverage, mostly because states’ Medicaid eligibility rules are far more restrictive for non-elderly adults than for children.

Working parents are eligible for Medicaid only up to 64 percent of the poverty line in the typical state, unemployed parents are typically eligible only up to 38 percent of the poverty line, and, in most states, childless adults aren’t covered by Medicaid at all.

These data show why it’s so important to implement the Affordable Care Act reforms scheduled to take effect in 2014, which are designed to make coverage available and affordable to people who don’t have employer-based insurance.  Full implementation of the Affordable Care Act will strengthen and extend coverage to most of the 41.8 million adults age 18-64 who lacked insurance in 2010.  It also will prevent insurance companies from denying coverage or charging people with medical conditions very high premiums that they often can’t afford.

The President’s New Proposal

September 19, 2011 at 6:14 pm

James R. Horney, the Center’s Vice President of Federal Fiscal Policy, has issued a statement on President Obama’s budget proposal. Here’s the opening:

President Obama proposed a balanced and well-designed package today that would boost economic growth and jobs in the short run while stabilizing federal debt as a share of the economy after 2013.

By keeping federal debt held by the public from growing as a share of the economy, the President’s proposal would meet the definition of a “sustainable budget” that economists often use. The President’s program cuts and revenue increases would take effect as the economy recovers, putting the federal budget on a sound footing through the end of this decade.

To be sure, policymakers would have to take further steps in coming years and decades, particularly to slow the rate of growth of health care costs, to keep the debt from starting to rise faster than the economy again after 2021. But, make no mistake, achieving stability through the end of this decade would represent a major accomplishment and buy time for policymakers to design and enact the changes in the health care system (in both the public and private sectors) needed to slow cost growth.

You can read the full statement here.

Underfunding WIC?

September 19, 2011 at 3:17 pm

For each of the last 15 years, Presidents and Congresses of both parties have given the WIC nutrition program enough funding to serve all eligible low-income pregnant women, infants, and young children who apply.  Leaders of the current Congress have reiterated this commitment rhetorically.  But there are mounting questions as to whether they will live up to it, as our new report explains.

WIC — the Special Supplemental Nutrition Program for Women, Infants, and Children — provides nutritious foods, counseling on healthy eating, and health care referrals to roughly 9 million low-income pregnant and postpartum women, infants, and children under age 5 who are at nutritional risk.  Extensive research shows that WIC improves birth outcomes, reduces child anemia, and improves participants’ nutrition and health.

The House-passed appropriations bill for fiscal year 2012 contains a large funding cut that would force WIC to turn away more than 700,000 eligible low-income women and young children next year.

The funding bill that the Senate Appropriations Committee approved earlier this month provides more than the House bill (though less than WIC received last year).  If food costs and WIC participation next year don’t exceed our projections, the Senate funding level would be enough to avoid turning people away, as long as the Agriculture Department also taps WIC’s contingency reserve.

But the latest data show that food costs have been rising rapidly — especially for milk and cheese, which account for about one-third of WIC’s food expenditures — and even small percentage differences in food price inflation have a big impact on WIC funding needs.  It may become clear in coming weeks that the Senate funding level, even with WIC’s contingency reserve, won’t be enough to avoid turning away eligible low-income women and children.

When Congress sets the final WIC funding level this fall, we urge lawmakers to use the most recent available data to ensure that WIC can continue the bipartisan tradition of serving all of the eligible low-income mothers and young children who apply.

More than one of every five American children lived in a household that was “food insecure” last year, meaning that it had difficulty affording sufficient food at some point during the year.  Congress should make sure it provides enough funding for WIC so as not to drive that number even higher.