A Compromise Where America Wins

By Tom Pallow of Third Way Progressives, 3/14/11

It is obvious that we cannot continue to extend the debt limit every two weeks from now until October 1. Therefore, we need to create a compromise extension of the debt limit with the Republicans in a way that most benefits the American people and therefore our party. The key to developing such a beneficial compromise is to have policies to offer the Republicans that the American people will want and that Republicans cannot refuse in exchange for commitments we want, and very importantly, offering them so that they occur in the proper sequence.

For example and to start with in this sequence, it is clear that the Republicans are going to be extremely persistent when it comes to demanding that the federal government cut $61 billion out of this year’s budget. This is especially true given the American people’s concern about our deficit, and the fact that $61 billion is only about 3% of our projected 2011 deficit. However, the American people will also be nervous about the projected 400,000 or more jobs that will be lost in 2011 and the 700,000 fewer jobs by the end of 2012 due to the $61 billion cut (1). Our best policy would be to offer, in exchange for cutting the $61 billion, the tax cuts in our FICA tax plan. These tax cuts would only cost about $14 billion in the first year, but they would also generate more than 400,000 jobs in the first year. Therefore, we would be increasing the amount of jobs in the US while cutting $47 billion in federal spending. At the same time we would also be able to argue that we are shrinking the size of the federal government while we are increasing the size of the private sector. Given that the size of the federal government in relation to our overall GDP is now the highest it has been since WWII, this would be a good thing. It would bring confidence to the private credit markets, and therefore bring even more economic growth.

Very importantly, as part of this compromise sequence, we would require that a vote be taken in 2013 regarding the tax increases in our FICA tax plan. This would entail taking the FICA tax cap up to 90% of American incomes or at about $180,000. This tax increase would generate about $336 billion over 10 years. Plus we would propose that non-C Corporation business owners with US employees would be able to exercise US Employee Tax Credits in a way that would allow them to drop their overall tax bill to as if the FICA tax cap had not been raised. This would create an even greater incentive for wealthy individuals to employ in the US. Details of our FICA tax plan can be found at our website, ThirdWayProgressives.org.

This brings us to the second major step in our road to American recovery. This step would be to immediately enact the tax cuts in the personal income and capital gains portion of our tax plan. By enacting these tax cuts now we would be creating absolute certainty within the private sector that neither Democrats nor Republicans would be working to raise taxes on American job creators. In fact, American job creators would be certain from that moment on that Democratic Party tax policy would be to lower their effective tax rate, especially those who hire in the most socially responsible ways. Such certainty, along with our FICA tax cuts, would create an environment that would be very conducive to private sector job growth in the US. The tax cuts in the personal income and capital gains portion of our plan would only cost about $10 billion in the first year and $105 billion over 10 years. So this year we would still be cutting over $37 billion in federal spending.

However, in exchange for all the above tax cuts we would push for all of the tax increases in our overall tax plan. We could achieve this one of two ways. Our first effort should be to, in exchange for all of the above tax cuts, enacting some or all of the tax increases in our plan this year, with the tax increases scheduled to go up in 2013. Of course the Republicans would probably not agree to these tax increases, but we would embarrass them for stopping the future tax increases as part of a tax package that would grow the economy now. Nonetheless, the Republicans may not agree to any tax increase, even if they are scheduled to increase in 2013. Therefore, we should enact all the tax cuts in our plan this year, and have all the Democrats and President Obama run in 2012 on enacting all of the tax increases in our plan in 2013.

It might appear absurd that we would run on tax increases in 2012, but there are three factors that would make this a winning issue for us. One, the American people are very concerned about the federal deficit and debt, and they know that tax increases will have to be part of closing our fiscal gap. Two, after one year of federal budget cuts many more Americans will be fine with raising taxes on the wealthy if it means less government cuts. Thirdly, and by far most persuasive, Democrats will be able to make the argument that the higher the tax rates are raised on the wealthy who do not employ Americans, while the lower are tax rates on those who do, the more private sector jobs and federal tax revenues will be generated! This is because, for example within all of the income that is produced by the top 2% of US income earners, only about 19% of all that income is the profits of any business that is taxed as personal income that has one or more employees in the US (2,3&4). And remember, within our FICA tax plan we would also let employers lower their overall tax bill through exercising our US Employee Tax Credits. For more information on all of our tax plans visit ThirdWayProgressives.org.

Our overall tax plan will raise more federal revenues than any other tax plan, $1.25 trillion over 10 years versus $925 billion and $700 billion over 10 years for the Deficit Commission’s plan and President Obama’s plan respectively. These differences would be much greater if these plans were dynamically scored! Our plan would create or save many, many more jobs than any other proposed tax plan, over 11,553,000 between 2013 and 2020. Studies show that the Obama tax plan would cause the loss of as much as 6,243,000 jobs between 2013 and 2020 (5). While it would be very surprising if studies showed that the Deficit Commission’s tax plan did not lose even more jobs. Therefore, the private sector jobs that would be created in our plan would stimulate the economy even more and generate even more tax revenues. The Obama and Deficit Commission’s plans would do the opposite! If all three tax plans were dynamically scored our tax plan could easily raise up to 4 to 5 times as much federal revenues as the other two plans!

Yet, even given the fact that our tax plan would raise enough to cover about 50% of our deficit gap, we will still need to do other things to completely control our debt. Hence, the rest of the fiscal gap will need to be closed by other means but tax increases. The key here for Democrats is to emphasize moving government resources into more efficient activities that help to grow the private sector. Many of these ideas can be found on the “Weekly Blog” section of our website, ThirdWayProgressives.org, especially within the paper titled, “The US Employee Tax Credit, the Environmental Fair Tax, Industrial Policy, and Saving Our Healthcare System and Our Budget: A Democratic Budget Outline.” Remember, the variables to keep track of when it comes to our budget deficit are our federal revenue and spending in relation to overall GDP. Therefore, the more we can grow the private sector, the better will be our federal revenue and spending to GDP numbers.

Yet even with an increase in GDP, at least in the short run some cuts will have to be made. The best cuts to be made in the short run are in those areas that cost us the most but would be cuts that would least slow the economy, like Medicare, Medicaid, and Social Security. These cuts would also be best made in a sequence that least adversely affects the economy but best puts the credit markets at ease. Such a policy would be to raise the retirement age for all those 55 or younger to age 67. This policy would send the message to the credit markets and the rest of the world that we are getting serious about our debt. At the same time this policy would not pull any consumer demand out of the economy.

Progressive activist will complain that the government is breaking a promise to the American people, but when Social Security was first enacted in 1935 the average American man lived to be age 60 and the average American woman lived to be 64. Today these numbers are 76 and 81 respectively. Also, in 1950 there were 50 workers for every one Social Security recipient, today there are only 3. The numbers for Social Security just aren’t sustainable, even with raising the FICA tax cap up to $180,000, and even with indexing that to inflation. So this is the fairest and most logical way to save money and make the system solvent. The quicker we make the system solvent, the more confidence there will exist in the credit markets and the private economy. The quicker we make this change the better, so it would be best to make this change this year. The vast majority of the American people will see this as real leadership and reward Democrats for it. Plus, the American people will vote for us in 2012 to raise the FICA tax cap in 2013.

The most complicated issue for us to settle optimally is healthcare. 2012, both the election and congressional hearings, should feature healthcare as the main issue. President Obama pulled an ingenious move by challenging the governors to come up with a healthcare plan that would insure as many people as his healthcare bill. By doing this, President Obama has opened up the ability for states to experiment in ways that both progressives and conservatives only dreamed of doing during the healthcare debate of the last two years.

For example, more progressive states will now be able to create a public insurance option. These states could then create an association, and along with Medicare and Medicaid, use their bulk purchasing power to lower their overall healthcare costs.

Along with such innovations as above, it is just as important that the federal government make it as easy as possible for people to be able to buy health insurance across state lines. Given past interpretations of the commerce clause, there is no way that the states should be able to make their healthcare regulations so idiosyncratic that states have so few health insurers. These states are infringing on the personal freedoms of their own citizens. In fact, it should be the federal government’s role to make the private health insurance industry as competitive as possible in each state with as many private options as possible in each state. Further, private insurance companies with a very large national presence would then be able to team up with Medicare and Medicaid in order to use their bulk purchasing power to lower their overall costs of healthcare.

Tort reform should also be a major component for the future of healthcare when it comes to healthcare for the poor. This would be true for both the private and public options. Healthcare is an art. Doctors and health providers should not have to make amends for educated, but still artistic decisions that go bad. They should only have to pay for decisions that even a lay person would know to be incompetent, or if they withhold information.

Along with the above changes to healthcare, the most important change that could be made to lower the cost of healthcare is to have a complete vertical integration of the healthcare system, wherein health providers are  also paid per client and not per procedure. Federal law can help here. We will know that our healthcare system is working optimally when a person’s private or public option health provider employs virtually all employees in a hospital or a wing of a hospital. State and federal law can help there. The system will also be working optimally when, private and public option health insurers can collaborate with Medicare and Medicaid to bid down the cost of their healthcare. Federal and state governments must help here too.

Right now American politicians have to accept that many of its states are not going to except a “big government solution” for anything while other states will demand them. A key to good government in the future is to provide both options where they are wanted so that much more competition exists.

The sequence for how we reform the just passed healthcare law is of great consequence. Democrats should spend 2011 passing the above proposed tax and Social Security reforms. Yet the primary issue in 2012 should be about saving and optimizing Medicare and Medicaid, and about reforming the newly passed healthcare bill. There should be congressional hearings on these issues in late 2011 and early 2012. By the summer of 2012 President Obama and the Republican presidential candidate should be competing to sell voters on competing proposals to reform the new healthcare bill and Medicare and Medicaid. It would be unfortunate, and politically to their disadvantage, if the Republicans, unlike we Democrats, proposed insuring less Americans than would the Affordable Care Act. If we can come up with a reform of the Affordable Care Act that is acceptable to our base and independents, Democrats will win in 2012 if they run on this reform. Then in 2013, the party that wins the presidency, along with those in Congress, should structure into law the healthcare plan of the winning party. Whatever law, or amendments to existing law, that are drafted in 2013 should not go into law until 2015. In this way the American people would have one final vote in the election of 2014 regarding what they thought of the legislation that was written in 2013.

Given that our nation now faces major problems that need to be solved, the best way to solve our biggest social and economic problems is to allow the American people to have elections that best determine the solutions that are enacted. The timelines and sequences of the proposed legislation in this paper achieve that.

Also, it is evident that we are now in a period of American history where Americans want many of our lingering and difficult problems to be solved, like healthcare, a lack of increase in real incomes for our poor and middle class, and our federal debt. Therefore, the American people are going to reward the politicians and party that run on very specific and workable solutions to these problems, and not political dogma! The American people will reward the party that pushes a positive agenda and not just fear of what the other party will bring. President Obama would greatly benefit by running on the above policies and the above sequence of enacting them into law, but more importantly America would greatly benefit. Wouldn’t that be great if we led, and ran on, and forced the other party to run on, proactive agendas rather than just fear of the other party! Now that would really be progress. That would be progressive.

1. Mark Zandi, Moody’s Analytics: A Federal Shutdown Could Derail the Recovery, February 28, 2011.

2. Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.

3. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.

4. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.

5. Obama Tax Hikes: The Economic and Fiscal Effects,  Published  onSeptember 20, 2010 by William BeachRea Hederman, Jr.John Ligon,Guinevere Nell and Karen Campbell, Ph.D. Center for Data Analysis Report #10-07