Smeal Faculty on the Fiscal Commission Recommendations
November 16th, 2010 - 7 Comments
The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.
Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.
Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:
In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer. Without indexing, Social Security’s finances go out of balance as we live longer. And it’s not draconian at all. They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074. This won’t affect older workers, and middle age workers won’t be affected much. Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition.
I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power).
There are many other fixes, which I’ll discuss in a later blog.
Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:
Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.
Here are some areas of current debate:
1. The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).
2. Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.
3. Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.
There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.
After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.
Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:
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For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington. Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts. It would be better to double the Small Business Administration and half the Department of Commerce.