From TaxVox: Rubio’s ambitious consumption tax would reduce revenue by $6.8 trillion, give most benefits to the highest-income households

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February 11, 2016

Senator Marco Rubio would convert the income tax into a progressive consumption tax, an ambitious idea that would eliminate the income tax’s penalty on saving. However, a new Tax Policy Center analysis finds that Rubio’s version would slash federal tax revenues by $6.8 trillion over the next decade with most of the benefits going to high-income households. Unless Rubio offsets those revenue losses with big spending cuts, he’d lose most if not all of the economic benefit of his plan.

Rubio tax plan

Rubio tax plan

Read the rest on TaxVox.

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Can economic growth really fix Social Security?

February 5, 2016

In less than 20 years, according to the latest official projections, Social Security will no longer be able to pay full benefits to retirees and people with disabilities. Yet, presidential candidates aren’t talking much about how they would fix the problem.

Democratic candidates Hillary Clinton and Bernie Sanders want high-salaried workers to pay more Social Security taxes. A few Republicans, like Jeb Bush, Chris Christie, and Marco Rubio, have proposed raising the retirement age and restricting benefits for high-income people to shore up Social Security. But 7 of the 12 Republicans who competed in the Iowa caucuses don’t offer any specific ideas on their websites about how to close the funding gap.

Republican candidate Mike Huckabee dropped out of the race after the Iowa caucuses this week. But during a debate last month, he offered a painless solution for Social Security: “Here's the fact. Four percent economic growth, we fully fund Social Security and Medicare. Our problem is not that Social Security is just too generous to seniors. It isn't. Our problem is that our politicians have not created the kind of policies that would bring economic growth.”

Some left-leaning commentators have made the same argument. Strong economic growth would raise earnings, which would boost payroll tax revenue going to Social Security, eliminating the need to cut benefits or raise taxes.

Is the solution really that easy? Unfortunately, it isn’t.

Four percent growth year after year is unrealistic. It’s been more than 40 years since we last completed even 10 years of 4 percent average annual growth (in inflation-adjusted dollars). And back in the early 1970s, the labor force was growing more than 2 percent a year as the baby boomers were coming of age and many women were entering the workplace. It’s going to be a lot harder to achieve that growth over the coming decades when the labor force is projected to increase only 0.5 percent a year.

But let’s say we could somehow turbocharge worker productivity enough to achieve average real economic growth of 3.4 percent a year indefinitely (and even higher rates in the short-term as we continue to recover from the Great Recession), instead of the 2.1 percent long-term rate that the Social Security trustees assume. This is optimistic, but it did happen between 1995 and 2005 (albeit when the labor force was growing more rapidly than today). Let’s assume that all of this additional growth results from higher productivity, instead of by expanding the labor force through more immigration or higher employment rates, and that it raises earnings uniformly for all workers.  

Crunching the numbers with DYNASIM, Urban Institute’s projection tool, we find that such economic growth would in fact significantly improve Social Security’s long-run balance sheet, pushing back by three decades the date when the system could no longer pay full benefits, from 2035 to 2064.

Impact of Economic Growth on the Social Security Trust Fund Balance, 2020–85

But those financial gains won’t last. Strong economic growth generates a lot of tax revenue for Social Security right away without immediately changing benefits. Over time, however, economic growth puts the system on the hook for much higher benefit payments. As the economy grows faster and people earn more, they eventually receive more Social Security benefits once they retire.

Under the high-growth scenario we considered, those higher benefits start squeezing Social Security by about 2050, when the system permanently begins owing beneficiaries more payments than it collects from taxes. That annual deficit then soars under the high-growth scenario as more retirees begin collecting sizable Social Security checks, growing much more rapidly than under the low-growth scenario. (These estimates compare annual tax receipts to scheduled benefits, not actual benefits, since Social Security would have to cut benefits paid each year to prevent the system from going broke.)

Impact of Economic Growth on Annual Social Security Deficit, 2020–85

Faster economic growth, however implausible, might delay Social Security’s insolvency but won’t permanently solve the system’s financial woes. Instead, we’re going to have to make hard choices about raising taxes and cutting benefits. The presidential campaign is a good time to begin the debate.

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On the campaign trail, little talk about legal immigration reform

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December 2, 2015

There has been a lot of talk about immigration this election cycle. But candidates and the press focus almost exclusively on undocumented immigration, when the evidence also points to important problems with the legal immigration system.

A recent NPR chart of the candidates’ views on immigration policy only refers to their stances on unauthorized immigrants and border control. Of all the candidates, Marco Rubio, Martin O’Malley, and, most recently, Bernie Sanders offer the most detail on their websites about their plans for legal immigration reform, including fixing employment barriers and promoting family unity. But even these proposals are drowned out by the conversation about unauthorized immigrants.  

And as we know from experience with the Senate’s 2013 immigration bill (S.744), reforming our legal immigration system can be as painful and divisive as the fight over unauthorized immigration.   

What’s broken about America’s legal immigration system?

The current legal immigration system keeps families apart. Children who were separated from their parents through immigration spend, on average, about a quarter of their lives without one of their parents.

Waiting times are long. Over 4 million people are in line abroad waiting to reunite with family members. Annual caps on the number of certain family members allowed in may be too low. Re-entry bars prohibit applicants from coming back to the United States for years if they were once here illegally, keeping families apart. And affidavits of support, which require the sponsor to accept financial responsibility for the applicant, can discourage family reunification and keep the poorest families apart.     

If family considerations don’t move anybody, let’s talk business. The H-1B temporary worker visa program for highly skilled workers is also broken. The caps are possibly too low, the process is easily manipulated by a few firms, and there is little oversight. The H-1B visas have become a back door to permanent immigration, and skilled workers with no immediate family members in the United States have no other way to get in.

Employment-based permanent resident visas are hard to come by. From 2009 to 2013, only 12 to 16 percent of all permanent resident visas were awarded on an employment basis. The maximum number of these visas allotted to each foreign country is capped at 7 percent, which does not reflect the make-up of the US foreign-born population nor employers’ needs for more IT and STEM workers primarily from China and India.  

With the aging workforce and low fertility rates, immigrants keep the labor force growing and help somewhat with Social Security solvency. The United States is missing an opportunity to attract and retain talent because our immigration system puts too little emphasis on human capital. US global competitiveness is also at stake by not striking a better balance between family-based and skill-based immigration. All of these problems will persist even if unauthorized immigrants are put on a pathway to legalization or citizenship.

Addressing unauthorized immigration is important, but our legal immigration system needs reform too.

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Marco Rubio’s gas tax cut would give state and local governments flexibility—and political fights

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November 13, 2015

Republican presidential candidate Marco Rubio recently introduced a transportation plan that cuts the federal gas tax 80 percent—from 18.4 cents per gallon to 3.7 cents—and eliminates the Highway Trust Fund’s (HTF) Mass Transit Account. Similar to other devolution proposals, Rubio’s plan would radically diminish the federal government’s role in transportation projects. States would lose federal dollars and gain flexibility—but also inherit political fights.

The federal government currently sends state and local governments more than $50 billion a year ($44 billion for highways and $8 billion for transit in 2015) in grants for surface transportation projects—or a quarter of all public transportation funding. Motor fuel taxes account for 87 percent of HTF receipts. Congress has struggled to balance the HTF and pass new transportation bills in part because the gas tax rate was last increased in 1994.

There are good reasons to reform transportation funding—Congress's apparent inability to fund the HTF and antiquated funding formulas that do a poor job sending dollars to where people work and live. But the arguments in Rubio’s plan for killing the gas tax and HTF are questionable. One is stopping “Bridges to Nowhere,” but Congress already made headway on this problem when it banned earmarks. In fact, some argue the inability to make political trades has made passing multi-year transportation bills more difficult. 

A second is freeing states from “strings attached” to federal funds. HTF dollars definitely come with mandates—such as requirements that local governments contribute 20 percent of spending and labor laws—but it’s debatable how debilitating these rules are. A 2012 Government Accountability Office study found the feds were “lax” in their oversight and “reluctant” to make states comply with grant requirements.

A third argument is inducing more public-private partnerships (P3s). But the Obama administration is already taking steps in this area and P3s are not a panacea for infrastructure (ever heard of Bertha?). 

After the HTF-funded federal grants are eliminated, most states would have to substantially increase and reform their gas taxes to fill the funding gap. And the quest for more state transportation revenue will create political headaches. While seven states increased their gas tax rate this year, the legislative fights were nearly always contentious and voters have continuously shown their disdain for the gas tax at the state and federal level.

state gas tax map

Rubio’s plan would also create political fights between states. It’s hard to see why states would undertake or coordinate projects of regional or national significance like the interstate highway system without the incentive of federal dollars.

One small but illuminating example: Maryland does not want to fund a bus that services Dulles airport (in Virginia) even though Maryland residents benefit from it. Why? Because Virginia does not fund a bus to BWI airport (in Maryland) even though Virginia residents benefit from that. Now envision this fight on every road or train that crosses state lines.

Putting states in the driver’s seat on transportation funding has some appeal but also creates new fiscal problems for states already governing with tight budgets. And even if states solve those problems, the solutions might not work well for people who rely on interstate travel, or the country. 

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Can private investors solve the student loan problem?

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November 7, 2015

Marco Rubio’s proposal for asking students to turn to private investors to get the funds they need to pay for college, rather than borrowing through the federal government, is getting renewed attention. The “Student Investment Plan”—labeled “income share agreements” in the Urban Institute’s overview of 2016 higher education campaign issues and sometimes called “human capital contracts”—would, according to Rubio,  “give students the option of paying for their education without acquiring any student loans at all.”

The idea is that investors would pay students’ tuition in return for a percentage of their incomes for a set period of time after graduation. The availability and terms of the non-loans would depend on students’ major, institution, school record, and other factors related to the likelihood that they would find good jobs and make high payments. The obligation would be for a fixed percentage of income for a set number of years, regardless of how the total payments added up over that period of time.

This plan could work out well for some students, especially those who expect their earnings to be lower than they might appear to an outside observer. But investors in these programs would no doubt expect to make a profit. Students would be supplying that profit. And it’s not clear in what sense the proposed system would be less risky for students than existing federal income-driven repayment plans that forgive remaining balances after 20 or 25 years if borrowers’ incomes are not high enough to support repayment of the entire debt.

For most students—and particularly for those for whom postsecondary education is their best hope for moving up from relatively humble beginnings—this plan would surely be worse than existing federal loan programs. A student in the final year of an engineering program at MIT would be funded with the expectation of a lower percentage of income and/or a shorter number of years of repayment than a community college student working toward an associate degree in phlebotomy or a student studying social work at a regional public university.

Among dependent four-year college students in 2011-12, the percentage enrolled in highly selective institutions ranged from 11 percent among the lowest-income quartile to 27 percent among the highest income group. Among students from families in the highest family income quartile, 51 percent attended doctoral universities and 26 percent were enrolled in public two-year colleges.

In contrast, among those from families with incomes below $30,000, 29 percent attended either public or private nonprofit doctoral universities and 41 percent were enrolled in public two-year colleges.

It is highly unlikely that low-income students would get the same favorable terms on their non-loans as higher-income students.

Perhaps most worrisome is the suggestion that this strategy eliminates loans. Like the short-lived Oregon Pay It Forward idea—where college would be “free” and students would have “no loans” but would pay a percentage of their incomes after finishing school—this plan gives loans a different name and pretends the problems are solved.

We do need to discourage over-borrowing for institutions that don’t serve students well. But relying on onerous borrowing terms to discourage at-risk borrowers is likely to make the situation worse. Insights from behavioral economics and the cognitive sciences make it clear that just modifying the cost/benefit ratio of a particular postsecondary choice is unlikely to be adequate for improving the decisions students make. And first-generation students, for whom the decision is most complicated and mysterious, face the biggest challenges.

The federal student loan system was designed to provide credit on reasonable terms to individuals without credit histories or collateral to give them the opportunity to invest in themselves through postsecondary education. We should be coming up with better ways to guide students to productive educational pathways rather than obscuring the reality that they are borrowing money they will have to repay.

(Full disclosure: earlier this year, I advised the Clinton campaign on the development of the candidate’s higher education plan. Urban scholars are willing to provide evidence-based counsel to any campaign that seeks it.)

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