Creating Fiscal Strife

One of the things that drives me crazy as an economist and a citizen looking at this so-called “fiscal cliff” is that our fiscal strife has been created by the people least likely to suffer from its resolution.  Congress gave the Bush administration authority to start a series of unfunded, reckless wars that have lasted well over a decade.  Congress passed the Bush administration’s reckless tax cuts and generous loopholes that have benefited the few at the cost of the many. The Bush administration’s and Congress’ lack of oversight and deregulation of the financial services’ industry created a low-risk, gambling casino with the national investment and savings accounts and the debt markets.  This led to a huge recession.  These are the roots of our fiscal problems.  But, the discussions around cleaning up messes in the District mostly surround Social Security which has nothing to do with the national debt and deficit and items that have become more necessary to average Americans since Congress and the Bush Administration broke the country with its bad policies.

Here’s some of the latest examples.   Closing loopholes and unnecessary deductions for certain constituents is a good idea.  However, which of these things are on the chopping block?  Inkling its way up the priority list is the major middle and working class deduction and source of household wealth:  the mortgage interest deduction.  I have no problem with eliminating second mortgages, mortgages on boats, and mortgages on second properties.  These benefit very few people and really serve little policy purpose.  Capping the deduction–with an annual COLA adjustment to the median price and below-based mortgages is also fine.  However, what are we likely to see?

As the Obama administration and lawmakers on Capitol Hill scramble to defuse automatic spending cuts and tax increases set to take effect Jan. 1, a herd of sacred cows — from Social Security and Medicare to deductions for charitable giving and mortgage interest — are in danger of losing their untouchable status.

Members of both parties have largely steered clear of detailed proposals so far. But plans put forth in the past year by President Obama and Mitt Romney to place limits on annual total tax deductions are likely to crimp the mortgage-interest deduction for certain taxpayers. Top congressional Republicans also have expressed openness to limiting total tax deductions as part of an overall budget deal. In addition, the presidentially appointed Simpson-Bowles fiscal commission suggested scaling back the mortgage-interest deduction as part of its own set of tax-related proposals.

Current law allows homeowners to deduct the interest paid on mortgage balances up to $1 million, including on second homes, as well as on $100,000 worth of home-equity loans. The deduction overwhelmingly benefits wealthier families, partly because they tend to have larger mortgages and pay more interest, and partly because most low- and middle-income Americans do not itemize deductions on their tax returns. It also tends to favor homeowners on the East and West Coasts, as well as those in large cities such as Chicago, where average home prices are higher.

Edward Kleinbard, a tax expert and law professor at the University of Southern California, said the mortgage-interest deduction represents the kind of government “extravagance” that the country no longer can justify, given its fiscal troubles.

“We simply cannot afford wasteful government subsidy programs anymore, and this is one of the most important examples of that,” Kleinbard said. “It’s very much a subsidy to those Americans who need it least.”

Mitch McConnell continues to service Grover Norquist and the Club for Growth. He’s back on his high horse for no tax increases for the wealthy. Ending tax cuts for the wealthy endlessly shown to have no ill-impact on the economy. There is also no real benefit to extending them.

Senate Republican Leader Mitch McConnell (Ky.) slammed the door Thursday morning on Democratic demands to raise tax rates on families earning more than $250,000 per year.

“We’re insisting on keeping tax rates where they are, first and foremost, to protect jobs and because we don’t think government needs the money in the first place,” McConnell said on the Senate floor.

“The problem, as I’ve said, is that Washington spends too much. But if more revenue is the price that Democrats want to exact, then we should at least agree to do it in a way that doesn’t cost jobs and disincentivize rates, as we all know raising rates would do,” he said.

McConnell’s comments came a day after Speaker John Boehner (R-Ohio) shot down a proposal by a senior GOP lawmaker, Oklahoma Rep. Tom Cole, to agree to extend tax rates only for families earning below $250,000 and resume the battle against higher tax rates on the wealthy next year.

Boehner said President Obama and Democrats should focus on finding ways to cut spending and reform entitlement programs.

The fate of the Bush-era tax rates — which will expire for all income levels in January — has dominated the debate over the slew of tax increases and spending cuts that are set to begin next year.

McConnell scolded the president Thursday for sticking fast to his campaign pledge to seek higher taxes on the rich, and made clear that raising tax rates on anyone is unacceptable.

The debate over Medicare is likely to be equally absurd.  Medicare needs some reworking.  Most of its problems comes from the pharmacy benefit which currently allows Big Pharma to price gouge participants and the taxpayers. But, you wouldn’t know that from the conversation.  Republicans are playing games with Amercan’s health.  They appear to be clinging to the Ryan’s voucher plan which would be disastrous for the majority of retired seniors.

The austerity crisis talks have hit a peculiar impasse. The problem isn’t, as most analysts expected, taxes, where Republicans seem increasingly resigned to new revenue. It’s Medicare. And the particular Medicare problem isn’t that Democrats are refusing the GOP’s proposed Medicare cuts. It’s that Republicans are refusing to name their Medicare cuts.

Politico quotes a “top Democratic official” who paints the picture simply: “Rob Nabors [the White House negotiator], has been saying: ‘This is what we want on revenues on the down payment. What’s your guys’ ask on the entitlement side?’ And they keep looking back at us and saying: ‘We want you to come up with that and pitch us.’ That’s not going to happen.”

That’s partly politics. If nothing else, Republicans are respectful of Medicare’s political potency. Recall that a core Republican message in both the 2010 and 2012 elections was that Democrats, through Obamacare, were cutting Medicare too much. Republicans, already concerned about their brand, don’t want to rebrand themselves as the party of Medicare cuts.

But it’s partly policy, too. The fact is that short of converting the program to a premium support system — a non-starter after they lost the 2012 election — Republicans simply don’t know what they want to do on Medicare.

Scour the various outlets for Democratic policy ideas and you’ll find plenty of proposed Medicare cuts. President Obama’s 2013 budget, for instance, includes hundreds of billions in Medicare cuts (see pages 33-37), and caps the program’s long-term growth at GDP+0.5 percent. More recently, the Center for American Progress released a 46-page proposal for cutting Medicare by almost $400 billion.

Republicans, meanwhile, have focused their energy on a long-term effort to convert Medicare to a premium-support model. Paul Ryan’s 2013 budget kept the Affordable Care Act’s Medicare cuts for the next 10 years and proposed to convert the program to a premium-support model in the future. Mitt Romney’s platform proposed reversing Obamacare’s Medicare cuts and offered a vague framework for converting the program to a premium-support model in the future.

If you dig deep into the Republican think tank world, you can find a few proposals that focus on the near-term.

The current fiscal ‘cliff’ framework appears to place a lot of burden on those least able to take it as well as those least responsible for creating the problems.