The Economic Policies of President Obama, Governor Romney and the Simpson -Bowles Plan

1. The Economic Policies of President Obama, Governor Romney and the Simpson-Bowles Plan John B. Shoven 25th Anniversary High School Teachers Workshop Stanford University August 3, 2012

2. The President’s Plan • American Jobs Act – introduced in 9/2011 – some of it has been enacted • Cutting payroll taxes in half for the first $5 million of payroll • Complete payroll tax holiday for added workers • 100% investment expensing in 2011 • Streamlining regulations for new entrepreneurs • Preventing 280,000 teacher layoffs • Modernizing 35,000 public schools • Expanding access to high-speed internet • $4,000 tax credit for hiring long-term unemployed • Cutting payroll taxes in half for 160 million Americans • Unemployment insurance reforms • Expanding job opportunities for low-income youth and adults

3. A Few Elements of the American Jobs Act have been Enacted • The 6.2% payroll tax on employees on the first $110,100 was lowered by 2 percentage points in both 2011 and 2012. Recently, President Obama has indicated that he would let these temporary payroll tax cuts lapse at the end of 2012 • A bill passed this past spring (Jumpstart Our Business Startup Act) which eases SEC and other regulations on small businesses

4. President’s position on tax changes • Extend Bush rates for singles with incomes <$200,000 and marrieds <$250,000 • Raise the top income rate from 35% to 39.6% on labor income. ACA adds another 3.8% tax on dividends, interest and capital gains. The phase-out of personal exemptions and the limitations on itemized deductions would further raise the top federal rate to roughly 45% • Lower the corporate income tax rate to 29% and close corporate tax loopholes • Raise the taxation of dividends and capital gains (in 2013 budget, Obama proposed taxing dividends as ordinary income with top rate of 43.4% up from 15%). Capital gains would be taxed at 20% +ACA tax or 23.8%. Senate Democrats passed a bill last month setting top tax rate on both dividends and capital gains at 23.8% • Estate tax in Senate Democrat bill would return to a 55% rate with $1 million exemption. At other times, Obama has proposed a $3.5 million exemption with a top rate of 45%

5. Silence is deafening • Social Security Solvency • Dealing with the long-run deficits and the resulting run-up in the debt-to-GDP ratio • Agricultural policies? • Environmental policies? • Repatriation of foreign cash for companies? Interesting Question – Who would President Obama appoint to succeed Ben Bernanke?

6. My Conclusion President Obama has focused his economic policy almost exclusively on health care and trying to stimulate the economy. There has been no focus on long-run economic issues other than health care.

7. Romney’s 59 point plan • Many of the ideas are recycled conservative standards • Also, many are only broad outlines without the details • But, those that say Romney doesn’t have a plan are mistaken… he has outlined a broad plan with the details missing

8. Romney’s Tax Ideas • Maintain current tax rates on personal income • Maintain current tax rates on dividends, interest and capital gains for higher income (>200K) taxpayers • Eliminate the taxation of interest, dividends and capital gains for those with <$200,000 income • Eliminate the estate tax • Pursue revenue neutral tax reform with rates lowered 20% in all cases (marginal rates from 8 to 28% instead of 10 to 35%) with base broadening measures • Reduce the corporate income tax rate to 25% • Pursue the transition from worldwide corporate taxation to territorial corporate taxation

9. Romney’s Regulation Ideas • Repeal ACA • Repeal Dodd-Frank; replace with streamlined framework • Amend Sarbanes-Oxley for medium & small companies • Cost-benefit analyses on environmental regulations. Lengthen compliance times. • Require Congressional approval of all new “major” regulations • Reform legal system to discourage spurious litigation

10. Romney’s Trade Ideas • Implement trade agreements with Columbia, Panama and South Korea • Complete negotiations for a trans-Pacific Partnership • Increase customs and border patrol personnel to prevent illegal entry of counterfeit goods from China • Designate China a currency manipulator and impose countervailing duties • Discontinue U.S. Government purchases from China until commits to the WTO’s GPA (government procurement agreement)

11. Romney on Energy and the Environment • Open America’s energy reserves for development • Support Keystone pipeline from Canada • Prevent overregulation of shale gas development and extraction • Support basic research on alternative energy sources • Comprehensive survey of America’s energy reserves • Fast track approvals for drilling in pre-approved areas by companies with good safety records • Use non-political organizations such as ARPA-E for basic energy and environmental research

12. Romney on Labor • Supports several changes to NLRB • Appoint experienced individuals • Require secret ballot in every union certification election • All certification elections must be announced at least one month in advance • Support states in right to work laws • Prohibit political use of funds automatically deducted from paychecks

13. Romney on Retraining • Give states authority to manage retraining programs by block granting federal funds • Encourage greater private sector involvement in retraining programs • Eliminate redundancy in federal programs. Consolidate to a single agency • Facilitate the creation of Personal Reemployment accounts

14. Romney on Immigration • Raise visa caps for highly skilled workers • Grant permanent residency to eligible graduates with degrees in math, science or engineering

15. Romney on Federal Spending • Immediately cut non-security discretionary spending by 5% • Restructure Medicaid as block grants to states • Reduce federal workforce by 10% by attrition • Cap federal spending at 20% of GDP • Align wages and benefits of federal workers with market rates • Pursue a balanced budget amendment

16. My take on the Romney 59-point plan • Not surprisingly, a mixture of conservative and moderate proposals • Romney is banking on supply side ideas to increase the rate of growth of the economy. • Romney’s idea is that lower taxes and less government will lead to more rapid economic growth • The crucial details are missing with his tax plans • Obama’s idea is that we need more government actions to stimulate the economy and now is not the time to worry about the long-run fiscal situation

17. Romney is Also Silent on Some Big Issues • Social Security Reform • How would he suggest we “bend the curve” in health care spending? • Would he sharply curtain agricultural subsidies? • What is in the black box of the tax base broadeners? For example, mortgage interest deduction? deductibility of state and local taxes? charitable deductions?

18. Simpson-Bowles Commission: The Biggest Missed Opportunity in Decades • Biggest benefit – Assuring consumers and businesses that we will get the budget under control • Vastly decreasing uncertainty regarding : • The future of Social Security • The basic design of the tax code • Future credit rating of the US • The outlook for the dollar, interest rates and inflation in the long-run

19. Simpson-Bowles: Illustrative Personal Taxes • Three tax brackets: 12, 22, &28% • Repeal AMT • Repeal phase out of personal exemptions • Maintain EITC • Maintain Standard deduction • Capital gains and dividends taxed as ordinary income • Replace mortgage interest deduction with 12% nonrefundable credit. Mortgage size limited to $500K. No credit for mortgage interest on second homes • Exclusion for health insurance capped at 75 percentile • Replace charitable deduction with 12% non-refundable credit. Credit only available if gifts exceed 2% of AGI • Interest on newly issued state and local bonds would be taxable • Cap tax-preferred contributions to retirement accounts at $20K or 20% of income and consolidate programs

20. Simpson-Bowles: Corporate Taxes • Reduce rate to 28% • Eliminate domestic oil and gas production deduction • Eliminate LIFO inventory accounting • Eliminate 115 general business credits and tax expenditures • Switch to territorial tax system to permit companies to repatriate foreign cash without taxation

21. Simpson-Bowles: Discretionary Spending Cuts • Eliminate all Congressional earmarks • Reduce Congressional and White House budgets by 15% • Freeze Congressional pay for four years • Eliminate 200,000 federal jobs by 2020 and also 250,000 non-defense contractor jobs • Limit the growth of federal spending to ½ of inflation • Cut $1B in fossil fuels research • Increase transportation revenues with a 15 cent addition to the gas tax • Establish a disaster fund based on the average amount spent on disasters over the past decade • Establish a committee to cut $11 billion of unnecessary programs by 2015 • Etc.

22. Simpson-Bowles: Mandatory Spending Cuts • Limit federal spending to 21% of GDP • Reduce agricultural subsidies • Reform military and civil service health and retirement systems • Charge market rates for federally generated electricity

23. Simpson-Bowles: Social Security Reform • Increase retirement age based on longevity statistics (full retirement age might be 69 by 2075) • Raise contribution ceiling (currently $110,100) • Increase benefits for those over 85 • Revise the inflation adjustments to more accurately reflect changes in the cost of living • Make the system more progressive by increasing benefits for low income households and decreasing benefits for high income households

24. Simpson-Bowles: Healthcare • Create a long-term budget for total health spending • Limit the growth in health care spending to GDP growth plus 1% • More low income households would be put on Medicaid managed care • Spending cap for Medicaid and Medicare outlays

25. Currently Federal spending is 25% of GDP, revenues are 16% or so • Bowles-Simpson would reduce spending to 21%, raise revenues to 19% and cut the deficit from 9% of GDP to 2% or so by 2020 • It is far from perfect, but it should have been the starting point for a real long-term plan • One thing that is holding back the economy – massive uncertainty about future policy

26. Two Important Matters regarding the progressivity of the tax system • Who bears the corporation income tax? • Revenues are estimated by CBO at $400 billion in 2014, or 2.5% of GDP • If it is the owners of capital who bears the tax, then the tax system is more progressive than it appears • Are FICA contributions (aka payroll taxes) a form of deferred compensation like pension contributions or are they labor income taxes?

27. Why Corporate Tax Is Not Borne by Customers Profit Profit Before Corporate Tax Profit After Corporate Tax Price

28. Companies Maximize Profits • Companies set prices, wages, advertising budgets, investments, etc. in order to maximize profits. • Exactly the same set of policies (the same prices, wages, advertising budgets, investments, etc.) maximize before tax profits and after tax profits. A corporate income tax increase (or decrease) will not change prices and will not be passed on to consumers.

29. Payroll tax and progressivity • With income taxes, you don’t earn promises for money from the government later for paying the taxes now • With payroll taxes, you do somewhat. So, the “taxes” could be considered deferred compensation at least to an extent

30. Affordable Care Act: Background

31. Affordable Care Act: Background

32. Affordable Care Act: Background • 85% of Americans have health insurance; 15% do not • Who Has It? • Elderly with Medicare • Very Poor with Medicaid (exception= able-bodied without dependents) • Workers at sizable firms • Who Doesn’t? • Those who are eligible for Medicaid but did not register • Young and healthy • Workers at small firms • Long-term unemployed

33. Elements of ACA • Expand Medicaid so that it covers everyone with income below 133% of poverty ($25,390 for family of 3 in 2012) • Mandate the purchase of quality health insurance • Penalty for non-compliance is $695/year or 2.5% of income, whichever is greater • State-based health exchanges • Limit of 3 to 1 ratio based on age • Limit of 50% surcharge for smokers • Four tiers of coverage based on co-pays • Limits of out-of-pocket expenses to $6K for individuals and $12K for families

34. More Elements of ACA • Health insurance purchased through exchanges subsidized for those with incomes up to 400% of poverty (up to $92,200 for family of four in 2012) • For those at 150% of poverty, insurance is limited to 4% of income • At 200%, limit is 6.3% of income • At 300-400%, limit is 9.5% of income • Cannot exclude for pre-existing conditions • Guaranteed renewal • Dependent coverage available until age 26

35. ACA: Employer Mandate • Firms with 50 or more employees must offer health insurance • Penalty for not offering insurance is $2,000 per employee

36. ACA: Some New Taxes • Medicare payroll tax is increased for individuals with incomes greater than $200K and marrieds greater than $250K. The increase is from 1.45% to 2.35%. For the high-income self employed the rate goes from 2.9% to 4.7% effective 2013 • A new 3.8% surtax on capital income (dividends, interest, capital gains and rental income) for those above $200K/$250K

37. ACA: My Assessment • Significant progress on coverage. Somewhere between half and 75% of uninsured will be covered • Essentially no progress on cost containment. In fact, the extra coverage and the subsidized exchanges may increase health spending, not decrease it

38. What We Should Have Done and What We Still May Need to Do • Put Total Health Spending on a Budget • Replace Medicare, Medicaid and Employer-Sponsored health insurance with universal risk-adjusted health insurance vouchers • Eliminate the Medicare payroll tax • Improve state budgets by eliminating Medicaid • Increase income taxes and take home pay by eliminating employer-sponsored health ins • Introduce new, dedicated tax source (e.g. 20% VAT)