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Netdebt to GDP, percent no Medicare reimbursement cuts 105 Cuts to discretionary and entitlement spending What's on the menu? US long-term debt scenarios WZ All tax cuts extended; AMT indexed to inflation; Reid-McConnell, Phase | ae e Fd Top two brackets return to 2001 levels: phase- aa wn out of itemized deductions; some discretionary oo ReldPlan ¢ J spending cuts; Medicare reimbursement freeze ss Pres. Budget Discretionary and entitlement cuts (CPI chain 85 Boehner 1 Plan —_ weighting), limit on itemized deductions, “bracket 80 ; creep" (faster migration to higher tax brackets) CBO Baseline 75 —__ All tax cuts return te 2004 levels; AMT no longer 70 Gang of Six @ indexed to inflation; Medicare reimbursement cuts to Doctors proceed as planned 85 - — Tax rates lowered, combined with reduction in 200 2012 2073 2015 2016 deductions to generate net tax revenue Increase: Source: CBO, news reports, Gang of Six praposal, J.P. Morgan Private Bank. cuts to discretionary and entitlement spending Ihave a feeling that revenue increases will be a material (e.g., 25% or more) part of the deal. The Peterson Foundation’s sampling of 6 policy groups shown below indicate that 5 of 6 recommend revenue increases compared to where we are today; the Heritage Foundation’s “Woody Guthrie Memorial Budget Plan” is the only exception. What kind of revenue increases? Raising the top two brackets, which would affect joint filers with adjusted gross incomes above $212,300, would raise $450-$700 billion over 10 years (depending on whether you use OMB or CBO numbers). If they cannot agree to raise rates, another option (as in the Gang of Six plan) would be reductions in the deductibility of state and local taxes, sales taxes, mortgage interest, etc. As this gets sorted out, let’s hope everyone recognizes that the US tax system is already progressive. As shown in the chart below, effective Federal tax rates for low earners have dropped to zero over the last decade, even after including FICA taxes. News reports that the US tax system is regressive make me want to throw hamburgers at the screen. Revenues and Spending as a '% of GDP Revenues Spendin What a progressive income tax system looks like Fiscal year 2011 ae CK, ST EC Combined effective federal income and FICA tax rates Fiscal years 1950-1969 17.5% 18.1% High earners Fiscal years 1970-2010 18.0% 20.8% 70% Estimates for 2035: an CBO alternative case 10% Median American Enterprise earners Bipartisan Policy Center 5% Center for Am, Progress O% Economic Policy Institute Heritage Foundation Roosevelt Institute Source: OME CHO, Peterson Foundation 2097 Fiscal Sunn. Low earners 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Tax Policy Center Europe: Finally (!!), but now what? For the first time since 2009, it felt last week like European policymakers were trying to get out in front of things. In exchange for a modest amount of “private sector involvement”, Germany agreed to more generous financing terms for Greece, Ireland and Portugal, and an expanded role for the EU-IMF lending facility (see following page). What would the plan accomplish if implemented? While Greek debt to GDP ratios would remain well over 125% of GDP (the IMF estimate for next year is a ridiculous 170%), Greece’s near-term financing obligations would decline, due to debt buybacks, exchanges into long maturity bonds, and interest grace periods on new EU loans. More broadly, the plan also allows for money to be lent to countries before they enter into an IMF program, for recapitalization of banks. All things considered, it’s the broadest defense of the Monetary Union so far. On paper, it even looks like a free ride for holders of Greek paper that don’t participate in the debt exchanges (they would be paid at par). So, what’s not to like? Well, there are still questions about Greece: ** There’s a big difference between generous financing terms and generous economic terms. Greece must still meet an enormous 5%-6% primary budget surplus target (government revenues less spending, pre-interest) during a recession ** Greece must execute on its asset sale targets, despite having little success or experience doing this in the past HOUSE_OVERSIGHT_025216