Bipartisanship in Budgeting

For most of recent memory, especially in years where large deficits loom, the Congress and the President have been unable to reach consensus on a budget in time for the start of the fiscal year on October first. This is almost scandalous, given the impact of the federal government on the economy. The lives of millions of hardworking public servants and contractors hang in the balance while Congress debates, or more likely stalemates. While it is healthy to debate the nature of government from time to time, holding the nation hostage to stage it is not.

When the government is divided between the parties, budgets are submitted "dead on arrival.” This leads to a series of missed deadlines and a likely impasse that threatens to shut the government down at the beginning of the fiscal year. Often, the impasse leads to the need for an Omnibus Appropriation Act, with its attendant pork barrel spending to assure passage (a practice which further undermines citizen confidence in the Federal Government). The same wasteful programs and tax benefits get funded and the budget crisis goes on. This goes on because each side gains political points for blaming the other, while no one has any stake in lessening their own role.

Of course, divided government is not the only reason for lateness. Even majority parties can behave in a hyper-partisan manner, which rules out any bipartisanship and thereby gives minority factions in the majority party a veto against moving forward, especially if these factions seek drastic spending cuts and threaten their colleagues with primary election challenges should they be too obviously thwarted by all but necessity. This has turned Congress into a College Republican State Convention run amok. It demands leadership and the willingness to simply disregard offending members, seeking votes and compromise with the other party. There is no organizational fix for this, just leadership and courage by leadership.

The topic of bipartisanship always comes up when the current majority is facing an electoral rout. There is Balanced Budget Amendment which often includes super-majority requirement to either run a deficit or raise taxes. It essentially guarantees the new minority either a veto or more likely a way to stop the budget process. It is exactly the wrong thing to do.

The right thing to do is to make sure the process moves forward automatically so that shutting down the government is never a possibility.

The federal budget process is broken. It must be replaced with a new budget process that allows for agreement on broad issues and a continuation of government while the details and controversies at the programmatic level are worked out. The solution must include incentives to keep the process moving. To force congressional movement on overall priorities, the administration withholds detailed appropriations proposals until a general solution is passed in both houses of Congress and signed by the President (a Joint Budget Resolution). After this is passed, detailed proposals are submitted and acted upon by the authorization and appropriations committees. A two-year budget process is suggested to assure the process is completed on time.

Phase One: The Joint Budget Resolution

The first phase of the budgetary process is high-level budget enactment. The budget message, revenue estimates and increases, departmental, independent agency and functional spending totals, and deficit projections are included in the Joint Budget Resolution proposal. Until the resolution is enacted the Executive withholds detailed spending estimate or authorizing language. The proposal is submitted to Congress during mid-January, with passage of the Joint Budget Resolution by the July 4th recess.

A Joint Committee on the Budget considers the resolution. The Committee consists of members of the leadership of both houses, various committee chairs and members, and members not assigned to any major authorizing or appropriations committee (who shall be a majority). The Chair alternates between chambers. Such a committee is necessary to expedite action.

After the Committee reports the resolution it is considered in an expedited fashion. If there are differences between the amended versions of the resolution it goes back to the Committee one final time, and acts as a conference committee in this case.

The Executive Branch uses the totals enacted in the Joint Budget Resolution as the totals in its detailed authorizations and appropriations submissions.

Control Act Years

During Budget Control Act years, unless a Joint Budget Resolution is passed, the budget caps in the Budget Control Act will be considered allocations for the purpose of drafting appropriations legislation and automatic appropriations should appropriations bill not be enacted by the start of the fiscal year. We suggest that as part of any reform, new caps be set out for the next decade at levels in line with the recently enacted Omnibus Appropriations Legislation. As long as the current tax cuts are in force, the money not collected in taxes should be made up with bond sales, else all sorts of mischief occur in the area of asset accumulation and inflation. Such accumulations are not economic growth, they are the manufacture of speculative investment bubbles that always lead back to recessions and depressions. There is no such thing as a business cycle, only rich people who are undertaxed who invest in garbage.

Phase Two: Authorization

The second phase of the budgetary process is authorization, which begins after the Joint Budget Resolution is signed, in July of the first session. Most of the authorization process is accomplished before the appropriations process begins. To guarantee this, no appropriations bill is marked up in committee in either house until the authorization bill has secured floor passage in that house, including tax and entitlement adjustments. This occurs by February of the second session. At the start of a new President's term honeymoon authorizations changes are submitted by February, with enactment by September so that they take effect October first.

Authorization legislation addresses changes to current law, revised spending ceilings and floors (which the marked up appropriations bills does not exceed or fall short of subject to a point of order), any new programs or program elimination (the only time these occur), changes to agency regulations, adjustments to any entitlement, and estimates of their effect on the next fiscal period.

The revenue committees examine the progressivity of both taxation and spending to assure that the middle class pays for itself and the upper 20% pay for the benefits they receive plus a lions share of the benefits for the bottom 20% of income earners. Corrections in the tax code are enacted as a result of this review. The revenue committees also examine the level for cost of living adjustments (COLAs) and indexing. COLAs and indexing are adjusted so the public sector neither loses or gains as the result of inflation.

As part of this process, authorizing committees consider major regulations enacted since the last authorization. Doing so avoids the practice of appropriators playing games with the funding of regulatory agencies, since Congress has the opportunity to work its will during the authorization process. Before continuing on to the appropriations phase, I briefly discuss ways in which regulatory power is exercised in such a way as to not appear illegitimate by the vast majority of the public.

Increasing Congressional Review of Regulation

A major theme in modern political life is the popular protest against regulations enacted by unelected bureaucrats. This anti-Washington theme aided the campaigns of many recent administrations, including the current one. Other reforms in the regulatory review process increased regulatory accountability to the President. However, these did little to improve the position of Congress.

On June 30, 1983, the Supreme Court ruled the legislative veto unconstitutional in an immigration case, In re: Chada. Since that time a Joint Resolution of Disapproval legislative veto has been enacted as a general case. Several other legislative vetoes have also been acted into law. However, many of these cannot survive the standards imposed by the Chada decision. Therefore, Congressional control of agency regulation remains an open question.

To regain control of regulations, authorization committees review the body of regulations under their purview during consideration of the President’s budget. The President or Independent Agencies submit any changes to their major regulations (enacted since their last authorization) as an appendix to their authorization proposals. If the authorizing committees approve of the changes they do nothing. However, if they are unsatisfied with the changes, or wish to make changes of their own they can at this juncture. These changes are made one of two ways. The first way is to write the change into law, which restricts subsequent action. If circumstances change the agency then seeks legislative relief or waits until the next authorization cycle. This option limits the ability of agencies to deal with emergencies, making it undesirable. The second way is to change agency regulation by law, allowing for further change as circumstance changes. This almost superficial difference preserves flexibility in the regulatory process, making it desirable.

Enactment of this proposal firmly places regulatory initiative with the Congress. This approach gives the people say in the regulatory process through Congress, strengthening representative government. In doing so it helps the less well organized (who know how to reach their Congressman, but not the administrative agency). The regulatory review provisions have two more advantages over the status quo. First, they bring the regulatory review process into sharper view, allowing for more involved citizen input. Second, they avoid the constitutional pitfalls of the legislative veto.

Note that this process is far superior than having a President from the business sector writing memos to agency heads thinking he is repealing regulations, as the Administrative Procedures Act does not allow such arbitrary and capricious behavior without public comments and the inevitable lawsuit if the repeal is contrary to legislative intent. This method, however, lets the legislative process work its will in regulatory matters without interfering with the ability of agencies to utilize their expertise and the public, including the regulated, to comment.

Phase Three: Appropriations

The third phase of the budgetary process is appropriations. The Executive Branch begins preparing its detailed appropriation submissions after passage of the Joint Budget Resolution in July of the previous year. It modifies its targets when Authorization legislation is marked up. The Appropriations submissions clear OMB and go to the Hill by March 15th of the second session. The submissions for each program are between the ceiling and floor listed in the authorization legislation. The total for the agency or department matches the total found in the Joint Budget Resolution. Agency submissions reflect program financial performance. Agency personnel defend the submission.

Appropriations sub-committees do not markup legislation until after the authorization has cleared the full chamber. The full Appropriations Committees reports by June 15. If the total for an appropriations bill exceeds the total specified in the Joint Resolution the bill must clear the Joint Budget Committee before going to the floor. Legislation gets to the President's desk by Labor Day.

If an appropriations bill is not enacted prior to the start of the fiscal period (October 1) the current distribution of spending within current law is maintained, minus programs cancelled in the authorization phase, at the total set in the Joint Budget Resolution. This prevents the government from stopping at the end of the fiscal year. Likewise, if there is no JBR or authorization legislation passed, the Budget Control Act totals, with the same current distribution as current law, are enacted.

This last measure is not meant to be used and it should not be if the Congress operates bipartisanly under effective leadership. If that leadership breaks down, however, the government absolutely must have a backup procedure.

Enactment of this proposal restores discipline to the budget process. Every actor in the process has specific responsibilities and incentives to meet them. Each actor maintains his share in the process, but not more than his share. The Executive Branch is forced to offer realistic proposals. The Legislative Branch meets its deadlines. The Federal Government then stops arguing about the budget and gets on with the business of governing.

Fiscal Reform

The remainder of our comments address the budget itself. If our usual changes suggested reforms are enacted, they will require additional changes. In this we echo the comments by Dr. Douglas Holtz-Eakin during your first hearing on April 17^th, which happened without much fanfare. Others have also said that if the content is not fixed, the process cannot be. Of course, we disagree with Dr. Holtz-Eakin’s prescription for cutting entitlements, as we will explain below.  As usual, our comments are based on our four-part tax reform plan, which is as follows:

• ·         A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• ·         Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
• ·         Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• ·         A VAT-like Net Business Receipts Tax (NBRT), essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age sixty.

When these proposals were first submitted to the Fiscal Commission in 2010, the value added tax in bullet one was regionally set, which would have required a constitutional amendment to overturn the requirement of uniform excise tax rates. The actual establishing of a regional caucus would not require constitutional change, so Congress could give it a trial before setting it in stone.

Regionalizing the domestic and military functions of the executive branch under regional vice presidents could be done by statute or even executive order, although an amendment would be required to confine election of the RVP to only the electors of that region. In this regime, either the remaining national caucus or each regional caucus would enact its Joint Budget Resolution, taking into account regional spending and economic conditions, which would be signed or allowed to pass by the President at the recommendation of the RVP. The regional caucus would enact the VAT rate and spending bills, with a balance requirement, automatic enactment of appropriations by the start of the fiscal year and sequesters and VAT rate adjustments if the budget is out of balance.

The second ballet relates to the recent tax law. We are on record predicting that enactment of the Fiscal and Job Cuts Act (not a typo) will restrict wages and cause other labor cost savings so that executives can cash in on the lower tax rates by earning higher bonuses, so that any economic gains (and growth could come faster) would be from deficit spending. While some companies gave very visible bonuses for the holidays, they did not als0 increase salary levels noticeably. Productivity has made huge gains but wages have not, mostly because employers have a market advantage in the down economy, which is good for CEOs and donors, but bad for the nation.

The tax law was a classic piece of Austrian Economics, where booms are encouraged, busts happen with no bail outs and the strong companies and best workers keep jobs and devil take the hindmost. It is economic Darwinism at its most obvious, but there is a safety valve. When tax cuts pass, Congress loses all fiscal discipline, the Budget Control Act is suspended and deficits grow. Taxpayers don’t mind because bond purchasers are sure to pick up the slack, which they will as long as we run trade deficits, unless the President’s economic naivete ruins that for us.

We remind the Committee that in the future we face a crisis, not in entitlements, but in net interest on the debt, both from increased rates and growing principal. This growth will only feasible until either China or the European Union develop tradeable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer. While it is good to run a deficit to balance out tax cuts for the wealthy, both are a sugar high for the economy. At some point we need incentives to pay down the debt.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt (although this will increase). People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands.

The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive?

If you cut entitlements, growth will be reduced, although wealthier Americans will have more money, which will lead to asset inflation and another sizeable recession, akin to 2008. We had been worried about entitlement cuts, we no longer are. The votes are simply not available in the Senate to enact them.

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.

Those who object to entitlement spending likely object most to its redistributive function and would strengthen those reforms that allow wealthier savers to retire with more while the poor have less. We absolutely object to that. It is not what we would call an American action.

The problem with entitlements is not overspending, but too drastic a set of tax cuts on the wealthy. If Social Security or Medicare is suffering, and it is not, then changing how revenue is collected fixes the problem easily. Simply lower the employee contribution to FICA so that rich people get less, decouple the employer and employee contributions with the employer contribution funded to each worker EQUALLY (without regard to income) and through a subtraction VAT or Net Business Receipts Tax with no cap, as per our standard recommendation.

Our tax reform plan alters how we deal with entitlement spending, including Social Security, by shifting payroll and a good bit of income taxation (including pass-throughs) to a subtraction value added tax/net business receipts tax (NBRT), where certain entitlements can be shifted to employers in lieu of paying a portion of the tax, with this encouraging both employment and participation in training programs in order to have access to social services.

These deduction and credits could include everything from the last two years of undergraduate and graduate education to a more robust child tax credit to health care reform that encourages hiring medical staff directly (thus matching the incentive to cut cost to the ability to do so) to retirement savings in lieu of Social Security, although the savings should be in the form of employer voting stock rather than unaccountable index funds run from Wall Street. These reforms can be hammered out next year or in the next Congress, but the right tax to hold them is clearly the NBRT.

The NBRT could be national or regional, with health care taxes or exclusions and the child tax cut all based on the regional economy, as recommended by economists in the central government who would all be moved from Commerce and Labor to Treasury, along with the Census. The mix of entitlements and tax expenditures would be set by region according to how each is used and ow poverty and employee-ownership are affected (and personal accounts would fund employee ownership, not Wall Street speculation) and accounts would be insured.

This plan gives regions an incentive to cut discretionary spending and transfer entitlement functions to employers, as well as to encourage the wealthy to finally pay their fair share of taxes to virtually eliminate the debt. It gives Congress, nationally and maybe regionally, an incentive to get its work done (until it has no work). It is everything even the Tea Party would want, except it is also good for workers and the poor. We dare you to consider it.

Thank you for the opportunity to address the Joint Select Committee.  We are, of course, available for direct testimony or to answer questions by members and staff.