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
The President’s Plan
• American Jobs Act – introduced in 9/2011 – some of it has
been enacted
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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
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
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%
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?
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.
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
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
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
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)
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
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
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
Romney on Immigration
• Raise visa caps for highly skilled workers
• Grant permanent residency to eligible
graduates with degrees in math, science or
engineering
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
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
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?
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
Simpson-Bowles: Illustrative Personal Taxes
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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
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
Simpson-Bowles: Discretionary
Spending Cuts
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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.
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
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
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
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
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?
Why Corporate Tax Is Not Borne by Customers
Profit
Profit Before Corporate Tax
Profit After Corporate Tax
Price
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.
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
Affordable Care Act: Background
Figure 1: Percent of Americans without Health Insurance
35
30
1999
2009
Percent
25
20
15
10
5
0
<18
18-24
25-34
35-44
Age Category
45-54
55-64
65+
Affordable Care Act: Background
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?
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Those who are eligible for Medicaid but did not register
Young and healthy
Workers at small firms
Long-term unemployed
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
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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
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
ACA: Employer Mandate
• Firms with 50 or more employees must offer
health insurance
– Penalty for not offering insurance is $2,000 per
employee
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
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
What We Should Have Done and What
We Still May Need to Do
• Put Total Health Spending on a Budget
• Replace Medicare, Medicaid and EmployerSponsored health insurance with universal riskadjusted 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)