too-many-budget-plans.pngComedians Bud Abbott and Lou Costello brought 1950s audiences to their feet with their iconic “Who’s on First” skit. Costello became hopelessly confused by the names of those playing first (“Who”), second (“What”), third (“I Don’t Know”), etc.

2011 audiences can identify with Costello as they try to understand all the budget plans Washington is considering these days. Perhaps this summary will clarify things:

Plan A. The August 2 “Budget Control Act” raises the debt ceiling by $900 billion (from the existing $14 trillion) and authorizes an additional $1.5 trillion increase if either (1) a Congressional super-committee comes up with an additional $1.5 trillion in deficit reduction that House and Senate approve; or (2) automatic cuts are triggered in entitlement programs like Medicaid and Medicare as well as national defense. Read more.

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Too Many Budget Plans: Who’s on First?

Mon Sep 26, 2011

too-many-budget-plans.pngComedians Bud Abbott and Lou Costello brought 1950s audiences to their feet with their iconic “Who’s on First” skit. Costello became hopelessly confused by the names of those playing first (“Who”), second (“What”), third (“I Don’t Know”), etc.

2011 audiences can identify with Costello as they try to understand all the budget plans Washington is considering these days. Perhaps this summary will clarify things:

Plan A. The August 2 “Budget Control Act” raises the debt ceiling by $900 billion (from the existing $14 trillion) and authorizes an additional $1.5 trillion increase if either (1) a Congressional super-committee comes up with an additional $1.5 trillion in deficit reduction that House and Senate approve; or (2) automatic cuts are triggered in entitlement programs like Medicaid and Medicare as well as national defense.

This last-minute compromise between Congressional republicans and the White House averted a potential U.S. Treasury default on government bonds and set the stage for the heavy lifting that the new super-committee will need to do in finding another $1.5 trillion in longer term deficit reduction by this November 23.

Plan B. The September 8 “Jobs for Americans Act” announced by President Obama in a speech to a Joint Session of Congress. Responding to stubbornly high unemployment and a stalling economy this $447 billion plan would, among other measures, expand the existing 2% payroll tax holiday and extend it to employers.

While not labeled an economic stimulus plan per se, the Jobs Act is intended to have that effect—to provide more after-tax income for consumers and reduce employers’ costs of new hires. Also included would be special new construction projects and aid to state and local governments to retain teachers and other government employees.

Plan C.The September 12 “Pay-For,” formally titled by the White House as the “Sectional Analysis,” spells out the President’s plan for paying for the $447 billion Jobs Act, thereby making good on a pledge that the plan not add to the already mammoth federal budget deficit.

Under this plan fully $400 billion of the $447 billion would be offset by establishing a new “cap” on itemized deductions and exclusions claimed by families making more than $250,000 and individuals making more than $200,000. Regardless of taxpayers’ actual tax bracket, e.g., 35% for high-income earners, itemized deductions would be limited to a tax value of 28%.

Congress is not expected to look favorably on this means of paying for economic stimulus, particularly as charitable organizations and the housing sector could be adversely affected by limits on the deductibility of contributions and home mortgage interest. It is possible that the new super-committee could come up with an alternative way to pay for the President’s jobs plan—assuming Congress decides to approve it.

Plan D. The September 19 “Economic Growth and Deficit Reduction Plan,” in which the President proposed to reduce federal budget deficits by $3.6 trillion over ten years, including $1.5 trillion in tax increases.

While details are scarce it appears that tax increases would take the form of allowing Bush-era income tax rates to expire in January 2013 for those earning in excess of $200,000 for individuals and $250,000 for couples. Increasing tax rates for higher-income earners would raise some $800 billion in additional revenue.

Part of Plan D includes a new so-called “Buffet Rule” (named for billionaire investor Warren Buffet) to ensure that wealthy taxpayers have a minimum tax rate that is higher than what middle income taxpayers pay. While it’s not yet clear what that tax rate would be or how much additional revenue it would produce, presumably it would operate like today’s alternative minimum tax (AMT).

While these plans have different features there are two common themes:

First, budget deficit reduction has emerged as the key economic policy question of the day. In the U.S. as well as across Europe political leaders of all stripes agree that out-of-control government deficits and accumulated public debts exert a drag on economic growth. While the White House and Capitol Hill have conflicting ideas for how to reduce budget deficits, there is consensus that government must act aggressively to do so.

Second, reducing longer term budget deficits is not necessarily inconsistent with shorter term efforts to boost jobs and economic growth. Expanding the payroll tax holiday from 2% to 3.1% may win bipartisan support and Congress may agree to extend it in some form to employers.

Notwithstanding these similarities, the various plans are characterized by huge philosophical differences, including whether taxes should be increased, whether the growth of entitlements like Medicare and Medicaid should be slowed and, most importantly, how to stop the mushrooming U.S. public debt, now on track to reach 100% of GDP. Can Washington DC compromise on these challenging questions?

Which brings us back to Abbott and Costello and “Who’s on First.” Looking at the complexity of the four plans that have been put on the table, the task facing the new super-committee to hammer out yet another plan and today’s political polarization, we’re reminded that “I Don’t Know” was the name of the baseball team’s star third baseman—and the only answer to the question of political compromise.