Off the Charts Blog | Center on Budget and Policy Priorities

House Budget Chairman Paul Ryan, speaking at a dinner several weeks ago honoring the life of Jack Kemp, spoke eloquently about poverty and opportunity:

We need a vision for bringing opportunity into every life — one that promotes strong families, secure livelihoods, and an equal chance for every American to fulfill their highest aspirations for themselves and for their children. . . .

It calls for a stronger safety net — one that protects the most vulnerable and promotes self-reliance. . . .

But, in the first significant policy action since the Ryan speech, House Republicans have advanced a budget plan (Speaker Boehner’s “Plan B”) that would push millions of working parents and their children into — or deeper into — poverty by failing to extend tax-credit improvements for low-income working families.  At the same time, Plan B would extend a lucrative tax cut for heirs of the nation’s wealthiest estates.

Two of our most effective weapons against poverty, the Earned Income Tax Credit and refundable Child Tax Credit encourage and reward the hard work of millions of low-income families across the country.   Improvements in the credits enacted in 2009 and 2010 lifted 1.5 million Americans in low-income working families — including 800,000 children — out of poverty in 2011, Census data show, while lessening the depth of poverty of 15.2 million other people.

Plan B would let those improvements expire at the end of the month.  Seven million children in working families earning less than about $13,000 would lose the child credit entirely, while an additional 10 million children in working families with earnings somewhat above $13,000 would have their child credit cut, in many cases by very large amounts, according to the Urban-Brookings Tax Policy Center.

For example, a single mother with two children working full-time, year-round at the minimum wage of $7.25 an hour — and earning $14,500 per year — would see her child credit plummet from $1,725 to just $165.

In contrast, Plan B’s extension of a 2010 cut in the estate tax would give the heirs of the largest 3 in 1,000 estates in the country tax cuts averaging more than $1 million apiece, compared to the President’s proposal to return the estate tax to its 2009 rules.  The 2009 rules are more than generous:  a wealthy couple could bequeath $7 million entirely tax-free.

Letting tax-credit improvements for working families expire while extending a tax cut for the nation’s highest-income people is not the way to fight poverty and promote opportunity.

As our new paper explains, key aspects of the “Plan B” tax bill that House Republicans will bring to the floor today — which would extend President Bush’s tax cuts on incomes up to $1 million and certain other tax cuts — aren’t widely understood.  The graphs here highlight two of them.

• People at the top would be better off under Plan B than under the Senate-passed bill to extend some tax cuts, but all other income groups would be worse off. People at the top would be better off not only because Plan B extends the Bush tax cuts up to a higher income threshold than the Senate bill ($1 million versus $250,000), but also because it extends a 2010 cut in the estate tax that benefits only the heirs of the wealthiest 3 in 1,000 people who die.  (The Senate bill would return the estate tax, which phased down significantly between 2001 and 2009, to its already generous 2009 level.)

  

  Further, Plan B would not allow limits on certain exemptions and deductions for high-income households, which the Bush tax cuts phased out, from returning in January as scheduled.

  All told, millionaires’ after-tax incomes would be 2.9 percent higher on average under Plan B than the Senate-passed bill, according to the Tax Policy Center.  That means millionaires would be $61,800 better off under Plan B than the Senate bill.

  The main reason why all other income groups would be worse off under Plan B is that the Senate-passed bill extends the 2009 improvements to tax credits for working families and students, while Plan B ends them.

  Plan B’s failure to extend the improvements in the Child Tax Credit and Earned Income Tax Credit for working families, as well as the American Opportunity Tax Credit to help pay college costs for low- and middle-income families, would affect 25 million families with incomes below $250,000 and throw more than 1.5 million working people (including 800,000 children) into poverty.

• Most of the benefit of Plan B’s increase in the threshold from $250,000 to $1 million would go to people above $1 million. That’s mostly because they are the only people who would get tax cuts on the full amount of the threshold increase.

  Further, as noted, Plan B blocks a major limit on tax expenditures for high-income households from returning on January 1^st, and households above $1 million gain the most from abolishing this limit.

Earlier today, we pointed out that when tallying up the mix of spending cuts and tax increases in the latest deficit-reduction proposals, one should include the spending cuts that will take place over the coming decade under last year’s Budget Control Act.

This graph shows that when you count those savings, President Obama’s budget offer of December 17 would result in $1.9 trillion in program cuts over 2013-2022, compared to $1.3 trillion in new revenues.

At some point, the President and Congress will likely agree on a deficit package that includes both up-front savings and a target for more savings that they would achieve in 2013 by changing tax and spending policies.

The package also will likely include a backstop mechanism that’s designed to ensure that the 2013 savings come to fruition even if the President and Congress fail to agree on those policy changes.

In designing that mechanism (e.g., automatic across-the-board spending cuts), policymakers will face a decision that’s received little attention of late — whether to continue a quarter-century tradition of protecting low-income programs or to break faith with that tradition and risk serious harm to the poorest and most vulnerable Americans.

Ever since the 1985 Gramm-Rudman-Hollings (GRH) law, with its annual deficit targets and its across-the-board spending cuts (or “sequestration”) to enforce them, policymakers have exempted low-income mandatory (or entitlement) programs whenever they’ve included backstop mechanisms of that kind in deficit-reduction packages.  That tradition includes both versions of GRH (1985 and 1987), the pay-as-you-go laws of 1990 and 2009, and the sequestration mechanism of last year’s Budget Control Act.  Most of these laws were enacted on a bipartisan basis.

Were policymakers to ignore this tradition, at risk would be such key safety net programs for the nation’s most vulnerable families and individuals as Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp Program), Temporary Assistance for Needy Families, Supplemental Security Income for poor seniors and people with disabilities, child care assistance, free and reduced-price school meals for low-income children, and the Children’s Health Insurance Program.

Subjecting these programs to a backstop mechanism would impose enormous hardship on people already living on the margins, far below the poverty line, and it would likely result in increases in homelessness, hunger, and the number of people who can’t access needed health care.  The effects on poor young children could be long-lasting.

The crafting of a backstop mechanism, and what’s in it, is part of a larger question: who should bear the burden of deficit reduction?

In the plan by its co-chairs, former White House Chief of Staff Erskine Bowles and former Senator Alan Simpson, the President’s fiscal commission concluded that any deficit reduction plan should “protect the truly disadvantaged.”  Similarly, a blue-ribbon private commission chaired by former Office of Management and Budget Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici proposed a plan that avoided cuts in low-income mandatory programs other than Medicaid.  The plan produced in July 2011 by the Senate’s bipartisan Gang of Six did the same.

Those who believe that deficit reduction should not increase poverty, inequality, the ranks of the uninsured, or other hardships for our most vulnerable citizens should honor the Bowles-Simpson principle to that effect.  Policymakers should not overturn more than 25 years of precedent, and instead should maintain the historic exemption for low-income entitlement programs from automatic cuts under a backstop mechanism.

The President’s decision to include, in his latest “fiscal cliff” offer to House Speaker John Boehner, a proposal to use the “chained Consumer Price Index” in calculating both annual cost-of-living adjustments in Social Security and other benefits and annual inflation adjustments to various features of the tax code (such as the incomes at which tax brackets begin and end) is eliciting dismay among many progressives.

At CBPP, we have long been open to such a change if, and only if, the tax savings are devoted entirely to deficit reduction (not to financing other tax cuts) and the benefit change includes protections for poor and very old beneficiaries.  The details on the Administration’s proposal are not yet available and, until they are, we’re withholding judgment on it.

But, my old friend Bob Kuttner attacked us yesterday on The American Prospect’s website for our openness to the chained CPI.  Bob’s piece merits some response.

First, Bob portrays the chained CPI as a massive Social Security benefit cut.  “On average,” he writes, “the cut is about 3 percent a year.”

But, the average cut isn’t 3 percent per year.  It’s three-tenths of 1 percentage point per year (0.3 percent), according to the Social Security actuaries, or one-tenth what Kuttner assumed.  And according to the Congressional Budget Office, the average reduction would be a bit smaller than that — 0.25 percent per year.

To be sure, the benefit loss would cumulate over time; after 20 years, it would represent a benefit cut of about 5 to 6 percent.  But, the proposal also appears to include a benefit increase after about 20 years that’s equal to 5 percent of the average Social Security benefit, returning the benefit level at that point to close what it would be under current law.  (It would begin to slowly erode again after that.)

In short, this proposal would affect beneficiaries.  But the benefit reduction is much smaller than Kuttner portrays it.

That leads me to my main disappointment with Bob’s piece.  The bulk of it purports to describe my thinking and motivation for being open to what he considers a horrific proposal.  Alas, Bob invents some of what he writes out of whole cloth.  He never talked to me about why I end up where I do on this issue, and he gets much of my thinking wrong.

Let’s quickly dismiss a Kuttner canard.  He lays out a series of reasons why he assumes I’ve adopted this view and suggests that one could be to strengthen my access to the Obama White House.  That makes no sense.  I have been writing about the chained CPI along the same lines since 2004, when Barack Obama was still serving in the Illinois state legislature.

So what is my thinking?  I share concerns about the effects of the chained CPI on beneficiaries.  But I think that some benefit cuts in Social Security are inevitable sooner or later.  The program needs some changes to make it solvent for the long term, and the chances that policymakers will restore solvency entirely through tax increases — with no benefit-reduction component — are essentially zero.  That didn’t happen in 1983, and it almost certainly won’t happen now or in the foreseeable future.

Furthermore, as in 1983, benefit changes won’t be limited to high-income beneficiaries.  There are limits to how far one can cut benefits at the top without breaking Social Security’s link between payroll-tax contributions and benefits, and thereby risking undermining public support for the program.  I see these factors as basic political realities, whether we like them or not.

That brings me to the key point: the chained CPI is the only Social Security benefit change that brings an increase in general tax revenues with it.  Eventually, about half of the savings from the chained CPI come from revenues, and about half from Social Security and other benefit programs.  The more that we raise in revenues, the less that policymakers will slash programs generally.  So, this — and the fact that the chained CPI is a more accurate measure of inflation (although not necessarily for the elderly) — leads me to conclude that if policymakers can build appropriate protections into the chained CPI to protect both the oldest and the poorest beneficiaries, it’s worth considering.

Finally, I hope people reading Bob’s article don’t think I’m the sole liberal who’s open to the chained CPI.  The late, revered Bob Ball — the former Commissioner of Social Security who led efforts to defend the program for half a century and was a hero and beacon on social insurance issues to so many of us — put forth several Social Security plans that included the chained CPI as a way to help restore Social Security solvency.  Indeed, I first looked at the proposal after I saw that Bob Ball had included it in one of his plans.  The Center for American Progress also embraced the chained CPI several years ago and included the proposal in its Social Security solvency plan.