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The GOP fiscal cliff solution is mathematically challenged
Before even considering if the Republican fiscal cliff counter proposalis a political move or a serious negotiation offer, you first must first discern if the math works. If the basic numbers in a deficit reduction proposal don’t add up it does not constitute a real offer. And as it currently stands, the GOP has a serious problem with math.
The Republicans claim this plan will bring in $800 billion in new revenue without raising tax rates by limiting deductions, even though days earlier the White House put out an analysis showing it would be mathematically impossible to raise that much from high income earners without creating serious issues. The only way to make the Republican plan work is to also raise taxes on the middle class. According to the Gene Sperling and Jason Furman:
- Limiting the cap to those with incomes over $250,000 leaves only $800 billion in revenue. A $25,000 cap that applied to all households would raise taxes by an average of $2,400 on 17 million households with incomes below $250,000 ($200,000 for singles). Treasury estimates show that about 40 percent of the revenue from such a cap would come from these households. Thus, the amount of revenue that could be raised from taxpayers making more than $250,000 is only about $800 billion.
- The need to phase in a cap to avoid a “cliff” reduces revenues to around $650 billion. In practice, it would not be possible to impose a $25,000 cap on itemized deductions beginning at an income threshold of $250,000. Doing so would create an immense “cliff,” where someone whose income rose to $251,000 could suddenly owe thousands of dollars more in taxes. Accounting for a realistic phase-in reduces the revenue from households above $250,000 by about 20 percent, to about $650 billion.
Similarly, the GOP has a math problem regarding planned saves from Medicare and Social Security. According to Paul Krugman, adopting all the specific policy changes they have put forward would only generate around $300 billion in savings while imposing serious hardship on regular Americans. That is significantly less than the $800 billion Republicans claim they want to saves from Medicare, Medicaid and Social Security. Given how strongly the Republicans have rejected many other proposals to reduce Medicare spending put forward by President Obama, such as the independent payment advisory board, they need to explain where the rest of that money will come from.
Until the Republicans figure out a way to make the math work their offer cannot be considered a serous plan, because it is not even a “plan.” A plan requires specific ideas that at least stand a chance of achieving the stated goal.
Photo by cogdogblog under Creative Commons license
13 Comments
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About FDL Action
70% of Republicans think you are wrong and the other 48% think you are right!
Why not reject the Democrat’s plan to make cuts in Medicare too?
Do you really want to let them turn Medicare into a managed care product, with rationed overall care instead of paying your doctor directly for services received?
That’s from the Dem economist’s plan.
Do you really want to be forced into a managed care system? Did you know 71% of Medicaid patients were forced into managed care programs? Is that what people expected when they elected Obama? Managed care for your golden years?
Link to the pocket-sized-Medicare-plan wizards I referred to in #2.
Actually, studies have shown that only 2 out 5 republicans think……..
That’s all. Just 2 out of 5.
As Crocodile Dundee would say “Think what?”
Do you think Democrats would be like 3 out of 5?
Jon,
I love your article about their “math problem’ even with that math wiz kid Paul Ryan.
I would suggest that they have a plan, they just cannot divulge the plan because they know it would kill them in 2014.
Part of that plan in my humble opinion, is to get rid of mortgage interest deductions at tax time for a majority of regular Americans who just happen to take advantage of that benefit at present.
If they divulge that part of the plan, it is a killer for any future Republican dreams of being re-elected.
Since the “stated goal” is at this point a sham, the “specific ideas” are a sham too.
I suppose they chose that number in order to “claim” that it’s similar to the $829B that would be expected to be raised by raising the top tax rates from 35% to 39.6%.
If we did both, raise taxes and limit deduction on the rich, next year’s 1.1 trillion dollar deficit would be reduced to a 0.94 trillion dollar deficit. Seems to be a lot of arguing about very little impact.
I like your analysis of the GOP offer, but if you look closely you’ll see that it actually raises more revenue from upper income people than the plan President Obama put forward.
When you raise income tax rates, higher income people just shift their pay into lower taxed income streams such as stock options, or deferred payments.
The only real way to bring in revenue is to close the loop holes. Limiting the deduction to $25,000 per year would slightly hurt people making 180K to 199K in order to raise the $800 billion talked about, but why are they not considered high income earners???
I think President Obama should take a deal that closes loop holes, but not a deal that cuts medicare, or Social security. Reduce military spending instead, and then grow the economy so we can reduce the deficient to a smaller more manageable number.
Also remember that tax rates where already raised on high earners. Jan 1 2013 the 3.8% surtax on earnings dividends, stocks, capital gains, annuities, etc goes into effect. and also a 0.9% surtax on upper income earners (but I’m not sure how this 0.9% tax works) so the top rate is already going from 35% to 39.7%. President Obama is pushing for another 3.6%. Plus the IRS is still trying to figure out if the 3.8% tax will include Rental income, we should get a ruling on Wednesday.
Nice to read discussions about raising revenue without so much deficit scolds. With all the REIT’s investing heavily in rental properties from the foreclosure crisis I would bet the IRS goes in favor of investor’s. What happens to all this if we go into recession again (it looks pretty likely IMO)? Spending will be the focus and revenue and deficits will be forgotten for awhile.
I suspect the 0.9% you speak of is for Medicare. It’s a payroll tax, so doesn’t get counted in income tax rate adjustment.
DC has a math problem. Fixed :)
I’m personally way past blaming things on the GOP. I think the main problem is national Democrats who know the GOP is full of crap and support them anyway. To me, that’s much worse.
I’ve tried to explain that loopholes aren’t necessarily that horrible of an idea. The truth is the rich do get a much greater benefit when it comes to stuff like mortgage interest deduction. Joe Schmoe buys a house for $200,000 and his interest write off is less than the standard. Meanwhile folks like Romney get to write off interest on their mansions to defer paying taxes on their millions.
Stuff like Mortgage interest should be capped at the median price for housing. For that matter, I don’t think the government should be insuring through the FHA any loan for more than that either. If you want a larger home either come up with the cash, find a private third party to “insure” the value for the bank, or make do with a house that is the same size as what the rest of us own.
The system is definitely rigged to the benefit of those who already have rather than to the benefit of those striving to own something.