How a worker is classified has serious implications and high costs for workers. Most federal and state labor and employment protections are granted to employees only, not independent contractors. This includes basic employment protections such as a minimum wage, overtime pay, and access to unemployment insurance (as shown in Table 1).

Table 1

State and federal governments also lose when workers are misclassified. Companies that misclassify workers avoid paying their fair share of Social Security, Medicare, and unemployment insurance taxes and avoid providing state workers’ compensation insurance. The state of California estimates that the annual state tax revenue loss due to misclassification is as high as $7 billion.

California’s AB5 ensures that workers who perform core work under company control have access to basic labor and employment protections and benefits denied to independent contractors. Further, AB5 makes it more difficult for companies to avoid paying their fair share of Social Security, Medicare, and unemployment insurance taxes and avoid providing state workers’ compensation insurance. A study by the UC Berkeley Labor Center found that if Uber and Lyft had treated workers as employees, they would have paid $413 million into California’s Unemployment Insurance Fund between 2014 and 2019. However, instead of paying their fair share, digital platform companies have backed Proposition 22 to deny gig workers the most basic labor and employment protections.

In exchange for exempting gig workers from AB5, Proposition 22 includes an earnings floor for drivers (set at 120% of the minimum wage), health subsidies consistent with employer contributions under the Affordable Care Act for drivers who work 15 hours or more per week, and auto insurance coverage. While Proposition 22 would appear to provide gig workers with some access to benefits and a meaningful wage floor, it denies these workers coverage under the most basic employment protections (as shown in Table 2).

Moreover, a study by the UC Berkeley Labor Center finds that because of multiple loopholes in Proposition 22, it will leave gig drivers with a pay guarantee that is equivalent to a wage of $5.64 per hour, far less than the $15.60 minimum wage the initiative claims drivers will receive ($15.60 is 120% of the current California minimum wage of $13). In short, Proposition 22 is nothing more than a vehicle for digital platform companies to avoid meaningful responsibility to its workers via a law that invents arbitrary standards for gig workers.

Table 2

The passage of AB5 helped to ensure that several million workers who have been wrongly misclassified as independent contractors in California receive the protections and benefits they are entitled to under the law. These protections are especially important during the COVID-19 pandemic. However, instead of complying with the law, digital platform companies have financed the most expensive ballot initiative in California’s political history while inventing their own meager labor standards with insufficient enforcement. Californians must require that companies follow the law and properly classify their workers. No company should be able to buy its way out of treating workers fairly.

President Trump’s erratic, ego-driven, and inconsistent trade policies have not achieved any measurable progress, despite the newly combative rhetoric. On top of that, COVID-19—and the administration’s mismanagement of the crisis—has wiped out much of the last decade’s job gains in U.S. manufacturing.

Unless steps are taken now—to reform our trade policy, to curb dollar overvaluation, to eliminate tax incentives for offshoring, and to rebuild the domestic economy—there won’t be a comeback.

As this policy report makes clear:

• Offshoring and the loss of manufacturing plants have continued under Trump, notwithstanding U.S. Trade Representative Robert Lighthizer’s claim that the administration’s trade policy is helping U.S. workers (Lighthizer 2020a).
• The strong and rising U.S. dollar is a major cause of the continuing growth of U.S. trade deficits.
• While manufacturing employment rose steadily between 2010 and 2019, the COVID-19 shutdown has wiped out more than half of the jobs gained in the past decade.
• The U.S. economy is in the midst of a historic collapse due to the uncontrolled coronavirus pandemic and recession.
• Restructuring and rebuilding the economy will require a coordinated and comprehensive strategic policy response that includes rebalancing of U.S. trade, as well as massive public investments in infrastructure, clean energy, training, R&D, and other industrial policies. These investments can create millions of skilled, high-wage jobs for non-college-educated workers in the U.S., who have been hard hit by the coronavirus downturn—especially Black, Latinx, and women workers—who have been left behind as manufacturing employment shrinks.
• Under current government procurement policies and trade rules, much of the public spending for infrastructure and clean energy systems would leak away to foreign providers, in the form of increased imports. Thus, new public investments should all include strong “Buy America” clauses.
• Joe Biden has recently proposed major investments in infrastructure, climate, and rebuilding manufacturing. These proposals could make a substantial contribution to meeting U.S. investment needs and generating a strong, sustainable, broadly shared recovery.

The Trump administration has not succeeded in reshoring manufacturing

In recent congressional testimony, U.S. Trade Representative Robert Lighthizer praised several companies that have scrapped offshoring efforts or have announced plans to move production to the United States, and he has further claimed that the “era of reflexive offshoring is over” (Lighthizer 2020b, 2020c). He also praised both the U.S.-Mexico-Canada Trade Agreement (USMCA)—which took effect July 1—and the current “Phase One” China trade deal. These are supposed to be signature accomplishments for the administration, contributing to a purported “blue-collar boom.”

It is important to note that the Trump administration has a habit of issuing press releases citing plans for major foreign investments in the U.S. that never materialize. In July 2017 Foxconn announced—to great fanfare from the White House–plans to invest $10 billion and bring “thousands of new American jobs” to Wisconsin and elsewhere in the United States (White House 2017). News reports indicate that Foxconn’s buildings in Wisconsin were still empty as of April 2020 (Dzieza and Patel 2020).1

But offshoring has in fact continued throughout this time, as reflected in changes in the total number of U.S. manufacturing plants, shown in Figure A. Overall, the U.S. has suffered a net loss of more than 91,000 manufacturing plants and nearly 5 million manufacturing jobs since 1997. Nearly 1,800 factories have disappeared during the Trump administration between 2016 and 2018 (BLS 2020; U.S. Census Bureau 2020a, 2020b). The U.S. has experienced a net loss of manufacturing plants (establishments) in every year from 1998 through 2018 (the most recent year for which data are available).

Figure A

Employment per plant has ebbed and flowed, increasing during recoveries and dropping much more sharply in downturns, as shown in Figure A. Massive job losses in just six years—during the 2001 recession and the China import surge of 2002–2004, and during the Great Recession of 2008–2009—account for more than all of the net loss of nearly 5 million manufacturing jobs in this period.

The loss of these jobs was particularly costly for women, Black, and Latinx workers, who were left behind as employment collapsed and many of the remaining manufacturing plants shifted to rural locations in right-to-work states in the West and South (Madland, Walter, and Eisenbrey 2012).

Here’s what the data actually show about the purported “blue-collar boom” under the Trump administration: The U.S. gained roughly 500,000 U.S. manufacturing jobs from 2016 to 2019. But these gains are exactly on par with gains across the entire economic recovery period from 2010 to 2019, during which 166,000 manufacturing jobs were gained each year, on average. The 2016–2019 gains did not represent an improvement over prior years in that decade, and even the decade’s overall gains had managed to restore only a fraction of the jobs lost in the prior decade.

And recent years’ manufacturing gains were abruptly wiped out by the COVID-19 crisis—with a staggering 740,000 manufacturing jobs lost this year, as shown in Figure B (BLS 2020). If President Trump wants to take credit for the job growth at the tail end of a decade of recovery from the Great Recession, then he must also own this collapse, thanks to his administration’s mismanagement of the pandemic—including a refusal to organize an effective national response (Scott 2020b). And while the June 2020 data show an upswing in manufacturing jobs, more recent jobs data indicate that the nascent and partial recovery in manufacturing is at risk due to recurrence of COVID-19 in states that have reopened, including many in the South and Western United States (Hannon and Kiernan 2020; WSJ Pro 2020; Bartash 2020).

Figure B

Contrary to popular myth, growing trade deficits, and not automation, are responsible for the vast bulk of manufacturing job and plant losses in the past two decades (Guilford 2018). Growing trade deficits with China between 2001 and 2018 (2.8 million manufacturing jobs lost) and the U.S. trade deficit with the Trans-Pacific Partnership countries in 2015 alone (1.1 million manufacturing jobs lost) account for more than three-fourths of the U.S. manufacturing jobs lost in the past 20 years (Scott and Mokhiber 2020; Scott and Glass 2016). This is confirmed by Susan Houseman’s extensive review of the research literature, “which finds that trade significantly contributed to the collapse of manufacturing employment in the 2000s, but finds little evidence of a causal link to automation” (Houseman 2018).

The rising dollar is responsible for growing trade deficits

U.S. manufacturing was struggling long before COVID-19. Starting in 2014, the U.S. dollar has appreciated in fits and starts, climbing nearly 23%, as shown in Figure C (Fed 2020b). More than half of that rise has come since the Trump tariffs were first imposed in March 2018. This stronger dollar keeps making U.S. exports more expensive and imports cheaper. Equally problematic, the 2017 Trump tax cuts on corporate profits incentivized offshoring for certain types of production while also raising after-tax profits. This has attracted more foreign capital to U.S. stock markets, spurring the dollar even higher. The dollar has also been driven higher during the coronavirus recession by “safe haven” effects, with foreign capital surging into the U.S.—as it does during most global downturns.

Figure C

Unfortunately, the Trump administration has simply ignored the linkage between these policies and a rising U.S. trade deficit, despite the fact that as a candidate, Donald Trump promised to declare China a “currency manipulator” on “day one” of his administration (Talley 2016). While the Treasury did, finally, name China a currency manipulator last year, it was too little, too late (Scott 2019). China’s currency, the yuan (or RMB), has continued to fall relative to the U.S. dollar since March 2018, despite the inclusion of a “currency clause” in the Phase One U.S.–China trade deal (Fed 2020a). Notably, the agreement was neither a binding constraint on Chinese monetary policy nor a real commitment to action on the part of the U.S. Treasury.

Overvaluation of the dollar is one of the most important structural causes of growing U.S. trade deficits. In order to help rebalance U.S. trade flows, the dollar needs to fall 25–30% overall on a real trade-weighted basis, and more against the currencies of surplus countries and areas such as China, the European Union, Japan, and Korea (Scott 2019). The strength of the dollar was sustained by massive currency manipulation between 2000 and 2014 (Bergsten and Gagnon 2017), but since then large private capital inflows to U.S. financial markets have continued the trend.

There are several tools that can be used to address dollar overvaluation.2 Perhaps the most effective proposal to reduce and manage excessive private capital flows on a sustained basis is a bipartisan bill, the “Competitive Dollar for Jobs and Prosperity Act,” introduced last year by Senators Baldwin (D-Wis.) and Hawley (R-Mo.) (S.2357).3 Their legislation would impose a small tax, or “market access charge” (MAC), on all foreign capital inflows (Hansen 2017). Their proposal would direct the U.S. Federal Reserve Board of Governors to set this tax at a level needed to rebalance trade and capital flows, giving the Fed both a new mandate—to achieve balanced trade—and a new tool to achieve that goal. Millions of good, high-wage manufacturing jobs can be created by rebalancing trade flows, something that would contribute to recovery from the COVID-19 recession.

If Trump’s trade policy really encouraged reshoring, America’s trade balance would have improved in the past three years. But the U.S. trade deficit in manufactured goods rose significantly between 2016 and 2019, as shown in Figure D. In fact, the real U.S. trade deficit has increased in every year since 2016, reducing GDP growth by roughly one-quarter of one percent annually over the past three years (USITC 2020; BEA 2020).

Figure D

Furthermore, the strong dollar has also decimated farmers, and it is a much more significant driver of the decline in farm incomes than Trump’s China trade war. There is a single world price for commodity products like wheat and soybeans, as Dean Baker has noted (Baker 2018, 2019). If the dollar rises relative to those of our competitors, then the dollar price of U.S. farm products must fall. Thus, there is a strong, negative correlation between soybean prices, for example, and exchange rates, as shown in Figure E.

Figure E

When the real (price-adjusted) dollar declines, as it did between 2002 and 2012, soybean prices increase. Grain and soybean prices started falling as soon as the dollar began to rise in 2014. Movements in the dollar alone explain nearly 80% of the change in soybean prices, with the rest having to do with changes in weather conditions, incomes, farm decisions (e.g., crop allocations), and other factors.

We need to realign the dollar to rebalance trade. Manufacturing and the farm sector will both benefit directly from dollar realignment. President Trump has utterly failed to address this core issue, despite his baseless and self-serving promises to address currency manipulation and rebuild manufacturing by getting “tough on trade.”

Trump’s trade deals have not helped U.S. workers

The USMCA—which was touted as a replacement for NAFTA—is unlikely to resolve longstanding U.S.–Mexico trade issues. America’s trade deficit with Mexico increased by more than 29% in 2019 alone (U.S. Census Bureau 2020c). And when it comes to important sectors like autos and auto parts, General Motors has been closing assembly plants in Ohio, Michigan, and Maryland while increasing its reliance on imports from Mexico (AP 2019; Samilton 2019; Mirabella 2019). In fact, GM has been ceding market share to foreign producers for decades, and has grown increasingly reliant on imports from Mexico and other countries. Meanwhile, market share has been captured by foreign producers. Recently, BMW, Mercedes/Infiniti, and Kia opened plants in Mexico—a missed opportunity to reshore production to the United States (Szczesny 2019; Mexico Now 2018a, 2018b). And the supplier networks for these plants will be built in Mexico, not the U.S.—further eroding America’s auto industry.

Offshoring to Mexico is also taking place in aerospace and other sectors, with aerospace exports from Mexico increasing 10% in 2019 (Krause 2020). While the USMCA significantly improves domestic labor protections in Mexico compared with the earlier version of NAFTA, its overall provisions are inadequate to stem these offshoring trends.

The Phase One China trade deal is a bust, too. China promised to increase purchases of U.S. goods and services by $200 billion over 2017 imports. But Beijing is unlikely to meet these targets (Craymer and DeBarros 2020). And the deal doesn’t even address China’s egregious, systematic labor rights violations.

Beijing has also strategically adjusted to the Trump tariffs. China is simply exporting more goods elsewhere, and the U.S. trade deficit with China’s trading partners rose rapidly in 2019. In fact, China’s overall trade surplus with the world climbed significantly in 2019 (Setser 2020a). China also reduced the value of its currency by 10.0% against the U.S. dollar since March 2018, helping to offset the tariffs (Fed 2020a).

The tariffs remain a “signature” element of the Trump trade agenda. And they’ve helped sectors like steel and aluminum (Scott 2018a, 2018b). But the president misses a key point: If you increase tariffs without taking steps to prevent the dollar’s appreciation, the overall benefits can be simply neutralized.

Trump’s tax policies have encouraged outsourcing

America’s trade problems have been exacerbated by mistakes and/or malfeasance in Trump’s tax policymaking. U.S. multinational corporations continually engage in massive, international tax avoidance—with some paying no U.S. income tax at all. The 2017 tax cut exacerbated this problem by creating a new, lower corporate tax rate for “global intangibles income.”4 The pharmaceuticals industry has since reaped major rewards and has moved plants to countries with the lowest possible corporate tax rate (Setser 2020b). As a result, the U.S. now has a massive trade deficit in pharmaceuticals, which exceeds the trade surplus in aerospace products, the strongest U.S. export industry. Leading suppliers of pharmaceutical imports—many produced by U.S. firms, such as Pfizer, which had no taxable U.S. income over the entire decade from 2007 to 2016 (Rice, Kitson, and Clemente 2017)—include Ireland, Germany, Switzerland, India, and China.

The U.S. trade deficit is likely to shrink during COVID-19 simply because of the decline in consumer income and spending. But unless steps are taken to address dollar overvaluation and the tax incentives that encourage offshoring, these deficits will simply reemerge when recovery occurs (Scott 2020a).

Manufacturing job loss was a key issue for voters in the 2016 election

Voters from manufacturing states have been hardest hit by growing trade deficits and failed trade and investment deals. In 2016, Donald Trump ran on a nationalist campaign platform, based in part on a critique of globalization that cited EPI research (Trump 2016). Hillary Clinton and Bernie Sanders have also cited EPI research on, for example, jobs lost due to growing trade deficits with China (Clinton 2007; Sanders 2020). Globalization is clearly an issue of bipartisan concern.

In 2016, voters from the top 25 manufacturing states, ranked by share of total employment in manufacturing, gave nearly 80% of their electoral votes to Donald Trump, as shown in Figure F, the manufacturing electoral heat map. Hillary Clinton prevailed in the bottom 25 manufacturing states, by a margin of 61% to 39%, but it was not enough to offset Trump’s advantage in the manufacturing states. However, Trump’s policies have failed to stop offshoring or the erosion of the U.S. manufacturing base.

Figure F

The restoration of manufacturing in the United States will be essential to the COVID-19 economic recovery. It is time to consider a progressive alternative for rebuilding manufacturing. The components of such a plan are described in the following section.

The COVID-19 recovery will require major investments in infrastructure and clean energy

The coronavirus crisis has devastated the U.S. and global economies. Black, Latinx, and women workers have been hardest hit, and without special efforts made for low-income communities, they will be the last to recover (Gould 2020b). With the economy in freefall, the U.S. needs to engage in massive and widespread relief.

America also needs a plan for economic reconstruction in the wake of the COVID-19 pandemic, one that is specifically designed to address the needs of those hardest hit in the economy. Millions of jobs and small businesses have been lost in sectors such as retail trade, travel, tourism, and restaurants, and many will never come back. The economy must be restructured—new and better jobs are needed for displaced workers. Properly done, the required investments can create good jobs with excellent wages and benefits for Black, Latinx, and women workers who have suffered from racism or discrimination and economic inequality (Gould 2020a; Gould and Wilson 2020). Thus, any relief and rebuilding plan must address the following core issues.

The U.S. must continue to provide massive and widespread relief

Relief spending must be continued and expanded. The U.S. has recently encountered a Wile E. Coyote moment—it just ran off the edge of a cliff—with the expiration of an expanded unemployment compensation program that was giving 33 million workers a $600 weekly unemployment insurance boost (Shierholz 2020). The failure to renew this and other relief programs will cause a collapse in consumer spending and business investment, resulting in an economic tsunami that threatens to deepen the coronavirus recession into a depression in the fall, while potentially exacerbating the health crisis by pushing people to go back to work before it’s safe to do so (Bivens 2020b).

We need expanded relief for all workers in the next coronavirus bill, and we also need to add at least $1 trillion in federal aid for state and local governments, support for public health measures (testing, tracing, and isolation, with paid leave), unemployment, and continuing income supports for the tens of millions who are furloughed or unemployed and for businesses that are shuttered (Bivens 2020a). Without aid for state and local governments, in particular, 5.3 million jobs are at risk by the end of 2021, which threatens to further deepen the coronavirus recession (Bivens and Cooper 2020).

The U.S. must rebuild a sustainable, resilient, manufacturing-based economy

Even if the coronavirus pandemic is successfully controlled, we are likely to experience recurrent infections and hot spots (as has already occurred in the South and West) until vaccines and more effective treatments arrive. Meanwhile, massive effort is needed, starting today, to rebuild and restructure the economy in ways that will address the needs of Black, Latinx, and women workers.

Millions of low-wage service jobs are unlikely to return. As we rebuild our economy, these jobs can and should be replaced with higher-wage jobs in manufacturing and construction that provide excellent benefits and afford workers the right to organize and bargain collectively. Planning and organizing these rebuilding efforts—including design, permitting, and purchase of materials and rights-of-way—should begin now, so that funding, projects, and employment can flow in earnest once the pandemic has been brought under control.

There are three essential components of a sustainable U.S. economy

Looking forward, the three pillars of building a sustainable, resilient, manufacturing-based economy are: (1) rebalancing trade flows; (2) rebuilding U.S. infrastructure; and (3) supporting the transition to efficient and clean energy systems.5

In 2017, the American Society of Civil Engineers estimated in its Infrastructure Report Card that the United States needs $4.6 trillion in infrastructure spending over 10 years for sorely needed repairs and modernization (ASCE 2017). This exceeds planned spending by $2 trillion. Similarly, Robert Pollin at the University of Massachusetts-Amherst suggests that the U.S. needs to devote roughly two percent of GDP annually to increased energy efficiency and clean energy conversion, or roughly $400–$500 billion per year (Drollette 2019). Thus, for infrastructure and clean energy transition, the U.S. needs additional investments of $650–$750 billion per year in rebuilding the economy.

The U.S. goods trade deficit exceeded $860 billion in 2019. By rebalancing trade and expanding U.S. public investment as described above, we can increase overall demand for U.S. production by up to $1.5 trillion per year, directly stimulating the manufacturing and construction industries while rebuilding the economy. This could generate massive increases in overall demand for goods and services produced in the United States that would support and create more than 17 million good jobs.6 These steps alone would absorb more than half of the 33 million workers who were drawing unemployment benefits or have applied and are waiting for benefits as of August 1 (Shierholz 2020).

Joe Biden has recently proposed a $2 trillion initiative for clean energy and infrastructure (Glueck and Friedman 2020; Erickson 2020). He has also proposed investing $300 billion in manufacturing R&D and implementing policies designed to maximize the domestic content of infrastructure investments through “Buy America” policies (Goldmacher and Tankersley 2020). These proposals could make a substantial contribution to meeting U.S. investment needs and generating a strong, sustainable, broadly shared recovery.

The U.S. must rebalance trade flows

Realigning the dollar, as described above, could help to eliminate U.S. trade deficits and prevent the reemergence of larger trade gaps in the future. Rebalancing trade can also generate millions of good manufacturing jobs and prevent the offshoring of more manufacturing plants in the future.

We must revise government procurement policies and trade rules to ensure that public infrastructure investments actually benefit U.S. workers and the U.S. economy

Steps must be taken to ensure that public investments maximize domestic bang-for-the-buck—in terms of job creation and GDP support—in the states and cities where they are needed most, providing good jobs for those who have been excluded from the economy of the past. Under current trade rules, much of the public spending for infrastructure and clean energy systems would leak away to foreign providers, in the form of increased imports. Thus, these proposals should all include strong “Buy America” clauses in state and federal procurement policies. Doing so will require modification of or withdrawal from the World Trade Organization government procurement agreement (Miller & Chevalier 2020).

We must also implement supply-side policies to ensure jobs go to those U.S. workers who were left behind by the decline in manufacturing

An array of supply-side policies are also needed to ensure that these investments generate jobs where they are needed most, for women, Black, and Latinx workers here in the United States. These workers have been hurt by the decline of these industries, which generate good jobs with excellent benefits, especially for non-college-educated workers. Supply-side policies include:

• An end to tax policies that encourage firms to offshore production, including all tax preferences for foreign investment and production. The U.S. should consider implementing a system of sales factor apportionment to fairly tax the global profits of all foreign and domestic companies, based on their total sales in the United States, and to further discourage offshoring (Stumo 2016).
• Substantial investments in R&D, training, school-to-work transition, job creation programs, expanded extension,7 and other industrial policies, including expanded financing of small and medium-sized manufacturing firms. The U.S. should also support improvements in labor rights in all 50 states (Madland, Walter, and Eisenbrey 2012) and measures to include workers, banks, and other community stakeholders on corporate boards, to improve their performance in local economies.
• Aggressive but strategic use of anti-dumping and enhanced safeguard measures to prevent surges of primary commodity imports, especially in sectors subject to chronic excess capacity (but with no across-the-board tariffs). The coronavirus has worsened a global metals glut, in part because China, the top producer of aluminum and steel, has kept up production as demand fell (Tita 2020). Aggressive enforcement of trade laws will be needed to limit damage to domestic producers during the coronavirus recession.

Investments should be financed with public debt until the economic crisis has subsided

Last, infrastructure and clean energy transition investments should be financed, at least during the COVID-19 recovery, by increasing public debt—including heavy borrowing until long-term interest rates begin to rise well in excess of a 2% inflation target (Bivens 2019). Then, and only then, can these needed investments be paid for by taxing capital, starting with the wealthy and those who can afford to pay, and with user fees as necessary and appropriate (offset by income transfers to low-income families). It is important to note that rebalancing trade will generate new federal revenues (through increased incomes), along with new revenues from the taxes imposed on foreign capital inflows, as referenced above. These revenues could also be used to pay off public debt.

Conclusion: Progressives must reshape their approach to trade

The coronavirus crisis is causing unprecedented damage to the U.S. economy and to the lives of tens of millions of Americans. This crisis will change the national economy in untold ways. Life in America will never be the same. But “in the midst of every crisis, lies great opportunity.”8 The need to rebuild America has never been greater, and the time to rebuild is now.

For the past three decades, mainstream Democrats have tied their fates to the twin mantras of free trade and globalization, which have cost millions of jobs and many thousands of factories. Bill Clinton campaigned for and signed NAFTA in 1993. He also negotiated and signed the agreement that created the World Trade Organization in 1994. And he negotiated the agreement that resulted in China’s entry into the World Trade Organization in 2001. Barack Obama negotiated and campaigned for the failed Trans-Pacific Partnership agreement. It is time for progressives to own and reject these failed policies, and to build and campaign on a plan to develop a 21st-century New Deal for the domestic economy.

In 2016, Donald Trump campaigned against globalization and these failed trade deals—which have clearly hurt U.S. manufacturing. It worked. He captured nearly 80% of the electoral votes in the top 25 manufacturing states, as shown above. But he has since failed to deliver for working Americans. Now the wheels are coming off. It’s time for a meaningful rewrite of failed U.S. trade and economic policies—all urgently needed to revive the U.S. economy at a critical time.

Acknowledgments

The author thanks Thea Lee for comments, Krista Faries for editorial guidance, and Daniel Perez for research assistance.

Endnotes

1. For more on Foxconn’s history of announced intentions to invest in the U.S., see Frankel 2017.

2. See the “Fair Globalization and Balanced Trade” section of EPI’s Policy Agenda (EPI 2018).

3. Competitive Dollar for Jobs and Prosperity Act, S. 2357, 116th Cong. (2019).

4. Global intangibles income is “income earned by foreign affiliates of U.S. companies from assets such as patents, trademarks and copyrights” (TPC 2020).

5. See the “Climate Change” section of EPI’s Policy Agenda (EPI 2018).

6. Author’s calculations based on model in Scott and Glass 2016.

7. For example, through the U.S. Manufacturing Extension Partnership Program (Shapira 2001; NIST 2020).

8. This quote is frequently attributed to Albert Einstein, but the actual source cannot be verified.

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Houseman, Susan N. 2018. “Understanding the Decline of U.S. Manufacturing Employment.” Upjohn Institute Working Paper no. 18-287, June 1, 2018.

Krause, Lou. 2020. “Aerospace Manufacturing Is the Source of US $9.5 Million in Industrial Exports.” Prince Manufacturing blog, April 13, 2020.

Lighthizer, Robert E. 2020a. “How to Make Trade Work for Workers: Charting a Path Between Protectionism and Globalism.” Foreign Affairs, July/August 2020.

Lighthizer, Robert E. 2020b. “Testimony of Ambassador Robert E. Lighthizer, United States Trade Representative, House Committee on Ways and Means Hearing on the President’s 2020 Trade Policy Agenda.” June 17, 2020.

Lighthizer, Robert E. 2020c. “The Era of Offshoring U.S. Jobs Is Over: The Pandemic, and Trump’s Trade Policy, Are Accelerating a Trend to Bring Manufacturing Back to America.” New York Times, May 11, 2020.

Madland, David, Karla Walter, and Ross Eisenbrey. 2012. Right-to-Work 101: Why These Laws Hurt Our Economy, Our Society, and Our Democracy. Center for American Progress Action Fund, the American Worker Project, and the Economic Policy Institute, February 2012.

Mexico Now. 2018a. “KIA to Increase Production 40% at Its Mexican Plant This Year.” January 30, 2018.

Mexico Now. 2018b. “Report: Mercedes-Benz to Build Sedans, Crossovers at Mexican Plant.” February 13, 2018.

Miller & Chevalier. 2020. What Then? What a U.S. Withdrawal from the WTO GPA Could Mean for Government Contractors Worldwide (litigation alert). February 6, 2020.

Mirabella, Lorraine. 2019. “Closure of General Motors’ White Marsh Plant Is Official, Local Union Officials Told.” Baltimore Sun, October 18, 2019.

National Institute of Standards and Technology (NIST). 2020. “Connect with Your Local MEP Center” (web page). Accessed July 2020.
Politico. 2016. “2016 Presidential Election Results” (website). Updated December 13, 2016. Source: AP.
Rice, William, Kayla Kitson, and Frank Clemente. 2017. The Pharma Big 10: Price Gougers, Tax Dodgers. Americans for Tax Fairness, December 2017.

Samilton, Tracy. 2019. “GM’s Warren Transmission Plant Closes Friday, to Worker Dismay.” Michigan Radio, July 30, 2019.

Sanders, Bernie. 2020. “Bernie Sanders on China.” FeeltheBern.org. Accessed June 2020.

Scott, Robert E. 2018a. “Trade Remedies for Steel and Aluminum Were Long Overdue” (statement). Economic Policy Institute, March 1, 2018.

Scott, Robert E. 2018b. Aluminum Tariffs Have Led to a Strong Recovery in Employment, Production, and Investment in Primary Aluminum and Downstream Industries. Economic Policy Institute, December 2018.

Scott, Robert E. 2019. “Trade Wars and the Over-Valued Dollar.” The Hill, August 9, 2019.

Scott, Robert E. 2020a. “The Wheels Are Coming Off Trump’s Trade Policy.” The Hill, June 19. 2020.

Scott, Robert E. 2020b. “Why Is Trump Putting Critical Protective Equipment on Layaway at Walmart?” Working Economics Blog (Economic Policy Institute), April 3, 2020.

Scott, Robert E., and Elizabeth Glass. 2016. Trans-Pacific Partnership, Currency Manipulation, Trade and Jobs: U.S. Trade Deficit with TPP Countries Cost 2 Million Jobs in 2015, with Job Losses in Every State. Economic Policy Institute, March 2016.

Scott, Robert E., and Zane Mokhiber. 2020. Growing China Trade Deficit Cost 3.7 Million American Jobs Between 2001 and 2018: Jobs Lost in Every U.S. State and Congressional District. Economic Policy Institute, January 2020.

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Setser, Brad. 2020b. “The Irish Shock to U.S. Manufacturing?” Follow the Money (Council on Foreign Relations blog), May 15, 2020.

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Shierholz, Heidi. 2020. “Unemployment Insurance Claims Remain Historically High: Congress Must Reinstate the Extra $600 Immediately.” Working Economics Blog (Economic Policy Institute), August 6, 2020.

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Szczesny, Joseph. 2019. “BMW Opens $1 Billion Plant in Mexico: Automaker Opens Site Despite Trump Administration Tariff Threats.” Detroit Bureau, June 10, 2019.

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The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2018 (FY2018) budget, titled “The People’s Budget—A Roadmap for the Resistance.” It builds on recent CPC budget alternatives in setting the following priorities: near-term job creation, financing public investments, strengthening low- and middle-income families’ economic security, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, strengthening social insurance programs, and ensuring long-run fiscal sustainability.

This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring The People’s Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.1

Figures A–C, showing the impact of The People’s Budget on debt, deficits, and nondefense discretionary funding compared with current law, the president’s “skinny budget,” and historical averages, appear in the body of the report.2 Tables 1 and 2 detailing the policy changes within the budget, and Summary Tables 1 through 4 depicting budget totals as well as comparisons with the current law baseline, appear at the end of the report.

We find that The People’s Budget would have significant positive impacts. Specifically, it would:

• Improve the economic well-being of low- and middle-income families by finally completing the economic recovery. To close the persistent jobs gap that has plagued the U.S. economy since the start of the Great Recession, The People’s Budget provides an upfront economic stimulus large enough to go beyond closing the output gap—(a measure of how far from potential the economy is operating). The People’s Budget would boost gross domestic product (GDP) by 2 percent and employment by 2.4 million jobs in the near term. This would both close the output gap as measured by the Congressional Budget Office (CBO) and further push unemployment down, to 4 percent, our estimate of genuine full employment. The budget would also ensure that the mixture of spending and revenue changes provides a net fiscal boost long enough to avoid a future fiscal cliff (i.e., a sharp drop in demand caused by budget deficits closing too quickly to sustain growth) that could throw recovery into reverse.3
• Make necessary public investments. The budget finances roughly $371 billion in job-creation and public-investment measures in calendar year 2017 alone and roughly $841 billion over calendar years 2017–2018.4 This fiscal expansion more than provides the amount of fiscal support needed to rapidly reduce labor market slack and restore the economy to full health. Furthermore, The People’s Budget also aims to hit more ambitious long-term public investment targets, by returning nondefense discretionary spending (NDD) to its historical average as a percentage of GDP by 2022.
• Facilitate economic opportunity for all. By expanding tax credits and other programs for low- and middle-wage workers, boosting public employment, and offering incentives for employers to create new jobs, The People’s Budget aims to boost economic opportunity for all segments of the population.
• Strengthen the social safety net. The People’s Budget strengthens the social safety net and proposes no benefit reductions to social insurance programs—in other words, it does not rely on simple cost-shifting to reduce the budgetary strain of health and retirement programs. Instead, it uses government purchasing power to lower health care costs (health care costs are the largest threat to long-term fiscal sustainability) and builds upon efficiency savings from the Affordable Care Act. The budget also expands and extends emergency unemployment benefits and increases funding for education, training, employment, and social services as well as income security programs in the discretionary budget.5
• Smartly cut spending. The budget focuses on modern security needs by repealing sequestration cuts and spending caps that affect the Defense Department but replacing them with similarly sized funding reductions that are less front-loaded and will allow more considered cuts. It ends emergency overseas contingency operation (OCO) spending in FY2018 and beyond, and it ensures a slow rate of spending growth for the Defense Department for the remainder of the decade.
• Increase tax progressivity and adequacy. The budget restores adequate revenue and pushes back against income inequality by adding higher marginal tax rates for millionaires and billionaires, equalizing the tax treatment of capital income and labor income, restoring a more progressive estate tax, eliminating inefficient corporate tax loopholes, levying a tax on systemically important financial institutions, and enacting a financial transactions tax, among other tax policies.
• Reduce the deficit in the medium term. The budget increases near-term deficits to boost job creation, but it reduces the deficit in FY2019 and beyond relative to CBO’s current law baseline. After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio in the now full-employment economy over time, almost reaching a key benchmark of sustainability (of a stable debt-to-GDP ratio during times of full employment). With the CPC budget as a starting point, reaching this benchmark of sustainability is not difficult. Any additional smart Social Security reform that closes that program’s long-run actuarial financing gap would as a byproduct result in meeting this benchmark of sustainability. The People’s Budget this year continues its longer-run stance of not specifying such a Social Security reform, as any fundamental reform of Social Security should be a stand-alone endeavor. But we can infer what a fundamental reform that closed the long-run Social Security financing gap would do to the overall budget balance. Relative to current law, the budget would reduce public debt by $3.7 trillion (13.3 percent of GDP) by FY2027.

For the seventh year in a row, the Economic Policy Institute Policy Center (EPIPC) has provided assistance to the Congressional Progressive Caucus (CPC) in analyzing and scoring the specific policy proposals in its alternative budget and in modeling its cumulative impact on the federal budget over the next decade. The policies in CPC’s fiscal year 2018 budget—The People’s Budget: A Roadmap for the Resistance—reflect the decisions of the CPC leadership and staff, not those of EPIPC (although many of the policies included in the budget overlap with policies included in previous EPI budget plans). Upon CPC’s request, the nonpartisan Citizens for Tax Justice (CTJ) independently scored the major individual income-tax reforms proposed in The People’s Budget. All other policy proposals have been independently analyzed and scored by EPIPC based on a variety of other sources, notably data from Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), the Office of Management and Budget (OMB), and the Tax Policy Center (TPC).

Introduction

The People’s Budget is focused on both short- and long-term economic objectives. In the short run, The People’s Budget targets a rapid and durable return to genuine full employment through the use of expansionary fiscal policy. In the long run, The People’s Budget pushes back on decelerating productivity growth by making necessary and sustained public investments.

The budget was developed from the evidence-based conclusion that the present economic challenge of joblessness results from a continuing shortfall of aggregate demand—the result of the Great Recession and its aftermath—and that the depressed state of economic activity is largely responsible for elevated budget deficits and the recent rise in public debt. Further, much recent research indicates that aggregate demand is likely to remain depressed in coming years without a fiscal boost (this hypothesis about chronic ongoing demand shortages is often referred to as “secular stagnation”). Labor market slack resulting from this continuing demand shortfall is in turn exacerbating the decade-long trend of falling working-age household income and the almost four-decades-long trend of markedly increasing income inequality.

Moreover, since late 2011, contractionary fiscal policy (reduced government spending) has greatly contributed to the continuing slack in the labor market and stagnant earnings for most workers. The slack in the labor market can still be seen through the low labor-force participation rate, high labor-underutilization rate, and the low employment-to-population ratio of prime-age workers (ages 25–54). Expansionary fiscal policy can help ensure a prompt and durable return to a full-employment economy, which will in turn spur rising wages.

Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, The People’s Budget invests heavily in front-loaded job-creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy, The People’s Budget substantially increases near-term budget deficits to finance a targeted stimulus program that would include aid to state and local governments, targeted tax credits, and public works programs.6 These types of investments would yield enormous returns—particularly by reducing the long-run economic scarring caused by the underuse of productive resources—and raise national income and living standards. The People’s Budget also seeks to accelerate productivity growth through sustained public investment—in part through $2.0 trillion of much-needed infrastructure investments through 2027 and in part through returning NDD spending to historical levels of 3.5 percent of GDP by 2022 and keeping it there.

Beyond improving middle-class living standards, using expansionary fiscal policy to ensure a rapid return to full employment is fiscally responsible. A significant portion of the sticker price of a fiscal stimulus package will be recouped through higher tax collections and lower spending on automatic stabilizers such as unemployment insurance (programs or policies that offset fluctuations in economic activity without direct intervention by policymakers). Higher levels of economic activity will also decrease near-term budget deficits and public debt as a share of GDP. Ensuring a rapid return to full employment hedges against many downside fiscal risks, notably slower-than-projected economic recovery, larger-than-projected cyclical budget deficits, and decreased long-run potential GDP due to economic scarring, long-lasting damage to individuals’ economic situations, and the economy more broadly. The People’s Budget would further promote fiscal responsibility and come near a sustainable public-debt trajectory by raising revenues progressively, exploiting health care efficiency savings, and maintaining the reduced spending trajectory of the Department of Defense (DOD). This means that worries that increased deficits in The People’s Budget would put upward pressure on interest rates are misplaced. Interest rate pressure is normally thought to stem from anticipated future budget deficits run while the economy is forecast to be at full employment. But in future years when the economy is at full employment, deficits will be smaller under The People’s Budget.

After increasing near-term borrowing to restore full employment, the budget nears the key benchmark of sustainability: stabilizing the debt-to-GDP ratio at full employment. Relative to current law, the budget would reduce public debt by $3.7 trillion (13.3 percent of GDP) by FY2027.

The economic context for The People’s Budget

More than nine years have passed since the onset of the Great Recession in December 2007, but the economic context for The People’s Budget remains unequivocally tied to the recession for the following reasons.

Slack remains

Growth in the 7.5 years since the recession’s official end has been too sluggish to restore the economy to prerecession conditions, let alone to genuine full employment. While the unemployment rate as of January 2017 stands at 4.8 percent, it likely overstates the extent of labor market recovery. The share of adults age 25–54 with a job—which fell an unprecedented 5.5 percentage points (from 80.3 percent to 74.8 percent) from its peak to trough due to the Great Recession—is now (as of January 2017) still just 78.2 percent. Further, while there has been a recent uptick, nominal wage growth still remains below where it should be in an economy at full employment.

The pace of economic growth since the economy emerged from recession in July 2009 has been too sluggish to restore the economy to full health, and this slow pace of growth can be entirely explained by the drag from fiscal policy since 2011. While fiscal policy during and immediately after the recession—particularly the enactment of the American Recovery and Reinvestment Act (ARRA)—was strongly expansionary and arrested the economy’s sharp decline, economic performance has since deteriorated largely because fiscal policy became increasingly contractionary in 2011.

This turn toward fiscal contraction has largely been driven by the enactment of the Budget Control Act (BCA) of 2011, which cut and capped discretionary spending and established the automatic “sequestration” spending cuts that took effect March 1, 2013. Contractionary fiscal measures aside from the BCA—the expiration of the payroll tax cut in January 2013, the expiration of federal emergency unemployment benefits in December 2013, and two rounds of benefit cuts to the Supplemental Nutrition Assistance Program—have also intensified fiscal drags. The sheer size of the contraction of government spending over the current recovery is unprecedented. If public spending in the current recovery had simply matched the growth trajectory of that of the early 1980s recession and recovery, spending would be at least $1 trillion higher now. When multiplier effects are taken into account, this level of spending would have induced a full recovery (Bivens 2016c). By prematurely pulling away from fiscal support, policymakers condemned the economy to years of unnecessarily depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits (Bivens, Fieldhouse, and Shierholz 2013). Instead of making recovery the priority, the Washington budget debate remained entirely focused on the one policy intrinsically at odds with spurring near-term economic growth: reducing budget deficits. And deficits will remain high as long as the economy is depressed. It is safe to say that by now the Budget Control Act has been an anti-stimulus substantially larger than the stimulus provided by the ARRA.

Fiscal expansion can restore genuine full employment

The still-present slack in the labor market means that fiscal expansion could return the economy to genuine full employment. Targeting genuine full employment means more than just closing the CBO’s measure of the output gap. Instead, fiscal expansion should go further and target a 4 percent rate of unemployment. This can only occur if the Federal Reserve does not raise interest rates relative to baseline. In fact, we believe that the Federal Reserve should not raise interest rates again until inflation actually appears in the data. (Bivens 2016b explains the logic behind this recommendation; wage and price inflation remains below the levels that should spur interest rate increases.)

Using fiscal policy to boost aggregate demand is not only the key to achieving a durable return to full employment, it will also actually substantially finance itself and improve key metrics of fiscal health (notably the public debt-to-GDP ratio) in the near term, as the extra economic activity it spurs leads to higher tax collections and lower safety-net spending.

Productivity growth has weakened

A worrisome trend that has emerged fairly recently is that productivity growth has decelerated over the course of the recovery. This means that the benefits of aggressive fiscal policy to restore the economy to full employment and hold it there for a while could be large indeed. Ball, DeLong, and Summers (2014) and Bivens (2014) have shown the damage to estimated long-run GDP by the extended period of running the economy below potential. Reversing the damage already done by—and preventing further damage from—the slack in demand is a key reason why further economic stimulus is needed and why policymakers should be aggressive in pursuing an extended period of full employment (Bivens 2016a). Likewise, in both the short and long run, another way to stem the tide of decelerating productivity growth is through sustained public investment.

The following sections describe the spending proposals and then the revenue policies in The People’s Budget (see Table 1 at the end of this report). The budget is modeled and all policies are scored relative to CBO’s January 2017 current law baseline (CBO 2017). Individual policies and net budgetary impacts, including projected debt-to-GDP (Figure A), deficit-to-GDP (Figure B), and NDD budget authority-to-GDP (Figure C) ratios are compared with CBO’s current law baseline, as well as President Trump’s FY2018 “skinny budget.”

Figure A

Figure B

Figure C

Outlays in The People’s Budget

The People’s Budget makes targeted investments in job creation and infrastructure spending aimed at rapidly restoring full employment, supporting a sustained recovery, and using public investment to accelerate productivity growth, while also making targeted cuts to reflect national priorities and improve efficiency in the budget.

The People’s Budget ramps up overall spending in the near term to support economic recovery and pursue genuine full employment. The People’s Budget therefore heavily invests in stimulus measures over fiscal years 2017 and 2018 when economic support is most needed (see Table 2 at the end of this report).7 Spending then supports the recovery by ensuring that the mix of spending and revenue changes still provide a fiscal boost relative to baseline. In later years, increased spending largely consists of additional infrastructure spending to help meet estimated needs, as well as sustained increases in NDD spending that return NDD spending to historical averages by 2022 and sustain it there, rather than letting it fall to a 60-year low of 2.3 percent of GDP in FY2027, as projected under current law (see Figure C).

As shown in Table 2, The People’s Budget finances $3.5 trillion in mandatory job-creation measures and public investments over FY2017–2027 ($3.3 trillion over FY2018–2027). A large share of the spending consists of sustained investments in infrastructure, child care subsidies, green manufacturing, and research and development.

Renewed fiscal expansion to restore full employment

Among the spending measures are those that make up the targeted stimulus program phased in over two years. The stimulus package, which totals $260 billion over FY2017–2018, includes investing in teachers and K–12 schools ($70 billion); providing block grants to aid states in rehiring first responders, funding safety net programs, and funding Medicaid ($70 billion); and funding public-works jobs programs to boost employment, with particular emphasis on aiding distressed communities ($114 billion). The package of public-works jobs programs would fully finance one year of initiatives proposed by Rep. Jan Schakowsky’s (D-Ill.) in her Emergency Jobs to Restore the American Dream Act of 2011.8 To provide both an economic boost as well as individual assistance to the still-elevated number of long-term unemployed workers, The People’s Budget substantially increases the generosity of the unemployment insurance (UI) system. The budgetary provision that restores the emergency unemployment compensation (EUC) to 99 weeks implies a total investment of $6 billion from FY2017.9

As shown in Table 2, The People’s Budget also funds a number of job-creation tax measures. The budget expands the Earned Income Tax Credit to greatly increase the credit’s generosity to childless workers, thus increasing the program’s work incentive for this group. The $82 billion expansion (2018–2027) was highlighted in President Obama’s FY2017 budget (OMB 2016). Moreover, The People’s Budget finances $106 billion in tax credits for businesses over FY2018–2027, including an enhanced and simplified research and experimentation credit as well as green-manufacturing incentives.

Strengthening the safety net and investing in education

The People’s Budget expands and strengthens other key provisions of the social safety net as well. Supplemental Nutrition Assistance Program (SNAP) benefits are expanded by reestablishing the American Recovery and Reinvestment Act (ARRA) levels of SNAP benefits and undoing SNAP cuts from the farm bill (adjustments totaling $21 billion in increased spending from FY2017—2027, as shown in Table 1). To ensure that federal civilian and veteran retirees do not experience a decline in their purchasing power, The People’s Budget indexes their retirement benefits to the Bureau of Labor Statistics’ experimental consumer price index for elderly households, or CPI-E, which more accurately reflects the buying patterns of American senior citizens. The change will result in additional outlays of $110 billion over FY2018–2027 (see Table 1).

Other spending proposals adopted over FY2018–2027 in The People’s Budget include refinancing student loans and making college more affordable ($443 billion) and adopting President Obama’s previously proposed Preschool for All ($73 billion) and End Family Homelessness ($13 billion) initiatives.

Significantly shrink the infrastructure funding gap

Despite the worrying trend of decelerating productivity growth, the United States has allowed its stock of public capital to decay. To reverse both of these trends, The People’s Budget includes a nearly $2 trillion investment in infrastructure over FY2018–2027. Updating the estimates of the American Society of Civil Engineers for inflation, this infrastructure investment would cover roughly 92 percent of the infrastructure funding gap—the funding necessary to close the nation’s investment shortfall while offering a sustained, continuing dedicated source of funding specifically for infrastructure investments (ASCE 2016).

Returning NDD public investment to historical levels

In addition to these targeted job-creation measures, infrastructure investments, public investments, and tax credits housed under the mandatory spending portion of the budget, The People’s Budget invests heavily in the core nondefense discretionary (NDD) budget. The NDD budget houses a range of critical public investments in areas such as education, energy, basic scientific research, workforce training, and health. The Budget Control Act (BCA) enacted deep cuts to the NDD budget; repealing these cuts under The People’s Budget starting in FY2018 would result in an additional $437 billion over FY2018–2027 in needed NDD investments. The People’s Budget would also repeal the entirety of the discretionary and mandatory BCA spending caps and sequester cuts.10 Over FY2017–2027, the CPC budget policy changes translate to a $1.5 trillion increase in NDD outlays over current law.11 Sustaining these investments is critical for building the country’s stock of public and human capital, a key driver of long-run productivity growth (Bivens 2012a). This boost to long-run productivity is vital given the worrisome trend of decelerating productivity growth.

Summarizing public investments and job-creation measures

Public investments and job-creation measures in the mandatory and NDD budgets total $730 billion over FY2017–2018 (see Table 2), which, when combined with the other spending and revenue provisions within The People’s Budget, is more than enough fiscal support to fully close the remaining jobs gap. In addition to the $2 trillion investment in infrastructure, mandatory public investment includes a $993 billion investment in an “affordable child care for all” subsidy program over FY2018–2027. The NDD public investments as well as mandatory changes in The People’s Budget bring total job creation and public investments in The People’s Budget to $5.8 trillion above the current law baseline over FY2017–2027 (see Table 2).12 Critically, NDD budget authority would reach the historical average of 3.5 percent of GDP by 2022. By FY2027, under The People’s Budget, NDD budget authority is projected to remain at the historical average of 3.5 percent. In comparison, under current law, NDD budget authority is projected to reach 2.3 percent by 2027. Meanwhile, the president’s “skinny budget” would drastically reduce NDD budget authority, reaching 2.3 percent as soon as FY2018 (see Figure C). This classification of federal spending is especially vital because much of it is needed public investment—purchases the government can make now that will boost employment in the short run but provide lasting benefits, such as infrastructure and education. Under current law, such investment will soon reach its historical low as a share of GDP and continue to decline thereafter (Smith 2014a).

Targeted spending cuts and health efficiency savings

The People’s Budget also proposes adjusting the pace of defense savings and finding other targeted and efficient savings in the budget. Over FY2018–2027, the CBO 2017 current law baseline includes a $134 billion reduction in DOD outlays from the BCA spending caps and sequestration cuts. The People’s Budget repeals these cuts and replaces them with similarly sized cuts that allow for a more gradual and considered approach to spending reductions. The budget provides $65 billion in budget authority for overseas contingency operations (OCO) for FY2017—the same as the baseline and enough to fund full and safe withdrawal from Afghanistan—after which all OCO funding is ended. Responsibly reducing OCO spending would save $851 billion over FY2018–2027 relative to current law (see Table 1).

The People’s Budget achieves savings outside of the Defense Department as well, many of which would build on the efficiency reforms already enacted in the Affordable Care Act. The budget implements the following policies: the addition of a public insurance option to Affordable Care Act health insurance exchanges, negotiation of Medicare Part D pharmaceutical drug prices with pharmaceutical companies (similar to current negotiation of drug prices through Medicaid), reform of pharmaceutical drug development and patent rules, payment and administrative cost improvements, and efforts to reduce fraud and abuse in Medicaid. In total, implementing these policies would decrease budget deficits by an estimated $790 billion over FY2018–2027 (see Table 1), much more than offsetting the $132 billion revenue loss from repealing the excise tax on high-premium health insurance plans. Along with health savings, The People’s Budget would adopt a proposal from President Obama’s FY2017 budget to cut $25 billion from crop insurance subsidies from 2018 to 2027—a proposal made necessary by the expansion of the subsidy program in the Agriculture Act of 2014.

Revenue in The People’s Budget

The U.S. tax code is failing in a number of dimensions. Tax receipts have been deliberately driven down to levels that cannot support current national priorities (let alone commitments to an aging population in an economy plagued by high rates of excess health care cost growth). Tax policy has increasingly exacerbated income inequality, and complexity within the tax code means that an individual’s or corporation’s tax bill can too easily depend on the abilities of one’s accountant. The People’s Budget would reform the tax code by enacting policies that would restore lost progressivity (so that effective tax rates reliably rise with income), push back against rising income inequality, raise sufficient revenue, and close inefficient or economically harmful loopholes. Although tax increases are contractionary under current conditions, the economic impact of a dollar of government spending (as shown by the fiscal multiplier) is about three times higher than the economic impact of a dollar of revenue in our estimates. Much of the revenue would be raised from upper-income households and businesses (which have relatively low marginal propensities to consume and thus particularly low fiscal multipliers even among tax changes) and used to finance high bang-per-buck job creation measures. Therefore the relatively small fiscal drag from raising revenue would be more than offset by the other budget policies.

The People’s Budget increases revenues as a share of GDP by 3.8 percent over FY2018–2027, from 18.2 percent under current law to 22.0 percent. Though higher relative to GDP than the previous postwar high of 19.9 percent in 2000 (OMB n.d.), this percentage remains small relative to that of other developed economies (even when state and local tax rates are taken into account). Moreover, aside from the United States, the great majority of advanced economies have increased their revenue-to-GDP ratios in recent decades (OECD n.d.), a logical extension of greater national wealth and aging populations.

Individual income tax reforms

The People’s Budget raises individual income tax revenue relative to current law by enacting what was referred to as “Obama policy” prior to enactment of the American Tax Payer Relief Act of 2012 (ATRA); that is, it allows Bush-era tax rate reductions to expire for tax filers with adjusted gross income (AGI) above $200,000 ($250,000 for joint filers).13 Though tax rates were scheduled to revert to Clinton-era levels at midnight on December 31, 2012, the ATRA extended the income tax cuts for those with AGI under $400,000 ($450,000 for married couples), making permanent the reduction to the 25, 28, and 33 percent brackets and creating a new 35 percent bracket for taxable income up to a $400,000 threshold.14 Under The People’s Budget the 33 percent bracket would revert to 36 percent and the 35 percent bracket would revert to 39.6 percent. The AGI threshold at which the personal exemption phase-out and limitation on itemized deductions are triggered would be lowered from $300,000 ($350,000 for joint filers) to $200,000 ($250,000 for joint filers).

The People’s Budget would increase progressivity of the individual income tax code by adding the five higher marginal tax rates at higher income thresholds from Rep. Schakowsky’s Fairness in Taxation Act of 2011, effective January 1, 2018: a 45 percent bracket starting at taxable income above $1 million; a 46 percent bracket at taxable income above $10 million; a 47 percent bracket at taxable income above $20 million; a 48 percent bracket at taxable income above $100 million; and a 49 percent bracket at taxable income above $1 billion.15 Across this modified rate structure, the budget would also tax all capital gains and dividends as ordinary income. The collective impact of these policies—raising taxes on households with AGI above $200,000 ($250,000 for joint filers), adding five additional high-income brackets, and equalizing treatment of investment and labor income—would generate almost $1.6 trillion over FY2018–2027 relative to current law.16

As Table 1 shows, The People’s Budget makes a number of additional policy changes to the individual income tax code. The budget repeals the step-up basis for capital gains at death ($166 billion in new revenue over FY2018–2027); increases progressivity in the tax code by capping the value of itemized deductions at 28 percent ($577 billion); denies the home-mortgage interest deduction for yachts and vacation homes ($11 billion); and ends the exclusion of foreign earned income ($84 billion). The budget would ensure all pass-through entities are subject to the self-employment tax and the 3.8 percent ACA Medicare tax ($318 billion in revenue over FY2018–2027). Finally, The People’s Budget would enact comprehensive immigration reform that includes a path to citizenship, resulting in more taxpayers paying income and payroll taxes, and it would qualify these residents for refundable tax credits (on net saving $301 billion over FY2018–2027).

Corporate income-tax loophole closers

On the corporate side, The People’s Budget eliminates some of the most egregious loopholes and enacts other progressive reforms. The budget repeals voluntary deferral of taxes owed on U.S.-controlled foreign companies’ source income, ends the Subpart F active financing exception, reforms treatment of the foreign tax credit, and includes an anti-inversion proposal for savings of $1.6 trillion over FY2018–2027. It curbs corporate deductions for stock options (saving $31 billion), limits the deductibility of bonus pay ($54 billion), eliminates corporate jet provisions ($4 billion), and reduces the level of deductibility of corporate meals and entertainment ($70 billion) over FY2018–2027. It saves $145 billion over FY2018–2027 by eliminating fossil fuel preferences through enactment of the End Polluter Welfare Act (EPWA) sponsored by Sen. Bernie Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.). The budget also ends tax deductions for the direct advertising of certain unhealthy foods to children ($20 billion over FY2018–2027).

Taxes on economic ‘bads’ and other tax reforms

Besides increasing progressivity in the individual and corporate income tax codes, The People’s Budget reflects the belief that government should levy Pigovian taxes so that the consumption of certain goods reflects their true societal costs. The People’s Budget imposes a financial transactions tax (FTT) in order to raise significant revenue while dampening speculative trading and encouraging more productive investment. By adhering to the same tax base and rates as the FTT proposed by Bivens and Blair (2016), the FTT in The People’s Budget would raise $1.8 trillion over FY2018–2027.17 The budget would also enact an idea proposed by former House Ways and Means Committee Chairman Dave Camp (R-Mich.) by imposing a 0.35 percent tax on “systemically important financial institutions,” assessed quarterly, to address the issue of “too big to fail” ($101 billion raised over FY2018–2027) .

To reduce the emission of greenhouse gases and yield significant revenue on an annual basis, the budget would price carbon emissions starting at $25 per metric ton in 2018 and indexed at a 5.6 annual rate. Because pricing carbon has the potential to be regressive, The People’s Budget would rebate 25 percent of the revenue from carbon abatement as refundable credits to low- and middle-income households. Net of this rebate, carbon pricing would raise $762 billion in revenue over FY2018–2027. On a much smaller scale, The People’s Budget increases the federal excise tax on cigarettes by $0.50 per pack, raising $33 billion over FY2018–2027. The People’s Budget also includes President Obama’s FY2017 $10.25 per barrel fee on oil and dedicates the $299 billion to the Highway Trust Fund.

Finally, the budget restores the progressive taxation of inherited wealth by instituting a progressive estate tax ($247 billion over FY2018–2027). It enacts Sen. Sanders’s Responsible Estate Tax Act of 2015, which sets an exemption level of $3.5 million and a graduated rate that rises to 55 percent for estates valued at over $50 million. The bill would levy a 10 percent surtax on estates valued at over $500 million.

In total, The People’s Budget raises $9.0 trillion in additional revenue relative to current law (see Summary Table 3). Revenue levels in the budget average 22.0 percent of GDP over FY2018–2027 (see Summary Table 2).

The People’s Budget’s near-term impact on jobs and growth

To eliminate the slack in the labor market—a precondition for real wage growth—The People’s Budget would finance enough in job-creation measures and public investments to roughly close the projected jobs gap and push the unemployment rate down to 4 percent in calendar years 2017–2018, provided the Federal Reserve accommodates the expansion. The U.S. economy would experience a sustained return to genuine full employment under The People’s Budget.

If the full amount of increased outlays and other job-creation measures in The People’s Budget were passed and implemented in calendar year 2017, we project that on net GDP would grow by an additional $386 billion (2 percent) and nonfarm payroll employment by 2.4 million jobs relative to CBO’s current law baseline. Given that calendar year 2017 is a quarter gone, and given as well that some spending might create jobs only after an additional lag, the job creation numbers for 2017 might come in below these projections, but this means that our estimates for 2018 would rise as activity and job creation spilled over into that year. In this analysis, we ignore these issues of potential lags and assume that the economic impact of The People’s Budget’s changes in outlays and revenues are reflected in the calendar year that these budget changes are made. Again, the only real concern this raises is that some of the impacts will be pushed from the end of 2017 and into early 2018. Either way, The People’s Budget will both solidify and accelerate an economic recovery that is clearly progressing, but is still coming too slowly, and that too many policymakers are assuming to be inevitable and imminent.

Specifically, The People’s Budget would increase spending on job-creation and public-investment measures by $371 billion in calendar year 2017 and $469 billion in calendar year 2018 relative to CBO’s current law baseline.18 The associated boost to aggregate demand would be enough to substantially reduce labor market slack, taking into consideration minor economic headwinds from raising additional revenue (which has a countervailing contractionary effect, albeit relatively small per dollar). The People’s Budget would increase revenue by roughly $123 billion in calendar year 2017 and $593 billion in calendar year 2018, relative to current law.19 If these revenue increases were not so progressive, one could worry that they  would actually reduce the deficit too rapidly in 2018 and would drag on growth. But because progressive revenue increases drag much less on demand growth, and because extra spending with large multipliers is sustained in 2018, we are confident that the economy can accept these revenue increases without slowing markedly.

On net, The People’s Budget would boost GDP by $386 billion (2 percent) from calendar year 2017 to 2018 relative to CBO’s current law baseline. Sustaining a fiscal boost for several years would be necessary to avoid creating a fiscal cliff demand shock. The People’s Budget does that even with reduced deficits by mixing very-high-multiplier spending increases with progressive revenue increases that drag much less on demand growth. These effects are projected based on the assumption that the Federal Reserve accommodates the fiscal expansion by not raising interest rates relative to baseline. While in our view the Federal Reserve should be accommodating to this expansion, recent rate increases make it plausible that the Federal Reserve would respond by raising rates. For more information, see Bivens (2016b).

About the author

Hunter Blair joined EPI in 2016 as a budget analyst, in which capacity he researches tax, budget, and infrastructure policy. He attended New York University, where he majored in math and economics. Blair received his master’s in economics from Cornell University.

Acknowledgements

The author would like to thank colleagues Josh Bivens and Samantha Sanders for their help with this project. Special thanks are due to Thomas Hungerford, Joshua Smith, Andrew Fieldhouse, and Rebecca Thiess, authors of previous EPI analyses of CPC budget alternatives, for their assistance and guidance. Thanks also to CPC staff, especially Leslie Zelenko. Thank you finally to Lora Engdahl for her helpful suggestions and excellent copyediting. All errors or omissions are solely the responsibility of the author.

Appendix

Budgetary scoring and modeling

The Economic Policy Institute Policy Center has scored the policies proposed by The People’s Budget and modeled their cumulative impact relative to CBO’s January 2017 baseline (CBO 2017). Table 1 at the end of the paper lists the major policy alterations to the January 2017 baseline and broadly separates policy proposals into two categories: revenue policies and spending policies. All policies are depicted as the net impact on the primary budget deficit (excluding net interest) rather than the impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects (i.e., refundable portions of tax credits), and some policies in the spending adjustments include revenue effects. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal change to the primary budget deficit, and the unified budget deficit is adjusted accordingly.20 The net impact of these policy changes on the budget, as well as relative to CBO’s current law baseline, can be found in Summary Tables 1 through 4. All figures in the tables and graphs are for fiscal years, but the text includes key calculations for calendar years.

In some instances it is necessary to extrapolate from existing official or trusted scores (e.g., those from the Congressional Budget Office, Citizens for Tax Justice, Joint Committee on Taxation, and Office of Management and Budget) to adjust from a previous budget window to the current budget window. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score. Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in the summary tables as such.

Unless otherwise specified, all tax policies are assumed to be implemented on January 1, 2018. Tax policies modeled from scores starting before FY2017 assume 75 percent of the revenue score for that year (the three quarters of FY2017 in calendar year 2017). More broadly, fiscal year scores are calculated as 25/75 weighted-average calendar-year scores where necessary.

Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling. Many of the individual income tax proposals, however, were collectively modeled by CTJ using the Institute on Taxation and Economic Policy (ITEP) microsimulation and accordingly account for interaction effects, including those with the alternative minimum tax and refundable tax credits.

Economic analysis

All economic impacts are estimated relative to CBO’s current law baseline.

A fiscal multiplier of 1.4 has been assigned to government spending provisions, and a fiscal multiplier of 0.5 has been assigned to tax provisions. These are essentially rough median estimates of a range of studies. Some of these sources include Moody’s Analytics Chief Economist Mark Zandi (Zandi 2011), as well as the International Monetary Fund, CBO, and the Council of Economic Advisers, among other forecasters (Bivens 2012b; CBO 2012; CEA 2011; IMF 2012). Best estimates for tax provisions’ multipliers demonstrate greater variance, depending on how they are targeted to households or businesses more or less likely to spend an extra dollar of disposable income. Multiplier estimates of increased taxes on upper-income households (following policy of the Obama administration) and corporations are lower, at 0.25 and 0.32, respectively, and almost all of The People’s Budget revenue policies fall into one of these two categories. The multiplier for pricing carbon would be somewhat higher, even taking into consideration the refundable rebate, and 0.5 is assigned as a conservative estimate for all tax changes.

Policy adjustments for 2017 are calculated as 100 percent of FY2017 and 25 percent of FY2018 budgetary costs. All current policy adjustments for calendar year 2018 adopt a 75/25 fiscal year/calendar year split. Following the methodology in Bivens and Fieldhouse (2012), a multiplier of 1.4 is assigned to removing sequestration.

The impact on the unemployment rate is calculated as an estimate using Okun’s rule of thumb. Specifically, the change in unemployment is projected by the percentage-point change in the relative output gap (actual output divided by potential output) divided by 2.0. Estimates for the change in nonfarm payroll employment are based on the percent change in GDP, using the methodology outlined in Bivens (2011b).

Endnotes

1. Where policies in The People’s Budget have been carried over from previous CPC budgets, this paper draws accordingly from EPIPC’s analyses of CPC’s fiscal 2012, 2013, 2014, 2015, 2016, and 2017 budget alternatives: The People’s Budget: A Technical Analysis (Fieldhouse 2011); The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013 (Fieldhouse and Thiess 2012); The Back to Work Budget: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2014 (Fieldhouse and Thiess 2013); The ‘Better Off Budget’: Analysis of the Congressional Progressive Caucus budget for Fiscal Year 2015 (Smith 2014b); The ‘People’s Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2016 (Hungerford 2015); ‘The People’s Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2017 (Blair 2016).

2. President Trump’s “skinny budget” only includes spending proposals for fiscal year 2017 and fiscal year 2018, and those spending proposals only cover discretionary spending.

3. These estimates are measured relative to CBO’s current law baseline. In our estimates the macroeconomic effect occurs at the end of 2017. Given that a quarter of 2017 has already gone by, and given various lags in enacting policy as well as lags in policy affecting the economy, it’s likely that this level of effectiveness could be reached in early 2018 instead. Regardless, if the job-creation measures in The People’s Budget were passed in coming months, there would be substantial near-term improvement in economic activity and jobs.

4. These estimates are measured relative to CBO’s current law baseline. This includes job-creation measures, nondefense discretionary spending increases, and repeal of Budget Control Act discretionary spending caps (see Table 2).

5. The People’s Budget apportions increases to the nondefense discretionary budget functions as follows: 15 percent for International Affairs (Function 150); 5 percent for General Science, Space, and Technology (F250); 5 percent for Energy (F270); 5 percent for Natural Resources and Environment (F300); 5 percent for Commerce and Housing Credit (F370); 5 percent for Community and Regional Development (F450); 15 percent for Education, Training, Employment, and Social Services (F500); 10 percent for Health (F550); 20 percent for Income Security (F600); 10 percent for Veterans Benefits and Services (F700); and 5 percent for Administration of Justice (F750).

6. The characterization of current fiscal policy as “austere” is eminently justifiable when comparing spending growth over the current recovery with spending growth in all other post–World War II recoveries—particularly when the size of the output gap at the recession’s trough is taken into account.

7. This includes undoing nondefense discretionary spending cuts included in the Budget Control Act.

8. The proposed Emergency Jobs to Restore the American Dream Act of 2011 was included in the Budget for All, the Congressional Progressive Caucus’s FY2013 budget alternative. The jobs-creation package invests $113.5 billion in each of two years, and it was estimated by Rep. Schakowsky’s staff to support the creation of two million jobs (Fieldhouse and Thiess 2012).

9. Emergency unemployment benefits have a relatively large economic impact per dollar. Mark Zandi of Moody’s Analytics has estimated this policy to have an estimated $1.52 impact per dollar spent (Zandi 2011).

10. The $437 billion is the additional NDD outlays that result from repealing both the BCA NDD caps and the BCA NDD sequester over FY2017–2028.

11. This value differs from the subtotal of additional NDD increases in Table 2 because of decreases in NDD spending under The People’s Budget resulting from ending supplemental spending for war, disaster, and emergencies. NDD budget authority is increased gradually in order to reach historical levels of NDD budget authority by 2021 and then sustained at historical levels for the rest of the budget window. The associated budgetary outlays can be seen in Table 2.

12. This includes undoing both phases of NDD cuts in the BCA.

13. These AGI cutoffs are measured in 2009 dollars and were subsequently indexed to inflation in the administration’s budget requests.

14. These rates were scheduled to revert to 28, 31, 36, and 39.6 percent. ATRA levied a 39.6 percent rate only on income over $400,000 ($450,000 for married couples).

15. The taxable income thresholds for these rates are applicable to individual, head of household, and married filing jointly tax returns by filing status. The taxable income thresholds for these rates are halved for married couples filing separately.

16. The collective budgetary impact of these policy modifications to the individual income tax were scored by Citizens for Tax Justice using the Institute on Taxation and Economic Policy (ITEP) microsimulation model, which is similar to models used by official scorekeepers at the Treasury Department and the Joint Committee on Taxation. The score of taxing capital gains as ordinary income takes into account behavioral responses of capital gains realizations to higher tax rates.

17. These estimates do not match TPC’s updated score. For more details, see Bivens and Blair (2016).

18. These calendar year increases are based on additional outlays of $252 billion in FY2017, $478 billion in FY2018, and $444 billion in FY2019, relative to CBO’s current law baseline (see Table 2).

19. These calendar year increases are based on a net increases in revenue of $493 billion in FY2018 and $894 billion in FY2019 relative to CBO’s current law baseline (see Summary Table 3).

20. Debt service is calculated by the CBO’s debt service matrix for the January 2017 baseline.

References

American Society of Civil Engineers (ASCE). 2016. Failure to Act: Closing the Infrastructure Investment Gap for America’s Economic Future. American Society of Civil Engineers.

Ball, Laurence, Brad DeLong, and Larry Summers, Larry. 2014. Fiscal Policy and Full Employment. Center on Budget and Policy Priorities, April 2.

Bivens, Josh. 2011b. Method Memo on Estimating the Jobs Impact of Various Policy Changes. Economic Policy Institute.

Bivens, Josh. 2012a. Public Investment: The Next ‘New Thing’ for Powering Economic Growth. Economic Policy Institute, Briefing Paper No. 338.

Bivens, Josh. 2012b. “Claims About the Efficacy of Fiscal Stimulus in a Depressed Economy Are Based on As-Flimsy Evidence as the Laffer Curve?! Seriously False Equivalence.” Working Economics (Economic Policy Institute blog), June 7.

Bivens, Josh. 2014. Nowhere Close: The Long March from Here to Full Employment. Economic Policy Institute.

Bivens, Josh. 2016a. A ‘High-Pressure Economy’ Can Help Boost Productivity and Provide Even More ‘Room to Run’ for the Recovery. Economic Policy Institute.

Bivens, Josh. 2016b. Mission Still not Accomplished: To Reach Full Employment We Need to Move Fiscal Policy from Austerity to Stimulus. Economic Policy Institute.

Bivens, Josh. 2016c. Why is Recovery Taking So Long—and Who’s to Blame? Economic Policy Institute.

Bivens, Josh, and Andrew Fieldhouse. 2012. A Fiscal Obstacle Course, Not a Cliff: Economic Impacts of Expiring Tax Cuts and Impending Spending Cuts, and Policy Recommendations. Economic Policy Institute and The Century Foundation, Issue Brief No. 338.

Bivens, Josh, Andrew Fieldhouse, and Heidi Shierholz. 2013. From Free-Fall to Stagnation: Five Years After the Start of the Great Recession, Extraordinary Policy Measures Are Still Needed, but Are Not Forthcoming. Economic Policy Institute, Briefing Paper No. 355.

Bivens, Josh, and Hunter Blair. 2016. A Financial Transaction Tax would Help Ensure Wall Street Works for Main Street. Economic Policy Institute.

Blair, Hunter. 2016. ‘The People’s Budget’: Analysis of the Congressional Progressive Caucus budget for Fiscal Year 2017. Economic Policy Institute Policy Center.

Congressional Budget Office (CBO). 2012. Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2012 through March 2012.

Congressional Budget Office (CBO). 2017. The Budget and Economic Outlook: 2017 to 2027.

Council of Economic Advisers (CEA). 2011. The Economic Impact of the American Recovery and Reinvestment Act of 2009: Eighth Quarterly Report.

Fieldhouse, Andrew. 2011. The People’s Budget: A Technical Analysis. Economic Policy Institute Policy Center, Working Paper No. 290.

Fieldhouse, Andrew, and Rebecca Thiess. 2012. The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013. Economic Policy Institute Policy Center.

Fieldhouse, Andrew, and Rebecca Thiess. 2013. The Back to Work Budget: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2014. Economic Policy Institute Policy Center.

Hungerford, Thomas. 2015. The ‘People’s Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2016. Economic Policy Institute Policy Center.

International Monetary Fund (IMF). 2012. World Economic Outlook October 2012: Coping with High Debt and Sluggish Growth.

Office of Management and Budget (OMB). 2016. Summary Tables, Budget of the United States Government, Fiscal Year 2017.

Office of Management and Budget (OMB). 2017. America First: A Budget Blueprint to Make America Great Again.

Office of Management and Budget (OMB). Undated. Historical Tables, Table 2.3—Receipts by Source as Percentage of GDP: 1934–2021.

Organization for Economic Cooperation and Development (OECD). Undated. Revenue Statistics—Comparative Tables.

Smith, Joshua. 2014a. Five Years Since the American Recovery and Reinvestment Act: The Downward Spiral of Public Investment. Economic Policy Institute.

Smith, Joshua. 2014b. The ‘Better Off Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2015. Economic Policy Institute Policy Center.

Zandi, Mark. 2011. “At Last, the U.S. Begins a Serious Fiscal Debate.” Moody’s Analytics, April 14.

Table 1

Table 2

Summary table 1

Summary table 2

Summary table 3

Summary table 4

The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2017 (FY2017) budget, titled “The People’s Budget—Prosperity not Austerity.” It builds on recent CPC budget alternatives in setting the following priorities: near-term job creation, financing public investments, strengthening low- and middle-income families’ economic security, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, strengthening social insurance programs, and ensuring long-run fiscal sustainability.

Figures A–C, visualizing The People’s Budget’s impacts on deficits, debt, and nondefense discretionary funding compared with current law, the president’s budget, and historical averages, appear in the body of the report. Tables 1 and 2 detailing the policy changes within the budget; and summary tables 1 through 4 depicting budget totals as well as comparisons with the current law baseline, appear at the end of the report.

The People’s Budget aims to improve the economic well-being of low- and middle-income families by finally closing the persistent jobs gap that has plagued the U.S. economy since the Great Recession began. For that purpose, The People’s Budget provides upfront economic stimulus large enough to go beyond closing the CBO’s measure of the output gap (a measure of how far from potential the economy is operating). The budget would close the output gap and target genuine full employment by pushing the unemployment rate down to 4 percent.

This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring The People’s Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.1

We find that The People’s Budget would have significant, positive impacts. Specifically, it would:

• Finally complete the economic recovery. The People’s Budget would sharply accelerate economic and employment growth; it would boost gross domestic product (GDP) by 3 percent and employment by 3.6 million jobs in the near term. This would both close the CBO estimate of the output gap and further push unemployment down, to 4 percent, our estimate of genuine full employment. The budget would also ensure that the mixture of spending and revenue changes provides a net fiscal boost long enough to avoid a future fiscal cliff (i.e., a sharp drop in demand caused by budget deficits closing too quickly to sustain growth) that could throw recovery into reverse.2
• Make necessary public investments. The budget finances roughly $295 billion in job-creation and public-investment measures in calendar year 2016 alone and roughly $565 billion over calendar years 2016–2017.3 This fiscal expansion is consistent with the amount of fiscal support needed to rapidly reduce labor market slack and restore the economy to full health. Furthermore, The People’s Budget also aims to hit more ambitious long-term public investment targets, by returning nondefense discretionary spending (NDD) to its historical average as a percentage of GDP by 2021.
• Facilitate economic opportunity for all. By expanding tax credits and other programs for low- and middle-wage workers, boosting public employment, and offering incentives for employers to create new jobs, The People’s Budget aims to boost economic opportunity for all segments of the population.
• Strengthen the social safety net. The People’s Budget strengthens the social safety net and proposes no benefit reductions to social insurance programs—in other words, it does not rely on simple cost-shifting to reduce the budgetary strain of health and retirement programs. Instead, it uses government purchasing power to lower health care costs (health care costs are the largest threat to long-term fiscal sustainability) and builds upon efficiency savings from the Affordable Care Act. The budget also expands and extends emergency unemployment benefits and increases funding for education, training, employment, and social services as well as income security programs in the discretionary budget.4
• Smartly cut spending. The budget focuses on modern security needs by repealing sequestration cuts and spending caps that affect the Defense Department but replacing them with similarly sized funding reductions that are less front-loaded and will allow more considered cuts. It ends emergency overseas contingency operation (OCO) spending in FY2017 and beyond, and ensures a slow rate of spending growth for the Defense Department for the remainder of the decade.
• Increase tax progressivity and adequacy. The budget restores adequate revenue and pushes back against income inequality by adding higher marginal tax rates for millionaires and billionaires, equalizing the tax treatment of capital income and labor income, restoring a more progressive estate tax, eliminating inefficient corporate tax loopholes, levying a tax on systemically important financial institutions, and enacting a financial transactions tax, among other tax policies.
• Reduce the deficit in the medium term. The budget increases near-term deficits to boost job creation, but reduces the deficit in FY2017 and beyond relative to CBO’s current law baseline. The budget would achieve primary budget balance (excluding net interest) and sustainable budget deficits in FY2018 and beyond. After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio in the now full-employment economy over time, actually exceeding a key benchmark of sustainability (of a stable debt-to-GDP ratio during times of full employment). Relative to current law, the budget would reduce public debt by $5.1 trillion (18.5 percent of GDP) by FY2026.

Introduction

The People’s Budget is focused on both short- and long-term economic objectives. In the short run, The People’s Budget targets a rapid and durable return to genuine full employment through the use of expansionary fiscal policy. In the long run, The People’s Budget pushes back on decelerating productivity growth by making necessary and sustained public investments.

The budget was developed from the evidence-based conclusion that the present economic challenge of joblessness results from a continuing shortfall of aggregate demand—the result of the Great Recession and its aftermath—and that the depressed state of economic activity is largely responsible for elevated budget deficits and the recent rise in public debt. Further, much recent research indicates that aggregate demand is likely to remain depressed in coming years without a fiscal boost (this hypothesis about chronic ongoing demand shortages is often referred to as “secular stagnation”). Labor market slack resulting from this continuing demand shortfall is in turn exacerbating the decade-long trend of falling working-age household income and the three-decades-long trend of markedly increasing income inequality.

Moreover, since late 2011, contractionary fiscal policy (reduced government spending) has greatly contributed to the continuing slack in the labor market and stagnant earnings for most workers. The slack in the labor market can still be seen through the low labor-force participation rate, high labor-underutilization rate, and the low employment-to-population ratio of prime-age workers (ages 25–54). Expansionary fiscal policy can help ensure a prompt and durable return to a full-employment economy which will in turn spur rising wages.

Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, The People’s Budget invests heavily in front-loaded job-creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy, The People’s Budget substantially increases near-term budget deficits to finance a targeted stimulus program that would include infrastructure investment, aid to state and local governments, targeted tax credits, and public works programs.5 These types of investments would yield enormous returns—particularly by reducing the long-run economic scarring caused by the underuse of productive resources—and raise national income and living standards. The People’s Budget also seeks to accelerate productivity growth through sustained public investment—in part through $1.2 trillion of much needed infrastructure investments and in part through returning NDD spending to historical levels of 3.5 percent of GDP by 2021 and keeping it there.

Beyond improving middle-class living standards, using expansionary fiscal policy to ensure a rapid return to full employment is fiscally responsible. A significant portion of the sticker price of a fiscal stimulus package will be recouped through higher tax collections and lower spending on automatic stabilizers such as unemployment insurance (programs or policies that offset fluctuations in economic activity without direct intervention by policymakers). Higher levels of economic activity will also decrease near-term budget deficits and public debt as a share of GDP. Ensuring a rapid return to full employment hedges against many downside fiscal risks, notably slower-than-projected economic recovery, larger-than-projected cyclical budget deficits, and decreased long-run potential GDP due to economic scarring, long-lasting damage to individuals’ economic situations, and the economy more broadly. The People’s Budget would further promote fiscal responsibility and a sustainable public-debt trajectory by raising revenues progressively, exploiting health care efficiency savings, and maintaining the reduced spending trajectory of the Department of Defense (DOD). This means that worries that increased deficits in The People’s Budget would put upward pressure on interest rates are misplaced. Interest rate pressure is normally thought to stem from anticipated future budget deficits run while the economy is forecast to be at full employment. But in future years when the economy is at full employment, deficits will be smaller under The People’s Budget.

After increasing near-term borrowing to restore full employment, the budget easily meets the key benchmark of sustainability: stabilizing the debt-to-GDP ratio at full employment. In fact, under The People’s Budget, the future debt-to-GDP ratio will decline in years the economy is at full employment. Relative to current law, the budget would reduce public debt by $5.1 trillion (18.5 percent of GDP).

The economic context for The People’s Budget

More than eight years have passed since the onset of the Great Recession in December 2007, but the economic context for The People’s Budget remains unequivocally tied to the recession for the following reasons.

Slack remains

Growth in the 6.5 years since the recession’s official end has been too sluggish to restore the economy to prerecession conditions, let alone to genuine full employment. While the unemployment rate as of January 2016 stands at 4.9 percent, it likely overstates the extent of labor market recovery. The share of adults age 25–54 with a job—which fell an unprecedented 5.5 percentage points (from 80.3 percent to 74.8 percent) from its peak to trough due to the Great Recession—is now still just 77.7 percent. Further, nominal wage growth has failed to accelerate over the recovery.

The pace of economic growth since the economy emerged from recession in July 2009 has been too sluggish to restore the economy to full health, and this slow pace of growth can be entirely explained by the drag from fiscal policy since 2011. While fiscal policy during and immediately after the recession— particularly the enactment of the American Recovery and Reinvestment Act (ARRA)—was strongly expansionary and arrested the economy’s sharp decline, economic performance has since deteriorated largely because fiscal policy became increasingly contractionary in 2011.

This turn toward fiscal contraction has largely been driven by the enactment of the Budget Control Act (BCA) of 2011, which cut and capped discretionary spending and established the automatic “sequestration” spending cuts that took effect March 1, 2013. Contractionary fiscal measures aside from the BCA—the expiration of the payroll tax cut in January 2013, the expiration of federal emergency unemployment benefits in December 2013, and two rounds of benefit cuts in the Supplemental Nutrition Assistance program—have also intensified fiscal drags. The sheer size of the contraction of government spending over the current recovery is unprecedented. If public spending in the current recovery had simply matched the growth trajectory of that of the early 1980s recession and recovery, spending would be at least $800 billion higher now. When multiplier effects are taken into account, this level of spending would have induced a full recovery (Bivens 2014). By prematurely pulling away from fiscal support, policymakers condemned the economy to years of unnecessarily depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits (Bivens, Fieldhouse, and Shierholz 2013). Instead of making recovery the priority, the Washington budget debate remains entirely focused on the one policy intrinsically at odds with spurring near-term economic growth: reducing budget deficits. And deficits will remain high as long as the economy is depressed. It is safe to say that by now the Budget Control Act has been an antistimulus substantially larger than the stimulus provided by the ARRA.

Fiscal expansion can restore genuine full employment

This still-present slack in the labor market means that fiscal expansion could return the economy to genuine full employment. Targeting genuine full employment means more than just closing the CBO’s measure of the output gap. Instead, fiscal expansion should go further and target a 4 percent rate of unemployment. This can only occur if the Federal Reserve does not raise interest rates relative to baseline. In fact, we believe that the Federal Reserve should not raise interest rates until inflation actually appears in the data. For a more in-depth discussion of this view, see the EPI report by Josh Bivens setting the context for this analysis.

Using fiscal policy to boost aggregate demand is not only the key to achieving a durable return to full employment, it will also actually substantially finance itself and improve key metrics of fiscal health (notably the public debt-to-GDP ratio) in the near term, as the extra economic activity it spurs leads to higher tax collections and lower safety-net spending.

Productivity growth has weakened

A worrisome trend that has emerged fairly recently is that productivity growth has decelerated over the course of the recovery. This means that the benefits of aggressive fiscal policy to restore the economy to full employment and hold it there for a while could be large indeed. Ball, DeLong, and Summers (2014) and Bivens (2014) have shown the damage to estimated long-run GDP by the extended period of running the economy below potential. Reversing the damage already done by—and preventing further damage from—the slack in demand is a key reason why further economic stimulus is needed and why policymakers should be aggressive in pursuing an extended period of full employment. Likewise, in both the short and long run, another way to stem the tide of decelerating productivity growth is through sustained public investment.

The following sections describe the spending proposals and then the revenue policies in The People’s Budget (see Table 1 at the end of this report). The budget is modeled and all policies are scored relative to CBO’s January 2016 current law baseline (CBO 2016). Individual policies and net budgetary impacts, including projected debt-to-GDP (Figure A), deficit-to-GDP (Figure B), and NDD budget authority-to-GDP (Figure C) ratios are compared with CBO’s current law baseline, as well as President Obama’s FY2017 budget request.

Figure A

Figure B

Figure C

Outlays in The People’s Budget

The People’s Budget makes targeted investments in job creation and infrastructure spending aimed at rapidly restoring full employment, supporting a sustained recovery, and using public investment to accelerate productivity growth, while also making targeted cuts to reflect national priorities and improve efficiency in the budget.

The People’s Budget ramps up overall spending in the near term to support economic recovery and pursue genuine full employment. The People’s Budget therefore heavily invests in stimulus measures over fiscal years 2016 and 2017 when economic support is most needed (see Table 2 at the end of this report).6 Spending then supports the recovery by ensuring that the mix of spending and revenue changes still provide a fiscal boost relative to baseline. In later years, increased spending largely consists of additional infrastructure spending to help meet estimated needs, as well as sustained increases in NDD spending that return NDD spending to historical averages by 2021 and sustain it there, rather than letting it fall to a 60-year low of 2.3 percent in FY2026, as projected under current law (see Figure C).

As shown in Table 2, The People’s Budget finances $1.8 trillion in mandatory job-creation measures and public investments over FY2016–2026 ($1.5 trillion over FY2017–2026). A large share of the spending consists of sustained investments in infrastructure, green manufacturing, and research and development.

Renewed fiscal expansion to restore full employment

Among the spending measures are those that make up the targeted stimulus program phased in over two years. This stimulus program includes a $208 billion investment in infrastructure, spending that reaches $1.2 trillion over FY2016–2026, which approaches the level the American Society of Civil Engineers calls for to close the nation’s investment shortfall while offering a sustained, continuing dedicated source of funding specifically for infrastructure investments (ASCE 2013).

Other pieces of the stimulus package, totaling $175 billion over FY2016–2017, include investing in teachers and K-12 schools ($15 billion); providing block grants to aid states in rehiring first responders, funding safety net programs, and funding Medicaid ($15 billion); and funding public-works jobs programs to boost employment, with particular emphasis on aiding distressed communities ($114 billion). The package of public-works jobs programs would fully finance one year of initiatives proposed by Rep. Jan Schakowsky’s (D-Ill.) in her Emergency Jobs to Restore the American Dream Act of 2011.7 To provide both an economic boost as well as individual assistance to the still elevated number of long-term unemployed workers, The People’s Budget substantially increases the generosity of the unemployment insurance (UI) system. This budgetary provision implies a total investment of $32 billion from FY2016–2017.8

As shown in Table 2, The People’s Budget also funds a number of job-creation tax measures. It introduces the Hard Work Tax Credit, an expanded version of the now-expired Making Work Pay tax credit, for calendar year 2016. The Hard Work Tax Credit will be equal to that of the old Making Work Pay credit.9 The budget also expands the Earned Income Tax Credit to greatly increase the credit’s generosity to childless workers, thus increasing the program’s work incentive for this group. The $67 billion expansion was highlighted in President Obama’s FY17 budget (OMB 2016). Moreover, The People’s Budget finances $48 billion in tax credits for businesses over FY2017–2026, including an enhanced and simplified research and experimentation credit as well as green-manufacturing incentives.

Strengthening the safety net and investing in education

The People’s Budget expands and strengthens other key provisions of the social safety net as well. Supplemental Nutrition Assistance Program (SNAP) benefits are expanded by reestablishing the American Recovery and Reinvestment Act (ARRA) levels of SNAP benefits and undoing SNAP cuts from the farm bill (adjustments totaling $26 billion in increased spending from FY2016-2026, as shown in Table 1). To ensure that federal civilian and veteran retirees are not experiencing a decline in their purchasing power, The People’s Budget indexes their retirement benefits to the Bureau of Labor Statistics’ experimental consumer price index for elderly households, or CPI-E, which more accurately reflects the buying patterns of American senior citizens. The change will result in additional outlays of $108 billion over FY2017–2026 (see Table 1).

Other spending proposals adopted over FY2017–2026 in The People’s Budget include refinancing student loans and making college more affordable ($412 billion) and adopting the president’s proposed Preschool for All ($66 billion) and End Family Homelessness ($11 billion) initiatives.

Returning NDD public investment to historical levels

In addition to these targeted job-creation measures, infrastructure investments, public investments, and tax credits housed under the mandatory spending portion of the budget, The People’s Budget invests heavily in the core nondefense discretionary (NDD) budget. The NDD budget houses a range of critical public investments in areas such as education, energy, basic scientific research, workforce training, and health. The Budget Control Act (BCA) enacted deep cuts to the NDD budget; repealing these cuts under The People’ Budget starting in FY2017 would result in an additional $513 billion over FY2017–2026 in needed NDD investments. The People’s Budget would also repeal the entirety of the discretionary and mandatory BCA spending caps and sequester cuts.10 In total, the CPC budget policy changes translate to a nearly $1.9 trillion increase in NDD outlays over current law).11 Sustaining these investments is critical for building the country’s stock of public and human capital, a key driver of long-run productivity growth (Bivens 2012a). This boost to long-run productivity is vital given the worrisome trend of decelerating productivity growth.

Summarizing investments and job-creation measures

Investments and job-creation measures in the mandatory and NDD budgets total $509 billion over FY2016–2017 (see Table 2), which, when combined with the other spending and revenue provisions within The People’s Budget, is in line with the level of fiscal support needed to fully close the remaining jobs gap. These NDD investments as well as mandatory changes in The People’s Budget bring total job creation and public investments in The People’s Budget to $3.8 trillion above the current law baseline over FY2016–2026 (see Table 2).12 Critically, NDD budget authority would reach the historical average of 3.5 percent of GDP by 2021, as opposed to averages of 2.5 and 2.6 percent respectively under current law and the president’s FY17 budget request. By FY2026, under The People’s Budget, NDD budget authority is projected to remain at the historical average of 3.5 percent compared with 2.3 percent under current law and the president’s budget (see Figure C). This classification of federal spending is especially vital because much of it is needed public investment—purchases the government can make now that will boost employment in the short run but provide lasting benefits, such as infrastructure and education. Under current law, such investment will soon reach its historical low as a share of GDP and continue to decline thereafter (Smith 2014a).

Targeted spending cuts and health efficiency savings

The People’s Budget also proposes adjusting the pace of defense savings and finding other targeted and efficient savings in the budget. Over FY2017–2026, the CBO 2016 current law baseline includes a $243 billion reduction in DOD outlays from the BCA spending caps and sequestration cuts. The People’s Budget repeals these cuts and replaces them with similarly sized cuts that allow for a more gradual and considered approach to spending reductions. The budget provides $74 billion in budget authority for overseas contingency operations (OCO) for FY2016—the same as the baseline and enough to fund full and safe withdrawal from Afghanistan—after which all OCO funding is ended. Responsibly reducing OCO spending would save $744 billion over FY2017–2026 relative to current law (see Table 1).

The People’s Budget achieves savings outside of the Defense Department as well, many of which would build on the efficiency reforms already enacted in the Affordable Care Act. The budget implements the following policies: the addition of a public insurance option to Affordable Care Act health insurance exchanges, negotiation of Medicare Part D pharmaceutical drug prices with pharmaceutical companies (similar to current negotiation of drug prices through Medicaid), reform of pharmaceutical drug development and patent rules, payment and administrative cost improvements, and efforts to reduce fraud and abuse in Medicaid. In total, implementing these policies would decrease budget deficits by an estimated $473 billion over FY2017–2026 (see Table 1), much more than offsetting the $103 billion revenue loss from repealing the excise tax on high-premium health insurance plans. Along with health savings, The People’s Budget would adopt a proposal in the president’s FY2017 budget to cut $18 billion from crop insurance subsidies—a proposal made necessary by the expansion of the subsidy program in the Agriculture Act of 2014.

Revenue in The People’s Budget

The U.S. tax code is failing in a number of dimensions. Tax receipts have been deliberately driven down to levels that cannot support current national priorities (let alone commitments to an aging population in an economy plagued by high rates of excess health care cost growth). Tax policy has increasingly exacerbated income inequality, and complexity within the tax code means that an individual’s or corporation’s tax bill can too easily depend on the abilities of one’s accountant. The People’s Budget would reform the tax code by enacting policies that would restore lost progressivity (so that effective tax rates reliably rise with income), push back against rising income inequality, raise sufficient revenue, and close inefficient or economically harmful loopholes. Although tax increases are contractionary under current conditions, the economic impact of a dollar of government spending (as shown by the fiscal multiplier) is about three times higher than the economic impact of a dollar of revenue in our estimates. Much of the revenue would be raised from upper-income households and businesses (which have relatively low marginal propensities to consume and thus particularly low fiscal multipliers even among tax changes) and used to finance high bang-per-buck job creation measures. Therefore the relatively small fiscal drag from raising revenue would be more than offset by the other budget policies.

The People’s Budget increases revenues as a share of GDP by 3.8 percent over FY2017–2026, from 18.1 percent under current law to 21.9 percent. Though higher relative to GDP than the previous postwar high of 19.9 percent in 2000 (OMB n.d.), this percentage remains small relative to that of other developed economies (even when state and local tax rates are taken into account). Moreover, aside from the United States, the great majority of advanced economies have increased their revenue-to-GDP ratios in recent decades (OECD n.d.), a logical extension of greater national wealth and aging populations.

Individual income tax reforms

The People’s Budget raises individual income tax revenue relative to current law by enacting what was referred to as “Obama policy” prior to enactment of the American Tax Payer Relief Act of 2012 (ATRA); that is, it allows Bush-era tax rate reductions to expire for tax filers with adjusted gross income (AGI) above $200,000 ($250,000 for joint filers).13 Though tax rates were scheduled to revert to Clinton-era levels at midnight on December 31, 2012, the ATRA extended the income tax cuts for those with AGI under $400,000 ($450,000 for married couples), making permanent the reduction to the 25, 28, and 33 percent brackets and creating a new 35 percent bracket for taxable income up to a $400,000 threshold.14 Under The People’s Budget the 33 percent bracket would revert to 36 percent and the 35 percent bracket would revert to 39.6 percent. The AGI threshold at which the personal exemption phase-out and limitation on itemized deductions are triggered would be lowered from $300,000 ($350,000 for joint filers) to $200,000 ($250,000 for joint filers).

The People’s Budget would increase progressivity of the individual income tax code by adding the five higher marginal tax rates at higher income thresholds from Rep. Schakowsky’s Fairness in Taxation Act of 2011, effective January 1, 2014: a 45 percent bracket starting at taxable income above $1 million; a 46 percent bracket at taxable income above $10 million; a 47 percent bracket at taxable income above $20 million; a 48 percent bracket at taxable income above $100 million; and a 49 percent bracket at taxable income above $1 billion.15 Across this modified rate structure, the budget would also tax all capital gains and dividends as ordinary income. The collective impact of these policies—raising taxes on households with AGI above $200,000 ($250,000 for joint filers), adding five additional high-income brackets, and equalizing treatment of investment and labor income—would generate almost $1.6 trillion over FY2017–2026 relative to current law.16

As Table 1 shows, The People’s Budget makes a number of additional policy changes to the individual income tax code. The budget repeals the step-up basis for capital gains at death ($825 billion in new revenue over FY2017–2026); increases progressivity in the tax code by capping the value of itemized deductions at 28 percent ($646 billion); denies the home-mortgage interest deduction for yachts and vacation homes ($10 billion); and ends the exclusion of foreign earned income ($83 billion). The budget would ensure all pass-through entities are subject to the self-employment tax and the 3.8 percent ACA Medicare tax ($272 billion in revenue over FY2017–2026). Finally, The People’s Budget would enact comprehensive immigration reform that includes a path to citizenship, resulting in more taxpayers paying income and payroll taxes, and it would qualify these residents for refundable tax credits (on net saving $216 billion over FY2017–2026).

Corporate income-tax loophole closers

On the corporate side, The People’s Budget eliminates some of the most egregious loopholes and enacts other progressive reforms. The budget repeals voluntary deferral of taxes owed on U.S.-controlled foreign companies’ source income, ends the Subpart F active financing exception, reforms treatment of the foreign tax credit, and includes an anti-inversion proposal for savings of $1 trillion over FY2017–2026 (OMB 2015). It curbs corporate deductions for stock options (saving $32 billion), limits the deductibility of bonus pay ($42 billion), eliminates corporate jet provisions ($3 billion), and reduces the level of deductibility of corporate meals and entertainment ($71 billion) over FY2017–2026. It saves $139 billion over FY2017–2026 by eliminating fossil fuel preferences through enactment of the End Polluter Welfare Act (EPWA) sponsored by Sen. Bernie Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.). The budget also ends tax deductions for the direct advertising of certain unhealthy foods to children ($20 billion over FY2017–2026).

Taxes on economic ‘bads’ and other tax reforms

Besides increasing progressivity in the individual and corporate income tax codes, The People’s Budget reflects the belief that government should levy Pigovian taxes so that the consumption of certain goods reflects their true societal costs. The People’s Budget imposes a financial transactions tax (FTT) in order to raise significant revenue while dampening speculative trading and encouraging more productive investment. By adhering to the same tax base and rates as the FTT proposed in the Back to Work budget (the CPC’s budget for FY2014), the FTT in The People’s Budget would raise $924 billion over FY2017–2026 (Fieldhouse and Thiess 2013).17 The budget would also enact an idea proposed by former House Ways and Means Committee Chairman Dave Camp (R-Mich.) by imposing a 0.35 percent tax on “systemically important financial institutions,” assessed quarterly, to address the issue of “too big to fail”($111 billion raised over FY2017–2026) (JCT 2014).

To reduce the emission of greenhouse gases and yield significant revenue on an annual basis, the budget would price carbon emissions starting at $25 per metric ton in 2017 and indexed at a 5.6 annual rate. Because pricing carbon has the potential to be regressive, The People’s Budget, like the Better Off Budget before it, would rebate 25 percent of the revenue from carbon abatement as refundable credits to low- and middle-income households. Net of this rebate, carbon pricing would raise $1.3 trillion in revenue over FY2017–2026. On a much smaller scale, The People’s Budget increases the federal excise tax on cigarettes by $0.50 per pack, raising $35 billion over FY2017–2026. The People’s Budget also includes the president’s $10.25 per barrel fee on oil and dedicates the $319 billion to the Highway Trust Fund.

Finally, the budget restores the progressive taxation of inherited wealth by instituting a progressive estate tax ($231 billion over FY2017–2026). It enacts Sen. Sanders’s Responsible Estate Tax Act of 2010, which sets an exemption level of $3.5 million and a graduated rate that rises to 55 percent for estates valued at over $50 million. The bill would levy a 10 percent surtax on estates valued at over $500 million.

In total, The People’s Budget raises $8.8 trillion in additional revenue relative to current law (see Summary Table 3). Revenue levels in the budget average 21.9 percent of GDP over FY2017–2026 (see Summary Table 2).

The People’s Budget’s near-term impact on jobs and growth

To eliminate the slack in the labor market—a precondition for real wage growth—The People’s Budget would finance enough in job-creation measures and public investments to roughly close the projected jobs gap and push the unemployment rate down to 4 percent in calendar years 2016–2017, provided the Federal Reserve accommodated the expansion. The U.S. economy would experience a sustained return to genuine full employment under The People’s Budget.

If the full amount of increased outlays and other job-creation measures in The People’s Budget were passed and implemented in calendar year 2016, we project that on net GDP would grow by an additional $565 billion (3 percent) and nonfarm payroll employment by 3.6 million jobs relative to CBO’s current law baseline. Given that calendar year 2016 is nearly a quarter gone, and given as well that some spending might create jobs only after an additional lag, the job creation numbers for 2016 might come in below these projections, but this means that our estimates for 2017 would rise as activity and job creation spilled over into that year. In this analysis, we ignore these issues of potential lags and assume that the economic impact of The People’s Budget’s changes in outlays and revenues are reflected in the calendar year that these budget changes are made. Again, the only real concern this raises is that some of the impacts will be pushed from the end of 2016 and into early 2017. Either way, The People’s Budget will both solidify and accelerate an economic recovery that is clearly progressing, but is still coming too slowly, and that too many policymakers are assuming to be inevitable and imminent.

Specifically, The People’s Budget would increase spending on job-creation and public-investment measures by $348 billion in calendar year 2016 and $217 billion in 2017 relative to CBO’s current law baseline.18 The associated boost to aggregate demand would be enough to substantially reduce labor market slack, taking into consideration minor economic headwinds from raising additional revenue (which has a countervailing contractionary effect, albeit relatively small per dollar). The People’s Budget would increase revenue by roughly $95 billion in calendar year 2016 and $532 billion in 2017, relative to current law.19 If these revenue increases were not so progressive, one could worry that they actually reduce the deficit too rapidly in 2017 and would drag on growth. But because progressive revenue increases drag much less on demand growth, and because extra spending with large multipliers is sustained in 2017, we are confident that the economy can accept these revenue increases without slowing markedly.

On net, The People’s Budget would boost GDP by $565 billion (3 percent) from calendar year 2016 to 2017 relative to CBO’s current law baseline. Sustaining a fiscal boost for several years would be necessary to avoid creating a fiscal cliff demand shock. The People’s Budget does that even with reduced deficits by mixing very-high-multiplier spending increases with progressive revenue increases that drag much less on demand growth. These effects are projected based on the assumption that the Federal Reserve accommodates the fiscal expansion by not raising interest rates relative to baseline. While in our view the Federal Reserve should be accommodating to this expansion, recent rate increases make it plausible that the Federal Reserve would respond by raising rates. For more information, see the EPI report by Josh Bivens providing the context of with this analysis.

Acknowledgements

The author would like to thank colleagues Josh Bivens and Christian Dorsey for their help with this project. Special thanks are due to Thomas Hungerford, Joshua Smith, Andrew Fieldhouse, and Rebecca Thiess, authors of previous EPI analyses of CPC budget alternatives, for their assistance and guidance. Thanks to Bobby Kogan at the Senate Budget Committee. Thanks also to CPC staff, especially Kelsey Mishkin, Leslie Zelenko, and Alicia Molt. Thank you finally to Lora Engdahl for her helpful suggestions and excellent copyediting. All errors or omissions are solely the responsibility of the author.

About the author

Hunter Blair is the Budget Analyst at the Economic Policy Institute. He joined EPI in 2016, and he researches tax, budget, and infrastructure policy. He attended New York University, where he majored in math and economics. He received his master’s in economics from Cornell University.

Appendix

Budgetary scoring and modeling

The Economic Policy Institute Policy Center has scored the policies proposed by The People’s Budget and modeled their cumulative impact relative to CBO’s January 2016 baseline (CBO 2016). Table 1 at the end of the paper lists the major policy alterations to the January 2016 baseline and broadly separates policy proposals into two categories: revenue policies and spending policies. All policies are depicted as the net impact on the primary budget deficit (excluding net interest) rather than the impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects (i.e., refundable portions of tax credits), and some policies in the spending adjustments include revenue effects. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal change to the primary budget deficit, and the unified budget deficit is adjusted accordingly.20 The net impact of these policy changes on the budget, as well as relative to CBO’s current law baseline, can be found in Summary Tables 1 to 4.

In some instances it is necessary to extrapolate from existing official or trusted scores (e.g., those from the Congressional Budget Office, Citizens for Tax Justice, Joint Committee on Taxation, and Office of Management and Budget) to adjust from a previous budget window to the current budget window. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score. Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in the summary tables as such.

Unless otherwise specified, all tax policies are assumed to be implemented on January 1, 2017. Tax policies modeled from scores starting before FY2016 assume 75 percent of the revenue score for that year (the three quarters of FY2016 in calendar year 2016). More broadly, fiscal year scores are calculated as 25/75 weighted-average calendar-year scores where necessary.

Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling. Many of the individual income tax proposals, however, were collectively modeled by the CTJ using the Institute on Taxation and Economic Policy (ITEP) microsimulation and accordingly account for interaction effects, including those with the alternative minimum tax and refundable tax credits.

Economic analysis

All economic impacts are estimated relative to CBO’s current law baseline.

A fiscal multiplier of 1.4 has been assigned to government spending provisions, and a fiscal multiplier of 0.5 has been assigned to tax provisions. These are essentially rough median estimates of a range of studies. Some of these sources include Moody’s Analytics Chief Economist Mark Zandi (Zandi 2011), as well as, the International Monetary Fund, CBO, and the Council of Economic Advisers, among other forecasters (Bivens 2012b; CBO 2012; CEA 2011; IMF 2012). Best estimates for tax provisions’ multipliers demonstrate greater variance, depending on how they are targeted to households or businesses more or less likely to spend an extra dollar of disposable income. Multiplier estimates of increased taxes on upper-income households (following Obama policy) and corporations are lower, at 0.25 and 0.32, respectively, and almost all of The People’s Budget revenue policies fall into one of these two categories. The multiplier for pricing carbon would be somewhat higher, even taking into consideration the refundable rebate, and 0.5 is assigned as a conservative estimate for all tax changes.

Policy adjustments for 2016 are calculated as 100 percent of FY2016 and 25 percent of FY2017 budgetary costs. All current policy adjustments for calendar year 2017 adopt a 75/25 fiscal year/calendar year split. Following the methodology in Bivens and Fieldhouse (2012), a multiplier of 1.4 is assigned to removing sequestration.

The impact on the unemployment rate is calculated as an estimate using Okun’s rule of thumb. Specifically, the change in unemployment is projected by the percentage-point change in the relative output gap (actual output divided by potential output) divided by 2.0. Estimates for the change in nonfarm payroll employment are based on the percent change in GDP, using the methodology outlined in Bivens (2011b).

Endnotes

1. Where policies in The People’s Budget have been carried over from previous CPC budgets, this paper draws accordingly from EPIPC’s analyses of CPC’s fiscal 2012, 2013, 2014, 2015, and 2016 budget alternatives: The ‘People’s Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2016 (Hungerford 2015). The ‘Better Off Budget’: Analysis of the Congressional Progressive Caucus budget for Fiscal Year 2015 (Smith 2014b), The People’s Budget: A Technical Analysis (Fieldhouse 2011), The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013 (Fieldhouse and Thiess 2012), and The Back to Work Budget: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2014 (Fieldhouse and Thiess 2013).

2. These estimates are measured relative to CBO’s current law baseline. In our estimates the macroeconomic effect occurs at the end of 2016. Given that nearly a quarter of 2016 has already gone by and given various lags in enacting policy, as well as lags in policy affecting the economy, it’s likely that this level of effectiveness could be reached in early 2017 instead. Regardless, if the job-creation measures in The People’s Budget were passed in coming months, there would be substantial near-term improvement in economic activity and jobs.

3. These estimates are measured relative to CBO’s current law baseline. This includes job-creation measures, nondefense discretionary spending increases, and repeal of Budget Control Act discretionary spending caps (see Table 2).

4. The People’s Budget apportions increases to the nondefense discretionary budget functions as follows: 15 percent for International Affairs (Function 150); 5 percent for General Science, Space, and Technology (F250); 5 percent for Energy (F270); 5 percent for Natural Resources and Environment (F300); 5 percent for Commerce and Housing Credit (F370); 5 percent for Community and Regional Development (F450); 15 percent for Education, Training, Employment, and Social Services (F500); 10 percent for Health (F550); 20 percent for Income Security (F600); 10 percent for Veterans Benefits and Services (F700); and 5 percent for Administration of Justice (F750).

5. The characterization of current fiscal policy as “austere” is eminently justifiable when comparing spending growth over the current recovery with spending growth in all other postwar recoveries—particularly when the size of the output gap at the recession’s trough is taken into account.

6. This includes undoing nondefense discretionary spending cuts included in the Budget Control Act.

7. The proposed Emergency Jobs to Restore the American Dream Act of 2011 was included in the Budget for All, the Congressional Progressive Caucus’s FY2013 budget alternative. The jobs-creation package invests $113.5 billion in each of two years, and was estimated by Rep. Schakowsky’s staff to support the creation of two million jobs (Fieldhouse and Thiess 2012).

8. Emergency unemployment benefits have a relatively large economic impact per dollar. Mark Zandi of Moody’s Analytics has estimated this policy to have an estimated $1.52 impact per dollar spent (Zandi 2011).

9. The benefit would be equal to that of the expired Making Work Pay tax credit, bringing the maximum benefit to $400 for an individual and $800 for joint filers for one year.

10. The $513 billion is the additional NDD outlays that result from repealing both the BCA NDD caps and the BCA NDD sequester over FY2016–2027.

11. This value differs from the subtotal of additional NDD increases in table 2 because of decreases in NDD spending under The People’s Budget resulting from ending supplemental spending for war, disaster, and emergencies. NDD budget authority is increased gradually in order to reach historical levels of NDD budget authority by 2021 and then sustained at historical levels for the rest of the budget window. The associated budgetary outlays can be seen in Table 2.

12. This includes undoing both phases of NDD cuts in the BCA.

13. These AGI cutoffs are measured in 2009 dollars and were subsequently indexed to inflation in the administration’s budget requests.

14. These rates were scheduled to revert to 28, 31, 36, and 39.6 percent. ATRA levied a 39.6 percent rate only on income over $400,000 ($450,000 for married couples).

15. The taxable income thresholds for these rates are applicable to individual, head of household, and married filing jointly tax returns by filing status. The taxable income thresholds for these rates are halved for married couples filing separately.

16. The collective budgetary impact of these policy modifications to the individual income tax were scored by Citizens for Tax Justice using the Institute on Taxation and Economic Policy (ITEP) microsimulation model, which is similar to models used by official scorekeepers at the Treasury Department and the Joint Committee on Taxation. The score of taxing capital gains as ordinary income takes into account behavioral responses of capital gains realizations to higher tax rates.

17. Though TPC has updated their score in a recent report; we continue to use the same estimates from last year. For more details, see the forthcoming paper concerning FTT revenues.

18. These calendar year increases are based on additional outlays of $295 billion in FY2016, $214 billion in FY2017, and $224 billion in FY2018, relative to CBO’s current law baseline (see Table 2).

19. These calendar year increases are based on a net decrease in revenue of $21 billion in FY2016, and a net increases in revenue of $467 billion in FY2017 and $728 billion in FY2018 relative to CBO’s current law baseline (see Summary Table 3).

20. Debt service is calculated by the CBO’s debt service matrix for the January 2016 baseline.

References

American Society of Civil Engineers (ASCE). 2013. Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future. American Society of Civil Engineers. http://www.asce.org/uploadedFiles/Issues_and_Advocacy/Our_Initiatives/Infrastructure/Content_Pieces/failure-to-act-economic-impact-summary-report.pdf

Ball, Laurence, DeLong, Brad, and Summers, Larry. 2014. Fiscal Policy and Full Employment. Center on Budget and Policy Priorities. April 2. http://www.pathtofullemployment.org/wp-content/uploads/2014/04/delong_summers_ball.pdf

Bivens, Josh. 2011b. Method Memo on Estimating the Jobs Impact of Various Policy Changes. Economic Policy Institute. http://www.epi.org/publication/methodology-estimating-jobs-impact/

Bivens, Josh. 2012a. Public Investment: The Next ‘New Thing’ for Powering Economic Growth. Economic Policy Institute, Briefing Paper No. 338. http://www.epi.org/files/2012/bp338.pdf

Bivens, Josh. 2012b. “Claims About the Efficacy of Fiscal Stimulus in a Depressed Economy Are Based on As-Flimsy Evidence as the Laffer Curve?! Seriously False Equivalence.” Working Economics (Economic Policy Institute blog), June 7. http://www.epi.org/blog/calls-fiscal-stimulus-depressed-economy/

Bivens, Josh. 2014. Nowhere Close: The Long March from Here to Full Employment. Economic Policy Institute. http://www.epi.org/publication/nowhere-close-the-long-march-from-here-to-full-employment/

Bivens, Josh, and Andrew Fieldhouse. 2012. A Fiscal Obstacle Course, Not a Cliff: Economic Impacts of Expiring Tax Cuts and Impending Spending Cuts, and Policy Recommendations. Economic Policy Institute and The Century Foundation, Issue Brief No. 338. http://www.epi.org/files/2012//ib3381.pdf

Bivens, Josh, Andrew Fieldhouse, and Heidi Shierholz. 2013. From Free-fall to Stagnation: Five years After the Start of the Great Recession, Extraordinary Policy Measures Are Still Needed, but Are Not Forthcoming. Economic Policy Institute, Briefing Paper No. 355. http://www.epi.org/publication/bp355-five-years-after-start-of-great-recession/

Congressional Budget Office (CBO). 2012. Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2012 through March 2012. http://www.cbo.gov/sites/default/files/cbofiles/attachments/ARRA_One-Col.pdf

Congressional Budget Office (CBO). 2016. The Budget and Economic Outlook: 2016 to 2026. http://www.cbo.gov/publication/51129

Council of Economic Advisers (CEA). 2011. The Economic Impact of the American Recovery and Reinvestment Act of 2009: Eighth Quarterly Report. http://www.whitehouse.gov/sites/default/files/cea_8th_arra_report_final_draft.pdf

Fieldhouse, Andrew. 2011. The People’s Budget: A Technical Analysis. Economic Policy Institute Policy Center, Working Paper No. 290. http://www.epi.org/page/-/WP290_FINAL.pdf

Fieldhouse, Andrew, and Rebecca Thiess. 2012. The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013. Economic Policy Institute Policy Center. http://www.epi.org/publication/wp293-cpc-budget-for-all-2013/

Fieldhouse, Andrew, and Rebecca Thiess. 2013. The Back to Work Budget: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2014. Economic Policy Institute Policy Center. http://www.epi.org/publication/back-to-work-budget-analysis-congressional-progressive/

Hungerford, Thomas. 2015. The ‘People’s Budget’: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2016. Economic Policy Institute Policy Center. http://www.epi.org/publication/the-peoples-budget-analysis-of-the-congressional-progressive-caucus-budget-for-fiscal-year-2016/

International Monetary Fund (IMF). 2012. World Economic Outlook October 2012: Coping with High Debt and Sluggish Growth. http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

Joint Committee on Taxation (JCT). 2014. Estimated Revenue Effects of the “Tax Reform Act of 2014.” JCX-20-14. https://www.jct.gov/publications.html?func=startdown&id=4562

Office of Management and Budget (OMB). 2015. Fiscal Year 2016 Analytical Perspectives of the U.S. Government. https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/spec.pdf

Office of Management and Budget (OMB). 2016. Summary Tables, Budget of the United States Government, Fiscal Year 2017. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/tables.pdf

Office of Management and Budget (OMB). Undated. Historical Tables, Table 2.3—Receipts by Source as Percentage of GDP: 1934–2021. http://www.whitehouse.gov/omb/budget/historicals

Organisation for Economic Co-operation and Development (OECD). Undated. Revenue Statistics—Comparative Tables. http://stats.oecd.org/Index.aspx?DataSetCode=REV

Smith, Joshua. 2014a. Five Years Since the American Recovery and Reinvestment Act: The Downward Spiral of Public Investment. Economic Policy Institute. http://www.epi.org/publication/years-american-recovery-reinvestment-act/

Smith, Joshua. 2014b. The ‘Better Off Budget’: Analysis of the Congressional Progressive Caucus budget for fiscal year 2015. Economic Policy Institute Policy Center. http://www.epi.org/publication/budget-analysis-congressional-progressive/

Zandi, Mark. 2011. “At Last, the U.S. Begins a Serious Fiscal Debate.” Moody’s Analytics, April 14. http://www.economy.com/dismal/article_free.asp?cid=198972

Table 1

Table 2

Summary Table 1

Summary Table 2

Summary Table 3

Summary Table 4

Executive summary

The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2016 (FY2016) budget, titled The People’s Budget—A Raise for America. It builds on recent CPC budget alternatives in prioritizing near-term job creation, financing public investments, strengthening the middle and working classes, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, protecting social insurance programs, and ensuring fiscal sustainability.

The People’s Budget aims to improve the economic well-being of the working and middle classes by focusing on finally closing the persistent jobs gap, and it provides substantial upfront economic stimulus for that purpose. This paper details the baseline assumptions, policy changes, and budgetary modeling used in developing and scoring the People’s Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.1

We find that the People’s Budget would have significant, positive impacts. Specifically, it would:

• Accelerate the economic recovery. The People’s Budget would sharply accelerate economic and employment growth. It would boost gross domestic product (GDP) by 3.9 percent and employment by 4.7 million jobs at its peak level of effectiveness (within one year of implementation), while ensuring that fiscal support lasts long enough to avoid future “fiscal cliffs” that could throw recovery into reverse.2
• Promote job growth and achieve full employment. The budget’s near-term economic stimulus measures would create 4.7 million jobs in calendar year 2015 and an additional 3.8 million jobs over the following two years. By the end of calendar year 2018 the People’s Budget would support 9.1 million job years and would ensure a prompt and durable return to full employment.
• Make necessary public investments. The budget finances roughly $528 billion in job creation and public investment measures in calendar year 2015 alone and roughly $1.34 trillion over calendar years 2015–2017.3 This fiscal expansion is consistent with the amount of fiscal support needed to rapidly reduce labor market slack and restore the economy to full health.
• Facilitate economic opportunity for all. By expanding tax credits and other programs for middle- and working-class workers, boosting public employment, and incentivizing employers to create new jobs, the People’s Budget aims to boost economic opportunity for all segments of the population.
• Strengthen social insurance. The People’s Budget strengthens the social safety net and proposes no benefit reductions to social insurance programs—in other words, it does not rely on simple cost-shifting to reduce the budgetary strain of health programs. Instead, it uses government purchasing power to lower health care costs (health care costs are the largest threat to long-term fiscal sustainability) and builds upon efficiency savings from the Affordable Care Act. The budget also expands and extends emergency unemployment benefits and increases funding for education, training, employment, and social services as well as income security programs in the discretionary budget.4
• Smartly cut spending. The budget focuses on modern security needs by repealing sequestration cuts and spending caps that affect the Defense Department but replacing them with similarly sized funding reductions. It ends emergency overseas contingency operation spending in FY2016 and beyond, and ensures a slow rate of spending growth for the Defense Department for the remainder of the decade.
• Ask everyone to contribute his or her fair share. The budget restores adequate revenue and pushes back against income inequality by adding higher marginal tax rates for millionaires and billionaires, equalizing the tax treatment of capital income and labor income, restoring a more progressive estate tax, eliminating inefficient corporate tax loopholes, levying a tax on systemically important financial institutions, and enacting a financial transactions tax, among other tax policies.
• Reduce the deficit in the medium term. The budget increases near-term deficits to boost job creation, but reduces the deficit in FY2017 and beyond relative to CBO’s current law baseline. The budget would achieve primary budget balance (excluding net interest) and sustainable budget deficits below 2 percent of GDP in FY2017 and beyond.
• Target a sustainable debt level. After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio to a fully sustainable 66.0 percent of GDP by FY2025. Relative to current law, the budget would reduce public debt by $3.2 trillion (11.6 percent of GDP).

Introduction

The primary objective of the People’s Budget is consistent with the Congressional Progressive Caucus’s FY2015 budget alternative: Use expansionary fiscal policy to directly address the nation’s most pressing economic challenges and target a rapid and durable return to full employment. The budget was developed from the evidence-based conclusion that the present economic challenge of joblessness results from a large demand shortfall—the result of the Great Recession and its aftermath—and that the depressed state of economic activity is largely responsible for increased budget deficits and the recent rise in public debt. Further, much recent research indicates that aggregate demand is likely to remain depressed in coming years without a fiscal boost (this hypothesis about chronic ongoing demand shortages is often referred to as “secular stagnation”). High unemployment in turn is exacerbating the decade-long trend of falling working-age household income and the three-decades-long trend of markedly increasing income inequality.

Moreover, since mid-2010, contractionary fiscal policy has greatly contributed to the continuing slack in the labor market and stagnant earnings for most workers. The slack in the labor market can be seen in the elevated unemployment rate, low labor force participation rate, high labor underutilization rate, and the high proportion of long-term unemployed workers. Expansionary fiscal policy can help ensure a prompt and durable return to a full-employment economy with rising wages.

Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, the People’s Budget invests heavily in front-loaded job creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy—notably the expiration of emergency unemployment insurance, cuts to the Supplemental Nutrition Assistance Program (food stamps), and the continuation of discretionary spending caps and sequestration spending cuts—the People’s Budget substantially increases near-term budget deficits to finance targeted stimulus, including infrastructure investment, aid to state and local governments, targeted tax credits, and public works programs. These types of investments would yield enormous returns—particularly by reducing long-run economic scarring resulting from underutilization of productive resources—and raise national income and living standards.

Beyond improving middle-class living standards, using expansionary fiscal policy to ensure a rapid return to full employment is fiscally responsible. A significant portion of the sticker price of fiscal stimulus will be recouped through higher tax collections and lower spending on automatic stabilizers, such as unemployment insurance. Higher levels of economic activity will also decrease near-term budget deficits and public debt as a share of GDP. While future budget deficits may decrease future living standards, the much more immediate problems of high joblessness and depressed levels of economic activity are decreasing both present and future living standards. Ensuring a rapid return to full employment hedges against many downside fiscal risks, notably slower-than-projected economic recovery, larger-than-projected cyclical budget deficits, and decreased long-run potential GDP due to economic scarring. The People’s Budget would further promote fiscal responsibility and a sustainable public debt trajectory by raising revenues progressively, exploiting health care efficiency savings, and maintaining the reduced spending trajectory of the Department of Defense (DOD).

After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio to a fully sustainable 66.0 percent of GDP by FY2025. Relative to current law, the budget would reduce public debt by $3.2 trillion (11.6 percent of GDP).

Economic context for the People’s Budget

The most pressing objective for macroeconomic policy, particularly fiscal policy, is rapidly restoring the economy to full health and ensuring that this return is sustainable. More than seven years have passed since the onset of the Great Recession in December 2007, but growth in the 5.5 years since the recession’s official end has been too sluggish to restore the economy to prerecession conditions, let alone to restore genuinely full employment. Unemployment as of February 2015 stands at 5.5 percent, the lowest rate seen since 2008 but still 1 percentage point higher than the annual rate in 2007, when the recession hit, and higher than any rate since 2004. Further, the unemployment rate likely understates how sluggish labor market recovery has been. The share of adults age 25–54 with a job—which fell an unprecedented 5.5 percentage points (from 80.3 percent to 74.8 percent) from its peak to trough due to the Great Recession—is now still just at 77.3 percent, and is still not even halfway recovered.

As of February 2015, the “jobs gap”—the number of jobs needed to restore the labor market to prerecession health—stood at a staggering 5.5 million jobs (Economic Policy Institute 2015a).5 Moreover, there was only one job opening for every two job seekers (Gould 2015). The jobs gap is especially acute—and repairable—in the public sector. There are 656,000 fewer public-sector jobs now than when the recovery began in June 2009; if the number of such jobs had merely kept up with population growth, there would be 1 million more than in June 2009. Therefore, altogether there is a public-sector jobs gap of nearly 1.7 million jobs (Economic Policy Institute 2015b).

The economic slack is a continuing consequence of the bursting of the housing bubble, which erased trillions of dollars of wealth from household balance sheets. The effects rippled through the economy as consumers pulled back their spending, construction spending cratered, businesses stopped investing and expanding, financial intermediation broke down, and state and local governments cut spending as tax receipts fell. In short, households, businesses, and governments stopped spending enough to keep their workers and resources employed. The resulting shortfall in aggregate demand has not—even seven years after the fact—ever been fully filled in.

The pace of economic growth since the economy emerged from recession in July 2009 has been too sluggish to restore the economy to full health, almost entirely because fiscal policy since the recovery began has been historically contractionary. While fiscal policy during the recession—particularly the American Recovery and Reinvestment Act (ARRA)—was strongly expansionary and arrested the economy’s sharp decline, economic performance has since fallen somewhat, largely because fiscal policy became increasingly contractionary.

This turn toward fiscal contraction has been largely driven by the enactment of the Budget Control Act (BCA) of 2011, which cut and capped discretionary spending and established the automatic “sequestration” spending cuts that took effect March 1, 2013. Discretionary spending cuts aside from the BCA—January 2013’s expiration of the payroll tax cut, December 2013’s expiration of federal emergency unemployment benefits, and two rounds of benefit cuts in the Supplemental Nutrition Assistance Program—have also intensified fiscal drags. Regrettably, the budget deal passed by the lame-duck Congress in January 2013 (the American Taxpayer Relief Act, or ATRA) failed to address the fundamental challenge posed by the “fiscal cliff” of legislated spending cuts and tax increases and instead accelerated the pace of deficit reduction relative to then-current policy (Fieldhouse 2013a). The Bipartisan Budget Act of 2013, signed into law in December, unwound some of the defense and nondefense discretionary sequester cuts over FY2014–2015, but at $63 billion over two years, did not boost aggregate demand sufficiently to ensure a full recovery, let alone drive the economy to genuine full employment.

The sheer size of the contraction of government spending since the end of the Great Recession is unprecedented. If public spending in the current recovery simply matched the growth trajectory of that of the early 1980s recession and recovery, spending would be $800 billion higher now. When multiplier effects are taken into account, this level of spending would have induced a full recovery by now (Bivens 2014). By prematurely pulling away from fiscal support, policymakers condemned the economy to years of unnecessarily depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits (Bivens, Fieldhouse, and Shierholz 2013). Instead of prioritizing recovery, the Washington budget debate remains too focused on the one policy intrinsically at odds with spurring near-term economic growth—reducing budget deficits. However, deficits will remain high as long as the economy is depressed.

While the pace of job growth picked up substantially in 2014, slack remains in the U.S. labor market, and this slack must be worked off before full employment is reached. The clearest sign of this continuing slack is the absence of acceleration in nominal wage growth over the recovery.

Given that the economy is still underperforming, the benefits of aggressive fiscal policy to restore the economy to full employment and hold it there for a considerable length of time could be large. Ball, DeLong, and Summers (2014) and Bivens (2014) have shown that the damage done to estimated long-run potential GDP by the extended period of economic underperformance could likely be reversed by an extended period of full employment.

Using fiscal policy to boost aggregate demand is not only the key to achieving a durable return to full employment, it will also actually prove largely self-financing in dollar terms and improve key metrics of fiscal health (notably the public-debt-to-GDP ratio) in the near term, as long as interest rates remain historically low. Conversely, budget austerity—particularly cutting spending—is so economically damaging that it actually becomes fiscally counterproductive in current conditions, with recent spending cuts actually projected to increase the debt-to-GDP ratio (Fieldhouse 2013b).

While policymakers’ misplaced obsession with reducing the federal debt and deficits seems to have abated somewhat in light of December 2013’s Bipartisan Budget Act (the deal made by House Budget Committee Chair Paul Ryan and Senate Budget Committee Chair Patty Murray) and a congressional détente over the debt ceiling, Congress remains far from embracing expansionary fiscal policies that would reliably lead to a durable return to full employment. The People’s Budget takes a strong stand for such policies by unequivocally affirming the goal of closing the jobs gap and returning the economy to full employment, all while ensuring sustainable projected deficit and debt levels.

The following sections describe first the spending proposals and then the revenue policies in the People’s Budget (see Table 1). The budget is modeled and all policies are scored relative to CBO’s March 2015 current law baseline (CBO 2015). Individual policies and net budgetary impacts, including projected deficits (see Figure A) and the debt-to-GDP ratio (see Figure B), and nondefense discretionary budget authority (see Figure C) are compared with CBO’s current law baseline, as well as President Obama’s FY2016 budget request. (Tables and figures can be found near the end of this report.)

Outlays in the People’s Budget

The People’s Budget makes targeted investments in job creation and infrastructure spending aimed at rapidly restoring full employment and supporting sustained recovery, while also making targeted cuts to reflect national priorities and improve efficiency in the budget. Although outlays would rise to 23.7 percent of GDP in FY2016 as the budget pursues expansionary fiscal policy, outlays would fall and average 22.9 percent of GDP over the last five years of the budget window (FY2021–2025), only 1.7 percentage points higher than the average under current law (see Summary Tables 2 and 4).

The People’s Budget ramps up spending in the near term in order to support economic recovery and pursue full employment. Investments over the 10-year window are thus frontloaded to address current economic needs; 63 percent of total job creation measures within the 11-year FY2015–2025 window are allocated over FY2015–2018, corresponding with the calendar years 2015–2017, when the People’s Budget most heavily invests in stimulus measures and when economic support is most needed (see Table 2).6 In later years, increased spending largely consists of additional infrastructure spending to help meet estimated needs, as well as sustained increases in nondefense discretionary (NDD) spending to keep it roughly in line with historical averages instead of letting it fall to a 60-year low of 2.3 percent in FY2025, as is currently projected under current law (see Figure C).

Renewed fiscal expansion to restore full employment

As shown in Table 2, the People’s Budget finances $1.6 trillion in direct job creation measures over FY2015–2025 ($1.3 trillion over FY2016–2025). As previously noted, 63 percent of these investments are made between now and the end of calendar year 2017 in order to target full employment; the remainder of the spending consists of sustained investments in infrastructure, green manufacturing, and research and development. Specifically, the People’s Budget invests $820 billion in infrastructure over FY2015–2025, which approaches the level the American Society of Civil Engineers calls for to close the nation’s investment shortfall while offering a sustained, continuing dedicated source of funding specifically for infrastructure investments (ASCE 2013). Other direct investments in job creation include $692 billion over FY2015–2018, with nearly half allocated among investing in teachers and K–12 schools ($99 billion); providing block grants to aid states in rehiring first responders, funding safety net programs, and funding Medicaid ($95 billion); and funding public works jobs programs to boost employment, with particular emphasis on aiding distressed communities ($116 billion). The package of public works jobs programs fully finances initiatives proposed by Rep. Jan Schakowsky (D-Ill.) in her Emergency Jobs to Restore the American Dream Act of 2011.7

To provide both an economic boost as well as individual assistance to the still elevated number of long-term unemployed workers, the People’s Budget restores the emergency unemployment compensation (EUC) program to support up to 99 weeks of benefits in calendar years 2015–2017. The ATRA financed a $30 billion extension of the EUC program through 2013 at current benefit levels; however, the maximum duration of benefits was reduced to 73 weeks starting in August 2012. Subsequently, despite an acute long-term unemployment crisis, Congress allowed the EUC program to lapse completely in December 2013. Federal extended unemployment benefits had never been cut with a long-term unemployment rate as elevated as it was in December 2013 (Shierholz 2014a). This budgetary provision restores benefits retroactively to their expiration in December 2013, for a total investment of $78 billion from FY2015–2025.8

To ensure federal civilian and veteran retirees are not experiencing a decline in their purchasing power, the People’s Budget indexes their retirement benefits to the Bureau of Labor Statistics’ experimental consumer price index for elderly households, or CPI-E, which more accurately reflects the buying patterns of American senior citizens. The change will result in additional outlays of $18 billion over FY2016–2025 (see Table 1).

As shown in Table 2, the People’s Budget also funds a number of job creation tax measures. It introduces the Work Hard Tax Credit, an expanded version of the now-expired Making Work Pay tax credit, for calendar years 2015–2016. In its first year, the Hard Work Tax Credit will be 150 percent of the old Making Work Pay credit, and is scaled back in the second calendar year.9 The budget also expands the earned income tax credit to greatly increase the credit’s generosity to childless workers, thus increasing the program’s work incentive for this group. The $61 billion expansion was highlighted in President Obama’s FY2016 budget (OMB 2015). Moreover, the People’s Budget finances $126 billion in tax credits for businesses over FY2016–2025, including continuation of the research and experimentation credit as well as green manufacturing incentives.

In addition to these targeted job creation measures, infrastructure investments, and tax credits, the People’s Budget invests heavily in the nondefense discretionary (NDD) budget, which houses a range of critical public investments in areas such as education, energy, basic scientific research, workforce training, and health. The Budget Control Act (BCA) enacted deep cuts to the NDD budget; repealing these cuts starting in FY2016 will result in an additional $342 billion over FY2016–2025 in needed NDD investments, and the People’s Budget would repeal these cuts, along with the entirety of the discretionary and mandatory BCA spending caps and sequester cuts.10 Beyond this repeal, the budget would finance a $1.6 trillion increase in NDD budget authority over FY2015–2025 (this translates to a nearly $1.9 trillion increase in NDD outlays over current law).11 Sustaining these investments is critical for building the country’s stock of public and human capital, a key driver of long-run productivity growth (Bivens 2012a). This increase in NDD spending covers a 4 percent raise in 2015 for federal civilian employees.

Investments and job creation measures in the budget total $1.6 trillion over FY2015–2018 (see Table 2), which, when combined with the other spending and revenue provisions within the People’s Budget, is in line with the level of fiscal support needed to fully close the remaining jobs gap. These NDD investments bring total job creation and public investments in the People’s Budget to $3.5 trillion above the current law baseline over FY2015–2025 (see Table 2).12 Critically, NDD budget authority would average 3.4 percent of GDP over FY2015–2025, as opposed to averages of 2.6 percent under current law or under the president’s FY2016 budget request.13 By FY2025, NDD budget authority under the People’s Budget is projected to be 3.1 percent of GDP, compared with 2.3 percent under current law and 2.4 percent under the president’s budget (see Figure C). This classification of federal spending is especially vital because much of it is needed public investment—purchases the government can make now that will boost employment in the short run but provide lasting benefits, such as infrastructure and education. Under current law, such investment will soon reach its historical low as a share of GDP and continue to decline thereafter (Smith 2014a).

Targeted spending cuts and health efficiency savings

The People’s Budget also proposes realigning the pace of defense savings and finding other targeted and efficient savings in the budget. Over FY2016–2025, the CBO 2015 current law baseline includes a $134 billion reduction in DOD outlays from the BCA spending caps and sequestration cuts. The People’s Budget repeals these cuts and replaces them with similarly sized cuts. The budget provides $92 billion in budget authority for overseas contingency operations (OCO) for FY2015—enough to fund full and safe withdrawal from Afghanistan—after which all OCO funding is ended. Responsibly reducing OCO spending would save $761 billion over FY2016–2025 relative to current law (see Table 1).

The People’s Budget achieves savings outside of the Defense Department as well, many of which would build on the efficiency reforms already enacted in the Affordable Care Act. The budget implements the following policies: the addition of a public insurance option to Affordable Care Act health insurance exchanges, negotiation of Medicare Part D pharmaceutical drug prices with pharmaceutical companies (similar to current negotiation of drug prices through Medicaid), reform of pharmaceutical drug development and patent rules, payment and administrative cost reforms, and efforts to reduce fraud and abuse in Medicaid. In total, implementing these policies would decrease budget deficits by an estimated $432 billion over FY2015–2025 (see Table 1). This would much more than offset the $135 billion FY2015–2025 cost of permanently eliminating the Medicare Sustainable Growth Rate formula (otherwise known as implementing the “doc fix”), the scheduled cuts in Medicare providers’ pay that Congress has routinely papered over on a temporary basis since 2003, and the $88 billion revenue loss from repealing the excise tax on high-premium health insurance plans. Along with health savings, the People’s Budget would adopt a proposal in the president’s FY2016 budget to cut $16 billion from crop insurance subsidies—a proposal made necessary by the expansion of the subsidy program in the Agriculture Act of 2014.

Revenue in the People’s Budget

The U.S. tax code is failing in a number of dimensions. Tax receipts have been deliberately driven down to levels that cannot support current national priorities (let alone commitments to an aging population), tax policy has increasingly exacerbated income inequality, and complexity within the tax code means that an individual’s or corporation’s tax bill can too easily depend on the abilities of one’s accountant. The People’s Budget would reform the tax code by enacting policies that would restore lost progressivity (so that effective tax rates rise with income), push back against rising income inequality, raise sufficient revenue, and close inefficient or economically harmful loopholes. Although tax increases are contractionary in current conditions, the economic impact of a dollar of government spending (as shown by the fiscal multiplier) is about four to seven times higher than the economic impact of a dollar of revenue (Bivens and Fieldhouse 2012). Since much of the revenue would be raised from upper-income households and businesses (which have relatively low marginal propensities to consume and thus particularly low fiscal multipliers even among tax changes) and used to finance high bang-per-buck job creation measures, the relatively small fiscal drag from raising revenue would be more than mitigated by the other budget policies.

The People’s Budget increases revenues as a share of GDP by over 3 percentage points over FY2016–2025, from 18.4 percent under current law to 21.5 percent. Though higher relative to GDP than the previous postwar high point of 19.9 percent in 2000 (OMB n.d.), this percentage remains small relative to that of other developed economies. Moreover, aside from the United States, the great majority of advanced economies have increased their revenue-to-GDP ratios in recent decades (OECD n.d.), a logical extension of greater national wealth and aging populations.

Individual income tax reforms

The People’s Budget raises individual income tax revenue relative to current law by enacting what was referred to as “Obama policy” prior to enactment of the ATRA; that is, it allows Bush-era tax rates to expire for tax filers with adjusted gross income (AGI) above $200,000 ($250,000 for joint filers).14 Though tax rates were scheduled to revert to Clinton-era levels at midnight on December 31, 2012, the ATRA extended the income tax cuts for those with AGI under $400,000 ($450,000 for married couples), making permanent the reduction in the 25, 28, and 33 percent brackets and creating a new 35 percent bracket for taxable income up to a $400,000 threshold.15 Under the People’s Budget the 33 percent bracket would revert to 36 percent and the 35 percent bracket would revert to 39.6 percent. The AGI threshold at which the personal exemption phase-out and limitation on itemized deductions are triggered would be lowered from $300,000 ($350,000 for joint filers) to $200,000 ($250,000 for joint filers). The People’s Budget would also permanently extend the ARRA expansion of refundable tax credits—the earned income tax credit, the child tax credit, and the tuition tax credit—beyond their scheduled expiration on December 31, 2017, at a cost of $166 billion over FY2018–2025.

The People’s Budget would increase progressivity of the individual income tax code by adding the five higher marginal tax rates at higher income thresholds from Rep. Schakowsky’s Fairness in Taxation Act of 2011, effective January 1, 2016: a 45 percent bracket starting at taxable income above $1 million, a 46 percent bracket at taxable income above $10 million, a 47 percent bracket at taxable income above $20 million, a 48 percent bracket at taxable income above $100 million, and a 49 percent bracket at taxable income above $1 billion.16 Across this modified rate structure, the budget would also tax all capital gains and dividends as ordinary income. The collective impact of these policies—raising taxes on households with AGI above $200,000 ($250,000 for joint filers), extending refundable credits, adding five additional high-income brackets, and equalizing treatment of investment and labor income—would generate $1.4 trillion over FY2016–2025 relative to current law.17

As Table 1 shows, the People’s Budget makes a number of additional policy changes to the individual income tax code. The budget repeals the step-up basis for capital gains at death ($352 billion in new revenue over FY2016–2025); increases progressivity in the tax code by capping the value of itemized deductions at 28 percent ($566 billion); denies the home mortgage interest deduction for yachts and vacation homes ($14 billion); and ends the exclusion of foreign earned income ($77 billion). The budget subjects S corporations to the self-employment tax ($75 billion in revenue over FY2016–2025). Finally, the People’s Budget would enact comprehensive immigration reform that includes a path to citizenship, resulting in more taxpayers paying income and payroll taxes, and it would qualify these residents for refundable tax credits (on net saving $237 billion over FY2015–2025).

Corporate income tax loophole closers

On the corporate side, the People’s Budget eliminates some of the most egregious loopholes and enacts other progressive reforms. The budget repeals voluntary deferral of taxes owed on U.S.-controlled foreign companies’ source income, ends the Subpart F active financing exception, and reforms treatment of the foreign tax credit, for savings of $628 billion over FY2016–2025 (CTJ 2013). It curbs corporate deductions for stock options (saving $26 billion), limits the deductibility of bonus pay ($51 billion), eliminates corporate jet provisions ($3 billion), and reduces the level of deductibility of corporate meals and entertainment ($70 billion) over FY2016–2025. It saves $110 billion over FY2016–2025 by eliminating fossil fuel preferences through enactment of the End Polluter Welfare Act (EPWA) sponsored by Sen. Bernard Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.). The budget also ends tax deductions for the direct advertising of certain unhealthy foods to children ($15 billion over FY2016–2025).

Taxes on economic ‘bads’ and other tax reforms

Besides increasing progressivity in the individual and corporate income tax codes, the People’s Budget reflects the belief that government should levy Pigovian taxes so that the consumption of certain goods reflects their true societal costs. The People’s Budget imposes a financial transactions tax (FTT) in order to raise significant revenue while dampening speculative trading and encouraging more productive investment. By adhering to the same tax base and rates as the FTT proposed in the Back to Work budget (the CPC’s FY2014 budget alternative), the FTT in the People’s Budget would raise $921 billion over FY2016–2025 (Fieldhouse and Thiess 2013). The budget would also enact an idea proposed by former House Ways and Means Committee Chairman Dave Camp (R-Mich.) by imposing a 0.35 percent tax on “systemically important financial institutions,” assessed quarterly, to address the issue of “too big to fail” ($112 billion raised over FY2016–2025) (JCT 2014).

To reduce the emission of greenhouse gases and yield significant revenue on an annual basis, the budget would price carbon emissions starting at $25 per metric ton in 2016 and indexed at a 5.6 percent annual rate. Because pricing carbon has the potential to be regressive, the People’s Budget, like the Better Off Budget before it, would rebate 25 percent of the revenue from carbon abatement as refundable credits to low- and middle-income households. Net of this rebate, carbon pricing would raise $1.2 trillion in revenue over FY2016–2025. On a much smaller scale, the People’s Budget increases the federal excise tax on cigarettes by $0.50 per pack, raising $38 billion over FY2016–2025.

Finally, the budget restores the progressive taxation of inherited wealth by instituting a progressive estate tax ($178 billion over FY2016–2025). It enacts Sen. Sanders’s Responsible Estate Tax Act of 2010, which sets an exemption level of $3.5 million and a graduated rate that rises to 55 percent for estates valued at over $50 million. The bill would levy a 10 percent surtax on estates valued at over $500 million.

In total, the People’s Budget raises $6.9 trillion in additional revenue relative to current law (see Summary Table 3). Revenue levels in the budget average 21.2 percent of GDP over FY2016–2025 (see Summary Table 2).

The People’s Budget’s near-term impact on jobs and growth

To eliminate the slack in the labor market—a precondition for real wage growth—the People’s Budget would finance enough in job creation measures and public investments to roughly close the projected jobs gap in calendar years 2015–2017. The U.S. economy would experience a sustained return to full employment under the People’s Budget.

If the full amount of increased outlays and other job creation measures in the People’s Budget were passed and implemented in calendar year 2015, we project that on net GDP would grow by an additional $708 billion (3.9 percent) and nonfarm payroll employment would rise by 4.7 million jobs relative to CBO’s current law baseline at the budget’s peak level of effectiveness (roughly within one year of implementation). Given that calendar year 2015 is nearly a quarter gone, and given as well that some spending might create jobs only after an additional lag, the job creation numbers for 2015 might come in below these projections, but this means that our estimates for 2016 would rise as activity and job creation spilled over into that year. Our baseline forecast for 2015 without additional lag considerations is 2.7 million jobs created by the People’s Budget by the end of the year. In this analysis, we ignore these issues of potential lags and assume that the economic impact of the People’s Budget’s changes in outlays and revenues are reflected in the calendar year that these budget changes are made. Again, the only real concern this raises is that some of the impacts will be pushed from the end of 2015 and into early 2016. Either way, the People’s Budget will both solidify and accelerate an economic recovery that at the moment is coming too slowly, and that too many policymakers are assuming to be inevitable and imminent.

Specifically, the People’s Budget would increase spending on job creation and public investment measures by $528 billion in calendar year 2015, $454 billion in 2016, and $354 billion in 2017, relative to CBO’s current law baseline.18 The associated boost to aggregate demand would be enough to substantially reduce labor market slack, taking into consideration lesser economic headwinds from raising additional revenue (which has a countervailing contractionary effect, albeit relatively small per dollar). The People’s Budget would increase revenue by roughly $61 billion in calendar year 2015, $419 billion in 2016, and $632 billion in 2017, relative to current law.19

On net, the People’s Budget would boost GDP by $708 billion (3.9 percent) in calendar year 2015, $426 billion (2.2 percent) in calendar year 2016, and $180 billion (0.9 percent) in calendar year 2017, relative to CBO’s current law baseline. Sustaining stimulus for several years would be necessary to avoid creating a “fiscal cliff” demand shock (i.e., budget deficits closing too quickly to sustain growth) before the Federal Reserve began raising interest rates to cool demand-side inflationary pressure. (The U.S. economy’s eventual emergence from the liquidity trap and return to full health will be signaled by the Federal Reserve’s raising of short-term interest rates.)

Acknowledgments

The author would like to thank colleagues Josh Bivens and Christian Dorsey for their help with this project. Special thanks are due to Joshua Smith, Andrew Fieldhouse, and Rebecca Thiess, authors of previous EPI Policy Center analyses of CPC budget alternatives, for their assistance and guidance. Thanks also to CPC staff, especially Kelsey Mishkin. Thank you finally to Mike McCarthy for his helpful suggestions and excellent copyediting. All errors or omissions are solely the responsibility of the author.

About the author

Thomas Hungerford joined the Economic Policy Institute as a senior economist in 2013. Prior to joining EPI, Hungerford worked at the General Accounting Office, the Office of Management and Budget, the Social Security Administration, and the Congressional Research Service. He has published research articles in journals such as the Review of Economics and Statistics, Journal of International Economics, Journal of Human Resources, Journal of Urban Economics, Review of Income and Wealth, Journal of Policy Analysis and Management, Challenge, and Tax Notes. He has taught economics at Wayne State University, American University, and Johns Hopkins University. He earned his Ph.D. in economics from the University of Michigan.

Figures and tables

Figure A

Figure B

Figure C

Table 1

Table 2

Summary Table 1

Summary Table 2

Summary Table 3

Summary Table 4

Appendix

Budgetary scoring and modeling

The Economic Policy Institute Policy Center has scored the policies proposed by the People’s Budget and modeled their cumulative impact relative to CBO’s March 2015 baseline (CBO 2015). Table 1 stacks the major policy alterations to the March 2015 baseline and broadly separates policy proposals into two categories: revenue policies and spending policies. All policies are depicted as the net impact on the primary budget deficit (excluding net interest) rather than the impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects (i.e., refundable portions of tax credits), and some policies in the spending adjustments include revenue effects. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal impulse to the primary budget deficit, and the unified budget deficit is adjusted accordingly.20 The net impact of these policy changes on the budget, as well as relative to CBO’s current law baseline, can be found in Summary Tables S1 to S4.

In some instances it is necessary to extrapolate from existing official or trusted scores (e.g., those from the Congressional Budget Office, Citizens for Tax Justice, Joint Committee on Taxation, and Office of Management and Budget) to adjust from a previous budget window to the current budget window. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score. Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in the summary tables as such.

Unless otherwise specified, all tax policies are assumed to be implemented on January 1, 2016. Tax policies modeled from scores starting before FY2015 assume 75 percent of the revenue score for that year (the three quarters of FY2015 in calendar year 2015). More broadly, fiscal year scores are calculated as 25/75 weighted average calendar year scores where necessary.

Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling. Many of the individual income tax proposals, however, were collectively modeled by the CTJ using the Institute on Taxation and Economic Policy (ITEP) microsimulation and accordingly account for interaction effects, including those with the alternative minimum tax and refundable tax credits.

Economic analysis

All economic impacts are estimated relative to CBO’s current law baseline.

A fiscal multiplier of 1.4 has been assigned to government spending provisions, and a fiscal multiplier of 0.5 has been assigned to tax provisions. Moody’s Analytics Chief Economist Mark Zandi’s most recent publicly available estimate of the government spending multiplier is 1.4 (Zandi 2011), and this is robust to estimates by the International Monetary Fund, CBO, and the Council of Economic Advisers, among other forecasters (Bivens 2012b; CBO 2012b; CEA 2011; IMF 2012). Best estimates for tax provisions’ multipliers demonstrate greater variance, depending on how they are targeted to households or businesses more or less likely to spend an extra dollar of disposable income. Multiplier estimates of increased taxes on upper-income households (following Obama policy) and corporations are lower, at 0.25 and 0.32, respectively, and almost all of the People’s Budget’s revenue policies fall into one of these two categories. The multiplier for pricing carbon would be somewhat higher, even taking into consideration the refundable rebate, and 0.5 is assigned as a conservative estimate for all tax changes.

Policy adjustments for 2015 are calculated as 100 percent of FY2015 and 25 percent of FY2016 budgetary costs. All current policy adjustments for calendar year 2015 adopt a 75/25 fiscal year/calendar year split. Following the methodology in Bivens and Fieldhouse (2012), a multiplier of 1.4 is assigned to removing sequestration.

The impact on the unemployment rate is calculated as a range of estimates using Okun’s rule of thumb. Specifically, the change in unemployment is projected by the percentage-point change in the relative output gap (actual output divided by potential output) divided by 2.5 for the low-end estimate and 2.0 for the high-end estimate. Estimates for the change in nonfarm payroll employment are based on the percent change in GDP, using the methodology outlined in Bivens (2011b).

Endnotes

1. Where policies in the People’s Budget have been carried over from previous CPC budgets, this paper draws accordingly from The ‘Better Off Budget’ (Smith 2014b), The People’s Budget: A Technical Analysis (Fieldhouse 2011), The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013 (Fieldhouse and Thiess 2012), and The Back to Work Budget: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2014 (Fieldhouse and Thiess 2013), EPIPC’s analyses of CPC’s fiscal 2012, 2013, 2014, and 2015 budget alternatives.

2. These estimates are measured relative to CBO’s current law baseline. In our estimates the peak macroeconomic effect occurs at the end of 2015. Given that nearly a quarter of 2015 has already gone by and given various lags in enacting policy, as well as lags in policy affecting the economy, it’s likely that this peak level of effectiveness could be reached in early 2016 instead. Regardless, if the job creation measures in the People’s Budget were passed in coming months, there would be substantial near-term improvement in economic activity and jobs.

3. These estimates are measured relative to CBO’s current law baseline. This includes job creation measures, nondefense discretionary spending increases, and repeal of Budget Control Act discretionary spending caps (see Table 2).

4. The People’s Budget apportions increases to the nondefense discretionary budget functions as follows: 10 percent for International Affairs (Function 150); 5 percent for General Science, Space, and Technology (F250); 10 percent for Energy (F270); 5 percent for Natural Resources and Environment (F300); 5 percent for Commerce and Housing Credit (F370); 5 percent for Community and Regional Development (F450); 15 percent for Education, Training, Employment, and Social Services (F500); 10 percent for Health (F550); 20 percent for Income Security (F600); 10 percent for Veterans Benefits and Services (F700); and 5 percent for Administration of Justice (F750).

5. This includes both the jobs lost and the jobs that should have been created during this time to absorb new labor market entrants, which requires roughly 100,000 jobs per month.

6. This includes undoing nondefense discretionary spending cuts included in the Budget Control Act.

7. The Emergency Jobs to Restore the American Dream Act of 2011 was included in the Budget for All, the Congressional Progressive Caucus’s FY2013 budget alternative. The jobs creation package invests $113.5 billion in each of two years, and was estimated by Rep. Schakowsky’s staff to support the creation of 2 million jobs (Fieldhouse and Thiess 2012).

8. Emergency unemployment benefits have a relatively large economic impact per dollar. Mark Zandi of Moody’s Analytics has estimated this policy to have an estimated $1.52 impact per dollar spent (Zandi 2011).

9. The initial benefit would be one-and-a-half times that of the expired Making Work Pay tax credit, bringing the maximum benefit to $600 for an individual and $1,200 for joint filers for the first two years, before reverting to the original level during the third year. During these first two years, the phase-out rate would be increased to keep the cost of the expanded tax credit at twice the budgetary cost of the lapsed credit.

10. The $342 billion is the additional NDD outlays that result from repealing both the BCA NDD caps and the BCA NDD sequester over FY2015–2024.

11. Similar to the Better Off Budget, NDD budget authority is increased by $75 billion for the remainder of FY2015, $150 billion for FY2016, $200 billion for FY2017, and sustained for the rest of the budget window. The associated budgetary outlays can be seen in Table 2.

12. This includes undoing both phases of NDD cuts in the BCA.

13. The People’s Budget would reclassify surface transportation outlays (currently discretionary spending) as mandatory, but this policy change has been excluded from NDD outlays in Figure C for an apples-to-apples comparison with historical and projected spending levels.

14. These AGI cutoffs are measured in 2009 dollars and were subsequently indexed to inflation in the administration’s budget requests.

15. These rates were scheduled to revert to 28, 31, 36, and 39.6 percent. ATRA levied a 39.6 percent rate only on income over $400,000 ($450,000 for married couples).

16. The taxable income thresholds for these rates are applicable to individual, head of household, and married filing jointly tax returns by filing status. The taxable income thresholds for these rates are halved for married couples filing separately.

17. The collective budgetary impact of these policy modifications to the individual income tax were scored by Citizens for Tax Justice using the Institute on Taxation and Economic Policy (ITEP) microsimulation model, which is similar to models used by official scorekeepers at the Treasury Department and the Joint Committee on Taxation. The score of taxing capital gains as ordinary income takes into account behavioral responses of capital gains realizations to higher tax rates.

18. These calendar year increases are based on additional outlays of $407 billion in FY2015, $483 billion in FY2016, $368 billion in FY2017, and $310 billion in FY2018, relative to CBO’s current law baseline (see Table 2).

19. These calendar year increases are based on net decreases in revenue of $300 billion in FY2015, $548 billion in FY2016, and $615 billion in FY2017 relative to CBO’s current law baseline (see Summary Table 3).

20. Debt service is calculated by the CBO’s debt service matrix for the March 2015 baseline.

References

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Congressional Budget Office (CBO). 2012b. Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2012 through March 2012. http://www.cbo.gov/sites/default/files/cbofiles/attachments/ARRA_One-Col.pdf

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The Congressional Progressive Caucus (CPC) has unveiled its fiscal year 2015 (FY2015) budget, titled the “Better Off Budget.” It builds on recent CPC budget alternatives in prioritizing near-term job creation, financing public investments, strengthening the middle and working classes, raising adequate revenue to meet budgetary needs while restoring fairness to the tax code, protecting social insurance programs, and ensuring fiscal sustainability.

The Better Off Budget aims to improve the economic well-being of the working and middle classes by focusing on ending the ongoing jobs crisis, and it provides substantial upfront economic stimulus for that purpose. This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring the Better Off Budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.1

We find that the Better Off Budget would have significant, positive impacts. Specifically, it would:

• Accelerate the economic recovery. The Better Off Budget would sharply accelerate economic and employment growth; it would boost gross domestic product (GDP) by 3.8 percent and employment by 4.6 million jobs at its peak level of effectiveness (within one year of implementation), while ensuring that fiscal support lasts long enough to avoid future fiscal cliffs that could throw recovery into reverse.2
• Promote job growth and achieve full employment. The budget’s near-term economic stimulus measures would rapidly restore the unemployment rate near to prerecession levels of 5 percent. The unemployment rate would be expected to range between 4.9 and 5.3 percent when these provisions are fully implemented, in line with what the Congressional Budget Office (CBO) regards as full employment (CBO 2014c).
• Close the economic “output gap.” U.S. economic output is currently $790 billion (4.6 percent) below potential (CBO 2014a), and the economy is projected to remain at least 3.3 percent below potential throughout 2014 under current law. The Better Off Budget would effectively use fiscal stimulus to restore actual GDP to potential GDP—a necessary condition for achieving full employment in the economy.
• Make necessary public investments. The budget finances roughly $485 billion in job creation and public investment measures in calendar year 2014 alone and roughly $1.35 trillion over calendar years 2014–2016.3 This fiscal expansion is consistent with the amount of fiscal support needed to rapidly shrink the “output gap” and restore the economy to full health.
• Facilitate economic opportunity for all. By expanding tax credits and other programs for middle- and working-class workers, boosting public employment, and incentivizing employers to create new jobs, the Better Off Budget aims to boost economic opportunity for all segments of the population.
• Strengthen social insurance. The Better Off Budget strengthens the social safety net and proposes no benefit reductions to social insurance programs—in other words, it does not rely on simple cost-shifting to reduce the budgetary strain of health programs. Instead, it uses government purchasing power to lower health care costs (health care costs are the largest threat to long-term fiscal sustainability) and builds upon efficiency savings from the Affordable Care Act. The budget also expands and extends emergency unemployment benefits and increases funding for education, training, employment, and social services as well as income security programs in the discretionary budget.4
• Smartly cut spending. The budget focuses on modern security needs by repealing sequestration cuts and spending caps that affect the Defense Department but replacing them with similarly sized funding reductions. It ends emergency overseas contingency operation spending in FY2015 and beyond, and ensures a slow rate of spending growth for the Defense Department for the remainder of the decade.
• Ask everyone to contribute his or her fair share. The budget restores adequate revenue and pushes back against income inequality by adding higher marginal tax rates for millionaires and billionaires, equalizing the tax treatment of capital income and labor income, restoring a more progressive estate tax, eliminating inefficient corporate tax loopholes, levying a tax on systemically important financial institutions, and enacting a financial transactions tax, among other tax policies.
• Reduce the deficit in the medium term. The budget increases near-term deficits to boost job creation, but reduces the deficit in FY2016 and beyond relative to CBO’s current law baseline. The budget would achieve primary budget balance (excluding net interest) and sustainable budget deficits below 2 percent of GDP in FY2017 and beyond. The deficit would gradually fall to 1.4 percent of GDP by FY2024.
• Target a sustainable debt level. After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt-to-GDP ratio to a fully sustainable 65.5 percent of GDP by FY2024. Relative to current law, the budget would reduce public debt by $3.6 trillion (13.8 percent of GDP).

I. Introduction

The primary objective of the Better Off Budget is consistent with the Congressional Progressive Caucus’s FY14 budget alternative: Use expansionary fiscal policy to directly address the nation’s most pressing economic challenges and target a rapid return to full employment. The budget was developed from the evidence-based conclusion that the present economic challenge of joblessness results from a large demand shortfall—the result of the Great Recession and its aftermath—and that the depressed state of economic activity is largely responsible for increased budget deficits and the recent rise in public debt. High unemployment in turn is exacerbating the decade-long trend of falling working-age household income and the three-decades-long trend of markedly increasing income inequality.

Moreover, since mid-2010, contractionary fiscal policy has greatly contributed to the still-elevated unemployment rate and the reduction in the labor force participation rate. At the official end of the Great Recession in June 2009, GDP was 7.5 percent less than its potential (maximum sustainable) level; by the end of 2013, less than half of that gap had closed. The slack in the labor market that can be seen in both the unemployment rate and labor force participation rate “mirrors the gap between actual and potential GDP” (CBO 2014d). Reverting to a full-employment economy will thus require closing this output gap. In our demand-starved economy, expansionary fiscal policy is currently the most effective policy lever for boosting employment (Bivens 2011a).

Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, the Better Off Budget invests heavily in front-loaded job creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy—notably the expiration of emergency unemployment insurance, cuts to the Supplemental Nutrition Assistance Program (food stamps), and the continuation of discretionary spending caps and sequestration spending cuts—the Better Off Budget substantially increases near-term budget deficits to finance targeted stimulus, including infrastructure investment, aid to state and local governments, targeted tax credits, and public works programs. These types of investments would yield enormous returns—particularly by reducing long-run economic scarring that is resulting from underutilization of productive resources—and, as the name “Better Off Budget” implies, raise national income and living standards.

Beyond improving middle-class living standards, using expansionary fiscal policy to ensure a rapid return to full employment is fiscally responsible. Much of the sticker price of fiscal stimulus will be recouped through higher tax collections and lower spending on automatic stabilizers, such as unemployment insurance. Higher levels of economic activity will also decrease near-term budget deficits and public debt as a share of GDP. While future budget deficits may decrease future living standards, the much more immediate problems of high joblessness and depressed levels of economic activity are decreasing both present and future living standards alike. Ensuring a rapid return to full employment hedges against many downside fiscal risks, notably slower-than-projected economic recovery, larger-than-projected cyclical budget deficits, and decreased long-run potential GDP due to economic scarring. The Better Off Budget would further promote fiscal responsibility and a sustainable public debt trajectory by raising revenues progressively, exploiting health care efficiency savings, and maintaining the reduced spending trajectory of the Department of Defense (DOD).

After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt-to-GDP ratio to a fully sustainable 65.5 percent of GDP by FY2024. Relative to current law, the budget would reduce public debt by $3.6 trillion (13.8 percent of GDP).

II. Economic context for the Better Off Budget

The most pressing objective for macroeconomic policy, particularly fiscal policy, is rapidly restoring the economy to full health. More than six years have passed since the onset of the Great Recession in December 2007, but growth in the 4.5 years since the recession’s official end has been too sluggish to restore full employment. Unemployment as of February 2014 stands at 6.7 percent, the lowest rate seen since 2008 but still two percentage points higher than the annual rate in 2007, when the recession hit, and higher than any previous rate since 1993. Further, the unemployment rate actually understates how sluggish labor market recovery has been. The share of adults age 25–54 with a job—which fell an unprecedented 5.5 percentage points (from 80.3 percent to 74.8 percent) from its peak to trough due to the Great Recession—is now still just at 76.5 percent.

As of January 2014, the “jobs gap”—the number of jobs needed to restore the labor market to prerecession health—remained a staggering 7.5 million jobs (Economic Policy Institute 2014b).5 Moreover, there were only two job openings for every five job seekers (Shierholz 2014c). The jobs gap is especially acute—and repairable—in the public sector. There are 728,000 fewer public-sector jobs now than when the recovery began in June 2009; if the number of such jobs had merely kept up with population growth, there would be 750,000 more than in June 2009—the losses create a public-sector jobs gap of nearly 1.5 million (Shierholz 2014b).

Despite sustained growth since mid-2009, economic output remains depressed as well. The output gap—the difference between actual economic activity and what the economy could be producing with higher, yet sustainable and noninflationary, levels of employment and industrial capacity utilization—was $790 billion (4.6 percent of potential output) in the fourth quarter of 2013 (CBO 2014a). And this measure of the output gap might actually be too cautious, as improvement in recent years has mostly reflected the CBO marking down its estimate of potential output, rather than reflecting an acceleration of actual growth (Bivens 2014).

Depressed levels of output and employment are a direct consequence of the bursting of the housing bubble, which erased trillions of dollars of wealth from household balance sheets. The effects rippled through the economy as consumers pulled back their spending, construction spending cratered, businesses stopped investing and expanding, financial intermediation broke down, and state and local governments cut spending as tax receipts fell. In short, households, businesses, and governments stopped spending enough to keep their workers and resources employed.

The pace of economic growth since the economy emerged from recession in July 2009 has been too sluggish to restore the economy to full health, and fiscal policy has slowed growth rates below what is needed to close this demand shortfall. The American Recovery and Reinvestment Act (ARRA) arrested the economy’s sharp decline and spurred reasonably robust growth during the first year of the recovery, but economic performance has since deteriorated as fiscal policy became increasingly contractionary. Annualized real GDP growth decelerated from 2.7 percent in the last six months of 2009 to 2.5 percent in 2010, and 1.9 percent in 2013.6 Similarly, the pace of employment growth since the labor market turned around in February 2010 has been too slow to restore full employment. While the national unemployment rate fell from 10 percent in October 2010 to 6.7 percent in February 2014, much of this decline reflects workers dropping out of the labor force due to the unavailability of jobs. If these workers were still in the labor force and unemployed, the unemployment rate would be a full 10 percent (Economic Policy Institute 2014a). Additionally, if the average monthly job gains seen in 2013 persisted, it would take five years to close the jobs gap (Shierholz 2014b).

While policymakers should be pursuing renewed fiscal expansion to accelerate the inadequate pace of economic and employment growth, Congress has instead enacted austerity measures—largely ignoring the economic and budgetary damage wrought by austerity budgets in the United Kingdom and other developed countries. This turn toward fiscal contraction has been largely driven by the enactment of the Budget Control Act (BCA) of 2011, which cut and capped discretionary spending and established the automatic “sequestration” spending cuts that took effect March 1, 2013. Discretionary spending cuts aside from the BCA—January 2013’s expiration of the payroll tax cut, December 2013’s expiration of federal emergency unemployment benefits, and two rounds of benefit cuts in the Supplemental Nutrition Assistance Program—have also intensified fiscal drags. Regrettably, the budget deal passed by the lame-duck Congress in January 2013 (the American Taxpayers Relief Act, or ATRA) failed to address the fundamental challenge posed by the “fiscal cliff” of legislated spending cuts and tax increases and instead accelerated the pace of deficit reduction relative to then-current policy (Fieldhouse 2013a). The Bipartisan Budget Act of 2013, signed into law in December, unwound some of the defense and nondefense discretionary sequester cuts over FY2014–2015, but at $63 billion of increased budget authority over two years, did little to increase aggregate demand.

The contraction of government spending in the wake of the Great Recession is unprecedented. If public spending in the current recovery simply matched the growth trajectory of that of the early 1980s recession and recovery, spending would be $800 billion higher now. When multiplier effects are taken into account, this level of spending would already have induced a full recovery (Bivens 2014). By prematurely pulling away from fiscal support, policymakers are condemning the economy of the future to depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits (Bivens, Fieldhouse, and Shierholz 2013). Instead of prioritizing recovery, the Washington budget debate remains entirely focused on the one policy intrinsically at odds with spurring near-term economic growth—reducing budget deficits—and deficits will remain high as long as the economy is depressed.

Using fiscal policy to boost aggregate demand remains the key to restoring full employment, and will actually prove largely self-financing in dollar terms and improve key metrics of fiscal health (notably the public debt-to-GDP ratio) in the near term, as long as interest rates remain historically low. Conversely, budget austerity—particularly cutting spending—is so economically damaging that it actually becomes fiscally counterproductive in current conditions, with the sequestration spending cuts actually projected to increase the debt-to-GDP ratio (Fieldhouse 2013b). The risks of austerity were also highlighted by concerns over the fiscal cliff in late 2012; if no congressional action were taken, budget deficits would have closed too quickly (meaning debt would not be allowed to rise fast enough) and the economy would have been pushed into an austerity-induced recession (CBO 2012a).

Having avoided the crippling austerity that has driven much of Europe back into recession, the United States is now embarking on the austerity path despite a wide consensus among economic experts that austerity wreaks havoc on depressed economies (Blanchard and Leigh 2013). Instead of austerity, what is truly necessary to ensure a rapid return to full employment is larger near-term budget deficits, which are a natural byproduct of government correctly acting to close the shortfall in aggregate demand through public investment, safety net spending, and federal support to state and local governments.

While policymakers’ obsession with debt and deficits seems to have abated somewhat in light of December 2013’s Bipartisan Budget Act (the deal made by House Budget Committee Chair Paul Ryan and Senate Budget Committee Chair Patty Murray) and a congressional détente over the debt ceiling, Congress remains far from embracing necessary expansionary fiscal policies. The Better Off Budget takes a strong stand for such policies by unequivocally affirming the goal of closing the output gap and returning the economy to full employment, all while ensuring sustainable projected deficit and debt levels.

The following sections describe first the spending proposals and then the revenue policies in the Better Off Budget (see Table 1). The budget is modeled and all policies are scored relative to CBO’s February 2013 current law baseline (CBO 2014b). Individual policies and net budgetary impacts, including projected deficits (see Figure A), the debt-to-GDP ratio (see Figure B), and nondefense discretionary budget authority (see Figure C) are compared with CBO’s current law baseline, as well as President Obama’s FY2015 budget request. (Tables and figures can be found at the end of this report.)

III. Outlays in the Better Off Budget

The Better Off Budget makes targeted investments in job creation and infrastructure spending aimed at rapidly restoring full employment and supporting sustained recovery, while also making targeted cuts to reflect national priorities and improve efficiency in the budget. Although outlays would rise to 23.4 percent of GDP in FY2015, as the budget pursues expansionary fiscal policy, outlays would fall and average 22.8 percent of GDP over the last five years of the budget window (FY2020–2024), only 0.7 percentage points higher than the average under current law (see Tables S-2 and S-4).

The Better Off Budget ramps up spending in the near term in order to support economic recovery and pursue full employment. Investments over the 10-year window are thus front-loaded to address current economic needs; 63 percent of total job creation measures within the 11-year FY2014–2024 window are allocated over FY2014–2017, corresponding with the calendar years 2014–2016, when the Better Off Budget most heavily invests in stimulus measures and when economic support is most needed (see Table 2).7 In later years, increased spending largely consists of additional infrastructure spending to help meet estimated needs, as well as sustained increases in nondefense discretionary (NDD) spending to keep it roughly in line with historical averages instead of letting it fall to a 60-year low of 2.3 percent in FY2024, as is currently projected under current law (see Figure C).

Renewed fiscal expansion to restore full employment

As shown in Table 2, the Better Off Budget finances $1.6 trillion in direct job creation measures over FY2014–2024 ($1.3 trillion over FY2015–2024). Sixty-three percent of these investments are made between now and the end of calendar year 2016 in order to target full employment; the remainder of the spending consists of sustained investments in infrastructure, green manufacturing, and research and development. Specifically, the Better Off Budget invests $820 billion in infrastructure over FY2014–2024, which approaches the level the American Society of Civil Engineers calls for to close the nation’s investment shortfall while offering a sustained, continuing dedicated source of funding specifically for infrastructure investments (ASCE 2013). Other direct investments in job creation include $678 billion over FY2014–2017, with nearly half allocated among investing in teachers and K-12 schools ($100 billion); providing block grants to aid states in rehiring first responders, funding safety net programs, and funding Medicaid ($95 billion); and funding public works jobs programs to boost employment, with particular emphasis on aiding distressed communities ($116 billion). The package of public works jobs programs fully finances initiatives proposed by Rep. Jan Schakowsky’s (D-Ill.) in her Emergency Jobs to Restore the American Dream Act of 2011.8

To provide both an economic boost as well as individual assistance to the near-record numbers of long-term unemployed workers, the Better Off Budget restores the emergency unemployment compensation (EUC) program to support up to 99 weeks of benefits in calendar years 2014–2016. The ATRA financed a $30 billion extension of the EUC program through 2013; however, the maximum duration of benefits was reduced to 73 weeks starting in August 2012. Subsequently, despite an acute long-term unemployment crisis—federal extended unemployment benefits have never been cut with a long-term unemployment rate as elevated as it is now (Shierholz 2014a)—Congress allowed the EUC program to lapse completely in December 2013. This budgetary provision restores benefits retroactively to their expiration in December, for a total investment of $78 billion from FY2014–2024.9

To ensure federal civilian and veteran retirees are not experiencing a decline in their purchasing power, the Better Off Budget indexes their retirement benefits to the Bureau of Labor Statistics’ experimental consumer price index, or CPI-E, which more accurately reflects the buying patterns of American senior citizens. The change will result in additional outlays of $15 billion over FY15-24 (see Table 1).

As shown in Table 2, the Better Off Budget also funds a number of job creation tax measures. It introduces the Hard Work Tax Credit, an expanded version of the now-expired Making Work Pay tax credit, for calendar years 2014–2016. In its first two years, the Hard Work Tax Credit will be 150 percent of the old Making Work Pay credit, before phasing out in the third calendar year.10 The budget also expands the earned income tax credit to greatly increase the credit’s generosity to childless workers, and thus increasing the program’s work incentive for this group. The $60 billion expansion was highlighted in President Obama’s FY15 budget (OMB 2014). Moreover, the Better Off Budget finances $126 billion in tax credits for businesses over FY2015–2024, including continuation of the research and experimentation credit as well as green manufacturing incentives.

In addition to these targeted job creation measures, infrastructure investments, and tax credits, the Better Off Budget invests heavily in the nondefense discretionary (NDD) budget, which houses a range of critical public investments in areas such as education, energy, basic scientific research, workforce training, and health. The Budget Control Act (BCA) enacted deep cuts to the NDD budget; repealing these cuts starting in FY15 will result in an additional $480 billion over FY2015–2024 in needed NDD investments, and the Better Off Budget would repeal these cuts, along with the entirety of the discretionary and mandatory BCA spending caps and sequester cuts.11 Beyond this repeal, the budget would finance a $1.7 trillion increase in NDD budget authority over FY2014–2024 (this translates to a nearly $1.6 trillion increase in NDD outlays over this period).12 Sustaining these investments is critical for building the country’s stock of public and human capital, a key driver of long-run productivity growth (Bivens 2012a). This increase in NDD spending also covers a 4 percent raise in 2014 for federal civilian employees.

Investments and job creation measures in the budget total $1.6 trillion over FY2014–2017 (see Table 2), which, when combined with the other spending and revenue provisions within the Better Off Budget is in line with the level of fiscal support needed to close the output gap. These NDD investments bring total job creation and public investments in the Better Off Budget to $3.7 trillion above the current law baseline over FY2014–2024 (see Table 2).13 Critically, NDD budget authority would average 3.4 percent of GDP over FY2014–2024, as opposed to averages of 2.5 percent under current law under or under the president’s FY15 budget request.14 By FY2024, NDD budget authority under the Better Off Budget is projected to be 3.16 percent of GDP, compared with 2.30 percent under current law and 2.26 in the president’s budget (see Figure C). This classification of federal spending is especially vital because much of it is needed public investment—purchases the government can make now that will boost employment in the short run but provide lasting benefits, such as infrastructure and education. Under current law, such investment will soon reach its historical low as a share of GDP and continue to decline thereafter (Smith 2014).

Targeted spending cuts and health efficiency savings

The Better Off Budget also proposes realigning defense priorities and finding other targeted and efficient savings in the budget. The CBO 2014 current law baseline includes a $200 billion increase in DOD outlays from the first BCA phase of discretionary spending caps and a $494 billion reduction in DOD outlays from the second phase of sequestration cuts, both over FY2015–2024. The Better Off Budget repeals these cuts and replaces them with similarly sized cuts. The budget provides $92 billion in budget authority for overseas contingency operations (OCO) budget authority for FY2014—enough to fund full and safe withdrawal from Afghanistan—after which all OCO funding is ended. Responsibly reducing OCO spending would save $949 billion over FY2015–2024 relative to current law (see Table 1). By remaining on this spending trajectory, the Better Off Budget authorizes non-emergency DOD funding at about $940 billion less than CBO projected such spending would be in the FY2015–2024 window in 2011—the final budget projections prior to the passage of the Budget Control Act (CBO 2011).

The Better Off Budget achieves savings outside of the Defense Department as well, many of which would build on the efficiency reforms already enacted in the Affordable Care Act. The budget implements the following policies: the addition of a public insurance option to Affordable Care Act health insurance exchanges, negotiation of Medicare Part D pharmaceutical drug prices with pharmaceutical companies (similar to current negotiation of drug prices through Medicaid), reform of pharmaceutical drug development and patent rules, payment and administrative cost reforms, and efforts to reduce fraud and abuse in Medicaid. In total, implementing these policies would decrease budget deficits by an estimated $384 billion over FY2014–2024 (see Table 1), much more than offsetting the $138 billion FY2014–2024 cost of permanently eliminating the Medicare Sustainable Growth Rate formula (otherwise known as implementing the “doc fix”), the scheduled cuts in Medicare providers’ pay that Congress has routinely papered over on a temporary basis since 2003. Along with health savings, the Better Off Budget would adopt a proposal in the president’s FY2015 budget to cut $14 billion from crop insurance subsidies—a proposal made necessary by the expansion of the subsidy program in the Agriculture Act of 2014.

IV. Revenue in the Better Off Budget

The U.S. tax code is failing in a number of dimensions. Tax receipts have been deliberately driven down to levels that cannot support current national priorities (let alone commitments to an aging population), tax policy has increasingly exacerbated income inequality, and complexity within the tax code means that an individual’s or corporation’s tax bill can too easily depend on the abilities of one’s accountant. The Better Off Budget would reform the tax code by enacting policies that would restore lost progressivity (so that effective tax rates rise with income), push back against rising income inequality, raise sufficient revenue, and close inefficient or economically harmful loopholes. Although tax increases are contractionary in current conditions, the economic impact of a dollar of government spending (as shown by the fiscal multiplier) is about four to seven times higher than the economic impact of a dollar of revenue (Bivens and Fieldhouse 2012). Since much of the revenue would be raised from upper-income households and businesses (which have relatively low marginal propensities to consume and thus particularly low fiscal multipliers even among tax changes) and used to finance high bang-per-buck job creation measures, the relatively small fiscal drag from raising revenue would be more than mitigated by the other budget policies.

The Better Off Budget increases revenues as a share of GDP by 3 percent over FY2015–24, from 18.1 percent under current law to 21.1 percent. Though higher relative to GDP than the previous postwar high point of 19.9 percent in 2000 (OMB n.d.), this percentage remains small relative to that of other developed economies. Moreover, aside from the United States, the great majority of advanced economies have increased their revenue-to-GDP ratios in recent decades (OECD n.d.), a logical extension of greater national wealth and aging populations.

Individual income tax reforms

The Better Off Budget raises individual income tax revenue relative to current law by enacting what was referred to as “Obama policy” prior to enactment of the ATRA; that is, it allows Bush-era tax rates to expire for tax filers with adjusted gross income (AGI) above $200,000 ($250,000 for joint filers).15 Though tax rates were scheduled to revert to Clinton-era levels at midnight on December 31, 2012, the ATRA extended the income tax cuts for those with AGI under $400,000 ($450,000 for married couples), making permanent the reduction in the 25, 28, and 33 percent brackets and creating a new 35 percent bracket for taxable income up to a $400,000 threshold.16 Under the Better Off Budget the 33 percent bracket would revert to 36 percent and the 35 percent bracket would revert to 39.6 percent. The AGI threshold at which the personal exemption phase-out and limitation on itemized deductions are triggered would be lowered from $300,000 ($350,000 for joint filers) to $200,000 ($250,000 for joint filers). The Better Off Budget would also permanently extend the ARRA expansion of refundable tax credits—the earned income tax credit, the child tax credit, and the tuition tax credit—beyond their scheduled expiration on December 31, 2017, at a cost of $108 billion over FY2018–2024.

The Better Off Budget would increase progressivity of the individual income tax code by adding the five higher marginal tax rates at higher income thresholds from Rep. Schakowsky’s Fairness in Taxation Act of 2011, effective January 1, 2014: a 45 percent bracket starting at taxable income above $1 million; a 46 percent bracket at taxable income above $10 million; a 47 percent bracket at taxable income above $20 million; a 48 percent bracket at taxable income above $100 million; and a 49 percent bracket at taxable income above $1 billion.17 Across this modified rate structure, the budget would also tax all capital gains and dividends as ordinary income. The collective impact of these policies—raising taxes on households with AGI above $200,000 ($250,000 for joint filers), extending refundable credits, adding five additional high-income brackets, and equalizing treatment of investment and labor income—would generate almost $1.4 trillion over FY2015–2024 relative to current law.18

As Table 1 shows, the Better Off Budget makes a number of additional policy changes to the individual income tax code. The budget repeals the step-up basis for capital gains at death ($352 billion in new revenue over FY2015–2024); increases progressivity in the tax code by capping the value of itemized deductions at 28 percent ($531 billion); denies the home mortgage interest deduction for yachts and vacation homes ($14 billion); and ends the exclusion of foreign earned income ($78 billion). The budget subjects S corporations to the self-employment tax ($38 billion in revenue over FY2015–2024). Finally, the Better Off Budget would enact comprehensive immigration reform that includes a path to citizenship, resulting in more taxpayers paying income and payroll taxes, and it would qualify these residents for refundable tax credits (on net saving $215 billion over FY2014–2024).

Corporate income tax loophole closers

On the corporate side, the Better Off Budget eliminates some of the most egregious loopholes and enacts other progressive reforms. The budget repeals voluntary deferral of taxes owed on U.S.-controlled foreign companies’ source income, ends the Subpart F active financing exception, and reforms treatment of the foreign tax credit, for savings of $620 billion over FY2015–2024 (CTJ 2013). It curbs corporate deductions for stock options (saving $26 billion), limits the deductibility of bonus pay ($51 billion), eliminates corporate jet provisions ($3 billion), and reduces the level of deductibility of corporate meals and entertainment $70 billion) over FY2015–2024. It saves $119 billion over FY2015–2024 by eliminating fossil fuel preferences through enactment of the End Polluter Welfare Act (EPWA) sponsored by Sen. Bernard Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.). The budget also ends tax deductions for the direct advertising of certain unhealthy foods to children ($15 billion over FY2015–2024).

Taxes on economic ‘bads’ and other tax reforms

Besides increasing progressivity in the individual and corporate income tax codes, the Better Off Budget reflects the belief that government should levy Pigovian taxes so that the consumption of certain goods reflects their true societal costs. The Better Off Budget imposes a financial transactions tax (FTT) in order to raise significant revenue while dampening speculative trading and encouraging more productive investment. By adhering to the same tax base and rates as the FTT proposed in the Back to Work budget, the FTT in the Better Off Budget would raise $908 billion over FY2015–2024 (Fieldhouse and Thiess 2013). The budget would also enact an idea proposed by House Ways and Means Committee Chairman Dave Camp (R-Mich.) by imposing a 0.35 percent tax on “systemically important financial institutions,” assessed quarterly, to address the issue of “too big to fail”($100 billion raised over FY2015–2024) (JCT 2014).

To reduce the emission of greenhouse gases and yield significant revenue on an annual basis, the budget would price carbon emissions starting at $25 per metric ton in 2015 and indexed at a 5.6 annual rate. Because pricing carbon has the potential to be regressive, the Better Off Budget, like the Back to Work budget before it, would rebate 25 percent of the revenue from carbon abatement as refundable credits to low- and middle-income households. Net of this rebate, carbon pricing would raise $1.2 trillion in revenue over FY2015–2024. On a much smaller scale, the Better Off Budget increases the federal excise tax on cigarettes by $0.50 per pack, raising $38 billion over FY2015-24.

Finally, the budget restores the progressive taxation of inherited wealth by instituting a progressive estate tax ($178 billion over FY2015–2024). It enacts Sen. Sanders’s Responsible Estate Tax Act of 2010, which sets an exemption level of $3.5 million and a graduated rate that rises to 55 percent for estates valued at over $50 million. The bill would levy a 10 percent surtax on estates valued at over $500 million.

In total, the Better Off Budget raises $6.6 trillion in additional revenue relative to current law (see Table S-3). Revenue levels in the budget average 21.1 percent of GDP over FY2015–2024 (see Table S-2).

V. Economic impacts of the Better Off Budget

Near-term impact on jobs and growth

Closing the output gap between actual economic output and potential, noninflationary levels of output is a key barometer for restoring full employment, and the Better Off Budget would finance enough in job creation measures and public investments to roughly close the projected output gaps in calendar years 2014–2016. The U.S. economy would experience a sustained return to full employment under the Better Off Budget, with unemployment falling to roughly prerecession unemployment of about 5 percent.

If the full amount of increased outlays and other job creation measures in the Better Off Budget were passed and implemented in calendar year 2014, we project that on net GDP would grow by an additional $673 billion (3.8 percent) and nonfarm payroll employment by 4.6 million jobs relative to CBO’s current law baseline at the budget’s peak level of effectiveness (within one year of implementation). Similarly, we project that the Better Off Budget would lower the unemployment rate to between 4.9 percent and 5.3 percent by the end of 2014, down from the 6.8 percent projected under current law. Given that calendar year 2014 is nearly a quarter gone, and given as well that some spending might create jobs only after an additional lag, the job creation numbers for 2014 might come in below these projections, but this means that our estimates for 2015 would rise as activity and job creation spilled over into that year. Our baseline forecast for 2015 without additional lag considerations is 2.9 million jobs created by the Better Off Budget by the end of the year. Similarly, the projected range of 4.9 percent to 5.3 percent unemployment by the end of 2014 might instead materialize in the first quarter of 2015, but we would nonetheless expect the unemployment rate to fall within a similar range throughout 2015–2016. (Discounting time lags, the unemployment rate would be expected to range between 5.3 and 5.5 percent by the end of 2015.) In this analysis, we ignore these issues of potential lags and assume that the economic impact of the Better Off Budget’s changes in outlays and revenues are reflected in the calendar year that these budget changes are made. Again, the only real concern this raises is that some of the impacts will be pushed from the end of 2014 and into early 2015. Either way, the Better Off Budget will both enshrine and accelerate an economic recovery that at the moment is coming too slowly, and too many policymakers are assuming to be inevitable and imminent.

Specifically, the Better Off Budget would increase spending on job creation and public investment measures by $485 billion in calendar year 2014, $463 billion in 2015, and $398 billion in 2016, relative to CBO’s current law baseline.19 This net increase in primary spending—totaling $1.35 trillion over three years—is consistent with what it would take to close the output gap and return the economy to full employment. The associated boost to aggregate demand would be enough to close the output gap, taking into consideration lesser economic headwinds from raising additional revenue (which has a countervailing contractionary effect, albeit relatively small per dollar). The Better Off Budget would increase revenue by roughly $56 billion in calendar year 2014, $300 billion in 2015, and $564 billion in 2016, relative to current law.20

On net, the Better Off Budget would boost GDP by $673 billion (3.8 percent) in calendar year 2014, $438 billion (2.4 percent) in calendar year 2015, and $218 billion (1.1 percent) in calendar year 2016, relative to CBO’s current law baseline. Sustaining stimulus for several years would be necessary to avoid creating a fiscal cliff demand shock (i.e., budget deficits closing too quickly to sustain growth) before the Federal Reserve began raising interest rates to cool demand-side inflationary pressure. (The U.S. economy’s eventual emergence from the liquidity trap and return to full health will be signaled by the Federal Reserve’s raising of short-term interest rates.) Note also that, while the economic boost relative to CBO’s current law baseline decreases with time, CBO’s economic forecast assumes an acceleration of growth starting in 2015, thus shrinking the output gap and need for stimulus relative to current law; while CBO’s forecasts have routinely and prematurely shown a burst of growth restoring the economy to full health four to five years from its forecasts’ issuance, this would be a more reasonable assumption if fiscal policy is accommodative rather than contractionary (Bivens, Fieldhouse, and Shierholz 2013). Consequently, the projected output gap under CBO’s current law baseline decreases from 3.7 percent of potential in 2014 to 2.3 percent in 2015, and the $435 billion boost in 2015 is enough to reduce the projected output gap to zero percent of potential GDP by year’s end.

Acknowledgements

The author would like to thank colleagues Josh Bivens, Tom Hungerford, and Christian Dorsey for their help with this project. Special thanks are due to Andrew Fieldhouse and Rebecca Thiess, authors of previous EPI analyses of CPC budget alternatives, for their assistance and guidance. Thanks also to CPC staff, especially Kelsey Mishkin. Thank you finally to Lora Engdahl for her helpful suggestions and excellent copyediting. All errors or omissions are solely the responsibility of the author.

About the author

Joshua Smith joined the Economic Policy Institute as a senior policy analyst in November 2013. His focus is on federal tax and budget policy. Prior to joining EPI, Josh worked as a budget policy analyst at the New America Foundation. While studying for his master’s in public policy from the University of California at Berkeley, Josh served as an intern for the Office of Management and Budget. He received his bachelor’s degree from Stanford University.

Appendix

Budgetary scoring and modeling

The Economic Policy Institute Policy Center has scored the policies proposed by the Better Off Budget and modeled their cumulative impact relative to CBO’s February 2014 baseline (CBO 2014b). Table 1 at the end of the paper stacks the major policy alterations to the February 2014 baseline and broadly separates policy proposals into two categories: revenue policies and spending policies. All policies are depicted as the net impact on the primary budget deficit (excluding net interest) rather than the impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects (i.e., refundable portions of tax credits), and some policies in the spending adjustments include revenue effects. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal impulse to the primary budget deficit, and the unified budget deficit is adjusted accordingly.21 The net impact of these policy changes on the budget, as well as relative to CBO’s current law baseline, can be found in Summary Tables S1 to S4.

In some instances it is necessary to extrapolate from existing official or trusted scores (e.g., those from the Congressional Budget Office, Citizens for Tax Justice, Joint Committee on Taxation, and Office of Management and Budget) to adjust from a previous budget window to the current budget window. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score. Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in the summary tables as such.

Unless otherwise specified, all tax policies are assumed to be implemented on January 1, 2015. Tax policies modeled from scores starting before FY2014 assume 75 percent of the revenue score for that year (the three quarters of FY2014 in calendar year 2014). More broadly, fiscal year scores are calculated as 25/75 weighted average calendar year scores where necessary.

Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling. Many of the individual income tax proposals, however, were collectively modeled by the CTJ using the Institute on Taxation and Economic Policy (ITEP) microsimulation and accordingly account for interaction effects, including those with the alternative minimum tax and refundable tax credits.

Economic analysis

All economic impacts are estimated relative to CBO’s current law baseline.

A fiscal multiplier of 1.4 has been assigned to government spending provisions, and a fiscal multiplier of 0.5 has been assigned to tax provisions. Moody’s Analytics Chief Economist Mark Zandi’s most recent publicly available estimate of the government spending multiplier is 1.4 (Zandi 2011), and this is robust to estimates by the International Monetary Fund, CBO, and the Council of Economic Advisers, among other forecasters (Bivens 2012b; CBO 2012b; CEA 2011; IMF 2012). Best estimates for tax provisions’ multipliers demonstrate greater variance, depending on how they are targeted to households or businesses more or less likely to spend an extra dollar of disposable income. Multiplier estimates of increased taxes on upper-income households (following Obama policy) and corporations are lower, at 0.25 and 0.32, respectively, and almost all of the Better Off Budget revenue policies fall into one of these two categories. The multiplier for pricing carbon would be somewhat higher, even taking into consideration the refundable rebate, and 0.5 is assigned as a conservative estimate for all tax changes.

Policy adjustments for 2014 are calculated as 100 percent of FY2014 and 25 percent of FY2015 budgetary costs. All current policy adjustments for calendar year 2015 adopt a 75/25 fiscal year/calendar year split. Following the methodology in Bivens and Fieldhouse (2012), a multiplier of 1.4 is assigned to removing sequestration.

The impact on the unemployment rate is calculated as a range of estimates using Okun’s rule of thumb. Specifically, the change in unemployment is projected by the percentage-point change in the relative output gap (actual output divided by potential output) divided by 2.5 for the low-end estimate and 2.0 for the high-end estimate. Estimates for the change in nonfarm payroll employment are based on the percent change in GDP, using the methodology outlined in Bivens (2011b).

Endnotes

1. Where policies in the Better Off Budget have been carried over from previous CPC budgets, this paper draws accordingly from The People’s Budget: A Technical Analysis (Fieldhouse 2011), The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013 (Fieldhouse and Thiess 2012), and The Back to Work Budget: Analysis of the Congressional Progressive Caucus Budget for Fiscal Year 2014, EPIPC’s analyses of CPC’s fiscal 2012, 2013, and 2014 budget alternatives.

2. These estimates are measured relative to CBO’s current law baseline. In our estimates the peak macroeconomic effect occurs at the end of 2014. Given that nearly a quarter of 2014 has already gone by and given various lags in enacting policy, as well as lags in policy affecting the economy, it’s likely that this peak level of effectiveness could be reached in early 2015 instead. Regardless, if the job creation measures in the Better Off Budget were passed in coming months, there would be substantial near-term improvement in economic activity and jobs.

3. These estimates are measured relative to CBO’s current law baseline. This includes job creation measures, nondefense discretionary spending increases, and repeal of Budget Control Act discretionary spending caps (see Table 2).

4. The Better Off Budget apportions increases to the nondefense discretionary budget functions as follows: 10 percent for International Affairs (Function 150); 5 percent for General Science, Space, and Technology (F250); 10 percent for Energy (F270); 5 percent for Natural Resources and Environment (F300); 5 percent for Commerce and Housing Credit (F370); 5 percent for Community and Regional Development (F450); 15 percent for Education, Training, Employment, and Social Services (F500); 10 percent for Health (F550); 20 percent for Income Security (F600); 10 percent for Veterans Benefits and Services (F700); and 5 percent for Administration of Justice (F750).

5. This includes both the jobs lost and the jobs that should have been created during this time to absorb new labor market entrants, which requires roughly 100,000 jobs per month.

6. Real GDP growth should be between 2.0 and 2.5 percent to keep the labor market holding steady; thus, growth above this level should be targeted in efforts to ameliorate a jobs crisis.

7. This includes undoing nondefense discretionary spending cuts included in the Budget Control Act.

8. The Emergency Jobs to Restore the American Dream Act of 2011 was included in the Budget for All, the Congressional Progressive Caucus’s FY2013 budget alternative. The jobs creation package invests $113.5 billion in each of two years, and was estimated by Rep. Schakowsky’s staff to support the creation of two million jobs (Fieldhouse and Thiess 2012).

9. Emergency unemployment benefits have a relatively large economic impact per dollar. Mark Zandi of Moody’s Analytics has estimated this policy to have an estimated $1.52 impact per dollar spent (Zandi 2011).

10. The initial benefit would be one-and-a-half times that of the expired Making Work Pay tax credit, bringing the maximum benefit to $600 for an individual and $1,200 for joint filers for the first two years, before reverting to the original level during the third year. During these first two years, the phase-out rate would be increased to keep the cost of the expanded tax credit at twice the budgetary cost of the lapsed credit.

11. The $480 billion is the additional NDD outlays that result from repealing both the BCA NDD caps and the BCA NDD sequester over FY2015–2024.

12. Similar to the Back to Work budget, NDD budget authority is increased by $75 billion for the remainder of FY2014, $150 billion for FY2015, $200 billion for FY2016, and sustained for the rest of the budget window. The associated budgetary outlays can be seen in Table 2.

13. This includes undoing both phases of NDD cuts in the BCA.

14. The Better Off Budget would reclassify surface transportation outlays (currently discretionary spending) as mandatory, but this policy change has been excluded from NDD outlays in Figure C for an apples-to-apples comparison with historical and projected spending levels.

15. These AGI cutoffs are measured in 2009 dollars and were subsequently indexed to inflation in the administration’s budget requests.

16. These rates were scheduled to revert to 28, 31, 36, and 39.6 percent. ATRA levied a 39.6 percent rate only on income over $400,000 ($450,000 for married couples).

17. The taxable income thresholds for these rates are applicable to individual, head of household, and married filing jointly tax returns by filing status. The taxable income thresholds for these rates are halved for married couples filing separately.

18. The collective budgetary impact of these policy modifications to the individual income tax were scored by Citizens for Tax Justice using the Institute on Taxation and Economic Policy (ITEP) microsimulation model, which is similar to models used by official scorekeepers at the Treasury Department and the Joint Committee on Taxation. The score of taxing capital gains as ordinary income takes into account behavioral responses of capital gains realizations to higher tax rates.

19. These calendar year increases are based on additional outlays of $365 billion in FY2014, $479 billion in FY2015, $417 billion in FY2016, and $340 billion in FY2017, relative to CBO’s current law baseline (see Table 2).

20. These calendar year increases are based on net decreases in revenue of $300 billion in FY2015, $548 billion in FY2016, and $615 billion in FY2017 relative to CBO’s current law baseline (see Table S-3).

21. Debt service is calculated by the CBO’s debt service matrix for the February 2014 baseline.

References

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In the spring of 2013, Missouri lawmakers are debating two bills that seek to limit the ability of state employees and Missouri workers in general to pay union dues that help fund political advocacy. These bills—dubbed “paycheck protection” by their supporters—are part of a national effort to restrict the role of unions in politics. Proponents of Missouri’s Senate Bill 29 and House Bill 64 claim that these bills will save taxpayers money, will remove the government from the role of collecting money used for political purposes, and will increase workers’ control over how their wages are spent.

The Missouri bills are part of a 15-year effort to promote “paycheck protection” legislation, advanced in states across the country by the U.S. Chamber of Commerce, the American Legislative Exchange Council (ALEC), the National Federation of Independent Business, and other corporate lobbies. This history sheds critical light on the logic of the bills currently under debate in Missouri.

On close examination, it is clear that these bills will not create new rights for Missouri employees, and will significantly tilt the political playing field by enabling unlimited corporate political spending while restricting political spending of organized workers.

• Neither SB29 nor HB64 will provide Missouri employees with any new rights that they do not possess under existing law. Under federal law, unions may contribute to congressional or presidential campaigns only through a political action committee funded through separate, voluntary contributions by individual union members. Furthermore, unions’ campaign contributions at the state level—and more general political activities such as lobbying, issue advocacy, ballot initiative campaigns, and independent union advocacy in support of particular candidates—cannot use dues from any individual who objects to these priorities. In other words, it is already the case that under both federal and state law, no employees—whether in the private sector or the public—can be forced to pay to support a political cause they oppose.

• In voicing its support for HB64, the Missouri Chamber of Commerce claims that, under current law, “employees who pay union dues have no say whether campaign contributions are taken out of their dues, or where those contributions are directed” (Missouri Chamber of Commerce 2013). This is false: All union members have a voice in how dues contributions are used, and any employee who doesn’t want his or her dues used for politics is free to either withhold that portion of dues (in the private sector) or withhold the entire dues payment (in the public sector).

• While providing no new rights, SB29 and HB64 would impede union political activity with extensive and onerous bureaucratic roadblocks that would waste valuable resources and hamper unions’ ability to respond to political attacks against labor rights.

• SB29 and HB64 tilt the political playing field toward big corporations by imposing restrictions on workers’ political activity while leaving corporations free to engage in unlimited political spending. While the U.S. Chamber of Commerce and ALEC insist that unions shouldn’t be able to spend money on politics without individual member approval, the groups vigorously oppose proposals that would require corporations to get shareholder approval before donating to political campaigns.

• Even in the treatment of payroll deductions themselves, SB29 and HB64 establish a stark double standard for labor organizations versus business. ALEC promotes “paycheck protection” on the grounds that “taking political contributions from workers without their fully informed consent violates these workers’ rights” (American Legislative Exchange Council 1998). The Missouri Chamber of Commerce declared that it supports HB64 because “people have a right to designate which candidate gets support with their money” (Missouri Chamber of Commerce 2013). Americans for Prosperity similarly promotes SB29 as guaranteeing workers’ “freedom to decide whether or not their earnings are put toward political activity to which they may object” (Americans for Prosperity–Missouri 2013). But these principles apply only to unions, not to corporations. Missouri currently allows 405 possible payroll deductions for public employees, and many of the payments go to corporations that spend heavily on politics. These include:

• Health insurance payments to UnitedHealth Group, which spent $3.4 million on lobbying activities in 2012.
• Prescription drug benefit payments to Express Scripts, which spent nearly $1.9 million to lobby Congress and $340,000 to lobby Missouri lawmakers in 2012.
• Life insurance deductions to Allstate, which spent over $17 million on lobbying in the past five years.
• Supplemental insurance payments to Aflac, which made campaign contributions totaling $2.5 million in 2012 and has spent $21 million on lobbying over the past five years.

These political and lobbying activities are untouched by either HB64 or SB29; both bills restrict contributions only to labor organizations, while leaving corporations completely free to deduct monies out of employee paychecks and use them for political purposes without employees’ knowledge or consent.

•  “Paycheck protection” does not save administrative costs, because the expense of electronic payroll deductions is minimal, while the bureaucratic requirements associated with “paycheck protection” are likely to impose significant extra costs.

• “Paycheck protection” is not a sound strategy for addressing state fiscal deficits. The record state budget deficits of recent years were caused by a falloff in revenues, not an increase in expenses. Statistical evidence shows no correlation between the presence of employee unions and the size of a state’s budget gap.

• “Paycheck protection”—both in Missouri and elsewhere—appears to function primarily as a political strategy that serves to impede the political voice of organized workers while allowing free reign to business corporations.

Corporations can be expected to pursue a political agenda that furthers their economic interests. But there is no conceivable justification for lawmakers to confer political rights on corporations while diminishing or violating the rights of working people.

What is ‘paycheck protection,’ and where does it come from?

SB29 and HR64, which Missouri lawmakers are debating in the spring of 2013, seek to limit employees’ ability to pay union dues that help fund political advocacy. Dubbed “paycheck protection” by their supporters, these bills are part of a national effort to restrict the role of unions in politics. Proponents of the legislation claim that these bills will save taxpayers money, will remove the government from the role of collecting money used for political purposes, and will increase workers’ control over how their wages are spent. Before evaluating each of these claims in detail, it is important to understand the larger historical and political context of “paycheck protection” in order to assess the likely impact of the bills and to make sense of their political purpose.

“Paycheck protection” proposals did not originate just in the past year or just in Missouri. The nation’s largest corporate lobbies—including the U.S. Chamber of Commerce, the National Association of Manufacturers, and the National Federation of Independent Business—have been promoting such measures for at least the past 15 years in various states (Norquist 1998; Broder 1998).

The first “paycheck protection” bid—California’s Proposition 226 in 1998—followed upon the loss at the polls of a school voucher proposal that would have allowed funds to be diverted to religious schools. The defeated backers of the voucher law concluded that their failure was due to the opposition of the teachers’ union; they launched “paycheck protection” not in order to safeguard the rights of teachers but rather to remove the teachers’ collective voice from state politics (Sabato 1998; Orange Net News 2006).1

Despite its defeat by California voters, Proposition 226 was trumpeted by corporate lobbies as a model for other states. At the center of this campaign to promote “paycheck protection” laws is the American Legislative Exchange Council (ALEC), a national network that brings state legislators together with the country’s largest corporations, including Wal-Mart, Coca-Cola, Koch Industries, ExxonMobil, and leading tobacco and pharmaceutical firms. Among other activities, ALEC sponsors conferences where corporate lobbyists sit with sympathetic lawmakers to draft model legislation. The resulting model bills must be approved by ALEC’s corporate donors before they are circulated. These corporations pay ALEC’s expenses, contribute to legislators’ campaigns, and fund the think tanks that promote legislation; in return, legislators carry the corporate agenda into their statehouses (Wilce 2013). Over the past decade, ALEC’s leading corporate backers have contributed more than $370 million to state elections, and over one hundred laws a year are adopted based on ALEC’s model bills (Common Cause 2011).

In many cases, ALEC pursues initiatives that directly benefit the bottom line of its corporate partners. For instance, ALEC receives money from energy companies and lobbies against environmental controls; it receives money from drug companies and advocates prohibiting cities from importing discounted drugs from Canada; it received money from Coca-Cola and lobbied against taxes on sugary soft drinks; it even receives money from “payday loan” companies and opposed a law prohibiting such firms from charging more than 36 percent interest. But ALEC also promotes a broader economic and deregulatory agenda that is not directly tied to the profitability of specific donors. It advocates cuts to Social Security, farm subsidies, unemployment insurance, and food stamps (all of which ALEC describes as “welfare”); it supports trade treaties along the lines of the North American Free Trade Agreement (NAFTA); it favors cutting public funding for schools; and it supports efforts to block union organizing and restrict unions’ participation in political debates (Laffer, Moore, and Williams 2011).

The influence of ALEC on the Missouri legislation is clear. In the same year that Proposition 226 was put on the ballot in California, ALEC adopted a model “Paycheck Protection Act,” to be distributed to legislators in all the states, that prohibited employees in both the public and private sectors from contributing to union political activities through payroll deductions—even if the employees voluntarily asked to do so (American Legislative Exchange Council 1998). The following year, in 1999, ALEC adopted the “Public Employee Freedom Act,” and the “Public Employer Payroll Deduction Policy Act,” both of which prohibit public employees from contributing union dues through the payroll system—even if the contribution is voluntary and regardless of what the dues are used for (American Legislative Exchange Council 1999a, 1999b).

Multiple bills aim at the same larger goal

It is not a coincidence that there are two slightly different bills in Missouri under the single rubric of “paycheck protection.” It is common practice in such legislative campaigns for corporate lobbies to develop multiple model bills addressing the same issue. By floating several options, ALEC can gauge how far lawmakers in a given state are willing to go toward the organization’s goal. ALEC and its legislative partners can then calibrate their bills to align with what they believe is politically feasible in a given place and time.

Thus, for instance, as a policy goal ALEC calls for complete abolition of the minimum wage, arguing that such laws “represent an unfunded mandate on business by the government” (American Legislative Exchange Council 1996a). For states that may not be ready to completely repeal the minimum wage, however, ALEC offers a model bill that simply blocks any increase. And for yet more moderate legislators, ALEC has model legislation that, while perhaps allowing one-time increases, opposes letting the wage be regularly adjusted for inflation (American Legislative Exchange Council 1996b, 2008).

Thus, when evaluating any given piece of ALEC-promoted legislation, it is important to examine not only the immediate bill itself, but to understand the end goal of the agenda of which it is a part. Bills to prohibit inflation adjustment of the minimum wage are not really about inflation, for instance—they are simply the step that legislators believe they can take in a given session toward the ultimate goal of eliminating the minimum wage altogether.

So too, ALEC and other corporate lobbies have promoted a variety of “paycheck protection” bills over the past two years. Some require that union members sign a special form authorizing payroll deductions to support union political activities; some prohibit contributing to union political activities through the public payroll system even for employees who ask to do so; some prohibit unions from endorsing candidates. What they have in common is that they would muffle the voice of organized workers in state legislative debates. Missouri’s bills continue this trend.

HB64 and SB29 create no new rights for Missouri workers

Of the two “paycheck protection” bills under consideration in Missouri, SB29, introduced by Senator Dan Brown, imposes new requirements for public employees who pay union dues through payroll deductions. The bill prohibits any amount of union dues being paid through payroll deductions—no matter what the dues are used for—unless each individual employee signs a personal authorization form every year. An employee who wants to authorize dues on an ongoing basis without having to fill out an annual form (retaining the right to cancel this arrangement in the future) cannot do so. Employees must fill out a second annual form to contribute dues that support their union’s political advocacy.

HB64 similarly requires that employees submit annual written authorization before any of their dues may be used for political purposes. But this bill applies to both public and private sector employees. Unlike SB29, HB64 does not require annual written authorization for payment of non-political dues.

It is critical to note that neither of these bills provides employees with rights they do not already possess under current law. Under federal law, unions may contribute to congressional, senatorial, or presidential campaigns only through a segregated PAC fund, and the PAC cannot be funded out of regular dues money but only through separate, voluntary contributions by individual union members. While Missouri law allows general dues to be used for contributions to state legislative candidates if a majority of members vote to do so (Missouri Revised Statutes 2012), many unions avoid this practice, making all contributions out of the separate PAC fund.

Furthermore, under current law even union contributions to state legislative campaigns—or more general political activities such as lobbying, issue advocacy, ballot initiative campaigns, or independent union advocacy in support of particular candidates—cannot be funded by dues money from any individual who objects to these priorities. Under both federal and state law, no employees—whether in the private sector or the public—can be forced to pay even one cent to support a politician or ballot initiative that they oppose. Every employee has the right to withhold any portion of his or her dues that might be used to fund political activities, or, for public employees, to withhold their dues entirely.

SB29 and HB64 substitute an opt-in for an opt-out system, but they create no new rights for employees to control whether their dues are spent on political activities.

In voicing its support for HB64, the Missouri Chamber of Commerce claims that under current law, “employees who pay union dues have no say whether campaign contributions are taken out of their dues, or where those contributions are directed” (Missouri Chamber of Commerce 2013). This is false: All union members have a voice in how dues contributions are used, and any employee who doesn’t want his or her dues used for politics is free to either withhold that portion of dues (in the private sector) or withhold the entire dues payment (in the public sector).

Indeed, workers have multiple channels through which to control union political priorities. As stated above, every employee has the right to refuse to contribute dues to political causes. In addition, of course, every union member has the right to vote out current union leadership and elect leaders whose political preferences reflect their own—or who pledge to avoid politics altogether. Finally, union members can vote to get rid of their union entirely. Thus, at least three legal channels exist for employees who disagree with their union’s political activities: They may withhold their dues as individuals; they may elect new leadership; or they may disband the union. All of these options are legally straightforward, and all of them occur every year. But they happen in exceedingly small numbers, suggesting that it is corporate lobbyists, rather than a silent majority of employees, who are most opposed to unions’ political activism.

HB64 and SB29 muffle workers’ collective voice and create wasteful new bureaucracy

While SB29 and HB64 do not give employees rights that they do not already possess, the bills do raise significant barriers to the ability of organized workers to participate as a full partner in political debates. By requiring annual written notice from each individual employee, “paycheck protection” imposes an extensive new bureaucratic obligation on unions. Even considering only those employees who support their union’s political activity, a union would need to devote considerable time, energy, and staff resources to meeting with each individual member each year and providing, collecting, filing, and forwarding to state officials tens of thousands of forms each year. The resources devoted to this operation would be taken away from those needed to negotiate contracts and represent employees in disputes with management—or to participate in political and legislative debates. In other contexts, corporate lobbies strongly oppose even milder bureaucratic hurdles to political participation. For example, ALEC opposes proposals that would require political advertisements to list their top contributors within the text of the ad; it argues that this requirement represents “an onerous burden on the organization, which has the effect of chilling speech since organizations are limited in the time or space they are given to express their message” (American Legislative Exchange Council 2010a). Yet ALEC and other corporate lobbies seek to impose much more onerous burdens on unions. For unions, the requirements in SB29 and HB64 effectively require that dues be much higher in order to pay for the activity of keeping authorization forms current, or that employees receive poorer representation, hence undermining the union’s effectiveness.

Furthermore, it is likely that a significant number of those who support their union’s political activity would nevertheless miss their annual filing deadline, at least for some months. This is not a special feature of labor unions. If everyone were required to reapply every year for home insurance, phone service, or home utilities, it is likely that some number of individuals would forget and miss the deadline. Even if it takes only a few months to correct this omission, union dues would go unpaid for that time. Spread over tens of thousands of members, such simple problems are likely to result in significant lost revenue that signifies nothing about members’ political beliefs.

It is instructive that neither bill provides an option for employees who support their union’s political program, have supported it for years, and do not want to fill out annual forms. It would be illegal for an employee to sign a document committing to pay full union dues (including for political advocacy) until such time as they notify the union otherwise. It is hard not to view this as taking away employees’ right to contract.

Furthermore, SB29 would effectively hamstring unions’ voice by strictly limiting the amount of resources that can be devoted to political advocacy. Under current law, unions must file annual reports showing what percentage of their budget was devoted to political activities. Each year’s report determines the percentage rebate that must be awarded in the following year to those who opt out of supporting their union’s political agenda. By contrast, SB29 effectively requires unions to determine and announce at the start of each year how much they will spend on political activities in the coming year, thus putting the union in a unique bind. It is easy to imagine how political events unforeseen at the start of the year might turn out to require greater-than-anticipated resources. For example, in March 2011 Ohio’s legislature adopted SB5, which drastically curtailed bargaining rights for the state’s 400,000 public employees. Opponents of the bill gathered 1.2 million signatures in order to schedule a citizen referendum on overturning the law; in November 2011, Ohio voters rejected the law by a wide margin. The response to SB5 entailed intensive activities by thousands of union members. But since neither legislators nor the governor had campaigned on such anti-union proposals, this fight could not have been anticipated at the start of the year. If an Ohio union had submitted a report at the start of 2011 projecting the funds it expected to devote to political activities, it would have drastically underestimated its needs. If a union guesses wrong, it may be unable to avert the loss of bargaining rights or other damage done by anti-union politicians. And if it “overspends” politically, it is in violation of the law.

One rule for unions, another rule for corporations

Business lobbies claim that their support for “paycheck protection” legislation is based on a commitment to individuals’ right to control what type of politics their money supports. But they vigorously oppose the same principle when it is applied to corporations.

In 2011, 10 states considered bills that would have required corporations to get shareholder approval for political donations. With ALEC lobbying against them, all 10 were defeated (Blake 2012). In September 2010, in a resolution supporting the Supreme Court’s Citizens United decision, ALEC argued, in part, that “shareholder approval schemes, in which a corporation’s shareholders…are required to give approval of a corporation’s independent expenditures, place an onerous burden on these organizations, which serves as a barrier to free speech and is in violation of…the First Amendment” (American Legislative Exchange Council 2010a).

This issue came to a head in 2011, when the New York legislature considered a bill that would have required corporations to obtain annual written authorization from a majority of shareholders before spending treasury funds on political campaign contributions. ALEC published an “issue alert” arguing that such requirements would “deter…[corporations] from participating in political debate,” and asserting that the bill “stifles…public debate and undermines the very purpose of the First Amendment.” Furthermore, ALEC insisted that shareholder approval of political donations is unnecessary because “shareholders always have the option of voting out board members and removing management who engage in independent expenditures contrary to the interests of the company and its owners” (American Legislative Exchange Council 2011). This same logic applies to unions as well, of course—members can vote out union officers whose politics they object to. Yet what ALEC characterizes as an intolerable impediment to First Amendment rights for corporations it vigorously promotes for labor unions.

A similar contradiction is evident in ALEC’s lobbying stance toward efforts to allow individuals to sue to recover money spent on their behalf for political purposes. HB64, for example, provides that individuals whose union dues are spent on politics without their consent have a private right of action to sue their union for damages and attorneys’ fees. Yet ALEC’s Citizens United resolution insists that “allowing shareholders to file a civil cause of action against a corporation in dispute of the corporation’s political activity” amounts to “a legal threat designed to silence corporate speech” (American Legislative Exchange Council 2010a).

By focusing exclusively on employee payroll deductions, “paycheck protection” proposals serve to tilt the political playing field toward big corporations. As the Los Angeles Times editorial board explained, while “unions raise their political money overwhelmingly through payroll deductions…corporations…rely on their treasuries rather than payroll deductions to make political contributions… and…they do so without asking permission of shareholders, employees or customers” (Los Angeles Times Editorial Board 2012).

SB29 and HB64 allow payroll deductions for corporate political spending—only union spending is restricted

Even in the treatment of payroll deductions themselves, SB29 and HB64 establish a stark double standard for labor organizations versus business.

“Paycheck protection” is often described as safeguarding the right of employees to control the political uses to which their money is put. Thus, Missouri House Speaker and ALEC State Chairman Tim Jones explains his support for the bills by arguing that “no one should be forced to make compulsory contributions to an organization which will use the funds to support candidates that the worker may not support”2 (Jones 2013). This sentiment is repeated by major corporate lobbies such as the Koch-family-funded Americans for Prosperity, which trumpets SB29 as guaranteeing workers’ “freedom to decide whether or not their earnings are put toward political activity to which they may object” (Americans for Prosperity–Missouri 2013). So too, the Missouri Chamber of Commerce declared it supports HB64 because “people have a right to designate which candidate gets support with their money” (Missouri Chamber of Commerce 2013). But all these principles appear to apply only to money contributed to workers’ organizations, not money contributed to corporations.

The state of Missouri offers public employees over 450 options for making payments through electronic payroll deductions. Many of these are payments to corporations that use their revenue to fund ambitious political lobbying and campaign contributions, including:

• Health insurance payments to the Missouri Consolidated Health Care Plan (MCHCP), which is operated by United Medical Resources, a division of the UnitedHealth Group. UnitedHealth Group uses its treasury funds to support an ambitious political program, which included spending $3.4 million on lobbying activities in 2012 (Missouri Consolidated Health Care Plan 2013a, 2013b; UnitedHealth Group 2013a, 2013b; Center for Responsive Politics 2013a).3
• Insurance premium payments to Coventry Health Care, which spent over $1 million on lobbying activities in 2008–2009 during the height of congressional debate over health care reform (Missouri Consolidated Health Care Plan 2013b; Center for Responsive Politics 2008a, 2009a).
• MCHCP premiums used to pay the Express Scripts company, which administers the state’s prescription drug benefit; Express Scripts spent nearly $1.9 million to lobby Congress in 2012 and $340,000 to lobby Missouri lawmakers (Center for Responsive Politics 2012a; National Institute on Money in State Politics 2012a).
• Life insurance purchases through the Allstate company, which spent nearly $17.5 million on lobbying over the past five years (Center for Responsive Politics 2008b, 2009b, 2010a, 2011a, 2012b, 2012c, 2012d, 2011).
• Hospital gap insurance purchases through the Aflac corporation, designated a “heavy hitter” in political spending by the Center for Responsive Politics. Aflac made campaign contributions totaling $2.5 million in 2012 and has spent $21 million on lobbying over the past five years (Center for Responsive Politics 2008c, 2009c, 2010b, 2011b, 2012e, 2012f; National Institute on Money in State Politics 2012b).
• Tax-sheltered annuity purchases through the Aetna insurance company. Aetna has spent $17.6 million on lobbying over the past five years, including $4.1 million in 2012. The company also contributed more than $2.2 million to state and federal candidate campaigns in 2012 (Center for Responsive Politics 2008d, 2009d, 2010c, 2011c, 2012g, 2012h; National Institute on Money in State Politics 2012c).
• Tax-favored college savings plan investments administered by the Vanguard Group (MOST 2013). Vanguard itself contributed $362,000 to congressional candidates and spent another $2 million on lobbying in 2012 (Center for Responsive Politics 2012i). Vanguard is also a member of the Investment Company Institute, which spent $7.5 million on lobbying activities in 2011–2012 (Investment Company Institute 2013; Influence Explorer 2013). Finally, the stocks in which Vanguard invests employees’ funds include three of the country’s top 20 lobbyists: General Electric, which spent $21.1 million on lobbying in 2012; Google, which spent $18.2 million; and AT&T, which spent $17.4 million (Vanguard Group 2013; Center for Responsive Politics 2013b). In no case are employees given the option of investing in college savings plans while withholding the portion of their investment or fees that fund these political activities.

In regulating dues deductions for labor unions, the law assumes that, unless it is held in a separate segregated account, all money is fungible. Thus, a union can’t make political dissidents continue paying the same dues rates by assuring them that none of their money will be used for political spending and that the union will instead rely on a greater share of other people’s dues to fund political activities. This is the meaning of SB29’s requirement that “individuals who do not authorize [political] contributions…shall not have their dues…increased in lieu of contribution.” Unions are required to treat all expenses as if they are paid in equal shares by each members’ dues; thus, someone who objects to supporting political activities must have his or her dues reduced by that amount—not simply reallocated to non-political expense categories—and the union cannot make this up by increasing others’ dues rates.

If the same logic applies to all deductions, insurance companies can’t plausibly declare that no part of Missouri employees’ premiums are used for lobbying activities by arguing that the company takes that money out of other income. Rather, we must assume that some portion of every dollar employees pay to UnitedHealth Group, Vanguard, Aetna, Aflac, and Express Scripts is used to fund corporate political activities. ALEC’s model Paycheck Protection Act declares that “taking political contributions from workers without their fully informed consent violates these workers’ rights. Such violations injure the workers, undermine the legitimacy of the political process and can have a corrupting effect on the electoral and governmental process” (American Legislative Exchange Council 1998). It appears, however, that this principle applies only to organizations that are politically opposed to ALEC. All of the contributions to investment banks and insurance companies’ political lobbying activities are untouched by HB64 and SB29; both bills restrict contributions only to labor organizations, while leaving corporations completely free to deduct monies out of employee paychecks and use them for political purposes without employees’ knowledge or consent.4

The double standard at the heart of SB29 and HB64 is common to many recent “paycheck protection” proposals. In Tennessee, for instance, both the U.S. Chamber of Commerce and the National Federation of Independent Business (NFIB) urged legislators to pass a pair of bills with starkly different outcomes for business and labor (Tennessee Chamber of Commerce & Industry 2012; National Federation of Independent Business 2011). One bill gave corporations the right, for the first time ever, to make direct contributions to candidate campaigns—extending corporate rights even beyond those established in the Citizens United ruling. The other bill would have made it a class C misdemeanor for a labor organization to contribute to any candidate for public office.5

‘Paycheck protection’ does not save the state money by eliminating the administrative costs of collecting union dues

Some proponents of limiting employees’ ability to pay union dues through electronic payroll deductions suggest their bills are motivated by the desire to save state tax dollars. ALEC’s model Public Employer Payroll Deduction Policy Act, for instance, argues that payroll dues deduction constitutes an unwarranted use of state resources. “It is in the interest of this State’s citizens,” ALEC asserts, “that government resources, including employee time, public property or equipment, and supplies be used exclusively for activities that are essential to carrying out the necessary functions of government,” which “do not include using government resources to confer the special convenience of deducting membership dues from…[employees’] paychecks” (American Legislative Exchange Council 1999b).

So too, when Michigan legislators passed a law banning school teachers from paying union dues through the payroll system, the law’s sponsor stressed that his bill “really prioritizes that the focus of our school administration has to be on teaching the kids. …Let’s get out of the business of collecting bills for other people” (Spencer 2012).

Governor Rick Snyder concurred, suggesting that the law would ensure that “state public school resources be devoted to the education of our children” (Snyder 2012). Unsurprisingly, the Michigan Chamber of Commerce “strongly” supported this bill, arguing that “in these challenging economic times, those responsible for expending government resources must be ever more vigilant that monies are being directed for the public good. …Since the monitoring and collection of union dues requires financial resources, it should be the obligation of the union to undertake this activity and not look to taxpayers to ensure the collection of dues” (Michigan Chamber of Commerce 2012).

But electronic payroll deductions are virtually costless. Indeed, Michigan’s own Senate Fiscal Agency concluded that this bill “would have no fiscal impact on the state” (Michigan Senate Fiscal Agency 2012). The Michigan House of Representatives’ legislative analysis of the bill reports that even in small school districts, “the bill would have no significant fiscal impact,” because “payroll deductions for union dues…[are] largely automated, so there is very little work districts must go through on a regular basis” (Michigan House Fiscal Agency 2012).

As noted above, the state of Missouri already offers more than 450 payroll deduction options for public employees; eliminating a handful of these will have no measurable impact on state administrative costs.

SB29 and HB64 are not effective strategies for closing state budget deficits

In Wisconsin and elsewhere, politicians justified attacks on public employee unions as a response to the fiscal crises confronting state governments. Commentators regularly suggested that budget deficits were the fault of unions that used their political clout to pad government payrolls and extract above-market wages and benefits from hard-working taxpayers (Bergquist and Stein 2010). But this characterization does not fit the facts of economic reality. Public employees generally make slightly less than similarly skilled employees in the private sector (Schmitt 2010; Keefe 2011). Furthermore, the timing of the budget crises that swept the nation in 2010–2011 makes it clear that these could not have been the product of overly generous compensation for public employees.

The budget deficits of 2010–2011 came on suddenly. As recently as 2007, 40 of the 50 states enjoyed budget surpluses (Eckl 2008). Three years later, the states faced a combined shortfall of almost $200 billion, by far the largest on record (McNichol, Oliff, and Johnson 2011). Whatever caused the crises, then, must have occurred in 2008–2009. There was certainly no dramatic increase in employee compensation in these years. On the contrary, both the number of state and local public employees per capita (see Figure A) and the share of state budgets devoted to employee compensation (Figure B) have been flat or declining for the past two decades (Allegretto, Jacobs, and Lucia 2011; Madland and Bunker 2011).

Figure A

Figure B

What changed in that short timespan was, in fact, no increase in state spending of any kind, but rather a dramatic falloff in revenues (Figure C), caused by the collapse of the housing market and the onset of the Great Recession (McNichol, Oliff, and Johnson 2011). Budget deficits struck nearly every state in the country, regardless of employees’ union status. Statistical analysis shows no correlation whatsoever between the presence of public employee unions and the size of state budget deficits (Allegretto, Jacobs, and Lucia 2011). Indeed, the state of Texas—which prohibits collective bargaining for nearly all public employees—faced one of the country’s largest deficits, with a massive shortfall of $18 billion, or 20 percent of state expenditures (Williams, Leachman, and Johnson 2011).6

Figure C

If unions didn’t cause the increase in state fiscal deficits, it’s also true that restricting union rights was not a strategy for solving states’ fiscal problems. Indeed, under questioning by members of Congress, Wisconsin Governor Scott Walker conceded that many of the most draconian provisions in his anti-union legislation “wouldn’t save [the state] anything” (Jilani 2011). So too, Ohio Governor John Kasich—who signed a law similar to Wisconsin’s only to see it overturned by voter referendum—conceded under questioning that his law “does not affect our budget” (Vardon 2011).

Thus, while “paycheck protection” laws may indeed weaken public employee unions, they cannot be considered a sound strategy for addressing state fiscal problems.

‘Paycheck protection’ does not get government out of the business of supporting political activities

In its model Paycheck Protection Act, ALEC argues that such laws are needed in order “to avoid the perception that the State has any involvement in political contributions.” For this reason, ALEC asks legislators “not to permit political contribution deductions from the compensation of any State employee” (American Legislative Exchange Council 1998). This argument has been repeated in numerous state debates. The corporate-funded Alabama Policy Institute, for instance, heralded that state’s ban on payroll deductions for union dues, insisting that the legislation “stops the abuse of state resources,” “paid for by Alabama taxpayers, to support…political efforts” (Palmer 2012).

However, such bills do not, in fact, remove the government from the role of facilitating political spending. Instead, they simply impose a one-sided limit on unions’ political activities. The state of Missouri not only allows myriad payroll deductions to politically active corporations, but it also makes direct grants of taxpayer dollars to such organizations.

In 2011–2012, for instance, Missouri gave $1 million grants to both the St. Joseph and Joplin Chambers of Commerce (Nixon 2012). Both organizations are members of the Missouri Chamber of Commerce and Industry, which boasts that its lobbying organization constitutes “one of the most powerful forces in the State Capitol”(King 2013). Furthermore, both the St. Joseph and Joplin chambers are accredited members of the U.S. Chamber of Commerce, to which they must pay fees. The U.S. Chamber is the single largest political lobby in the country, spending $136.3 million on lobbying activities in 2012 (Center for Responsive Politics 2013b). Since the Chamber of Commerce uses general treasury funds to pay for lobbying and political activities, some small portion of the $2 million in grants must be assumed to be supporting chamber political activities.

Yet neither of these grants was greeted with warnings about taxpayers’ dollars going to fund political views that taxpayers might not support or with concerns about the ethics of the state government appearing to provide financial support to organizations that might use some of their budgets for political purposes.

 ‘Paycheck protection’ is not part of an agenda to expand workers’ rights

Corporate advocates sometimes present themselves as champions of employees’ rights. In Missouri, ALEC-affiliated Sen. Mike Parson insists that “paycheck protection” is “not an attack on unions,” but “is about employee freedom” (Missouri Times 2013). HB64 sponsor and ALEC Task Force member Rep. Eric Burlison similarly argues that his bill aims “to protect the rights of Missouri workers” (Yokley 2012). But the organizations most responsible for the promotion of such bills are not engaged in a campaign to expand workers’ rights.

“Paycheck protection” is part of a broader corporate agenda of economic reform being championed in state houses across the country. That agenda includes eliminating the minimum wage, stripping employees of the right to paid sick leave, and making it harder for employees to file suit over job discrimination, but it is not an agenda to expand workers’ rights.

Most importantly, the very lobbies that are at the forefront of advocacy for restricting union dues are working to actively oppose the most fundamental form of what might truly be termed “paycheck protection”—a guarantee that employees are actually paid the wages they have legally earned.

The United States is currently facing an epidemic of wage theft, and the corporate lobbies’ response is telling. A multi-city survey reports that 64 percent of low-wage workers have some amount of pay illegally withheld from their paychecks every week, including 26 percent who are effectively paid less than the minimum wage. Fully three-quarters of workers who are due overtime have part or all of their earned overtime wages stolen by their employer. In total, the average low-wage worker loses a stunning $2,634 per year in unpaid wages, representing 15 percent of their earned income (Bernhardt et al. 2009). Indeed, the amount of money illegally taken out of employees’ paychecks every year is greater than the combined total of all the bank robberies, gas station robberies, and convenience store robberies in the country (U.S. Department of Labor 2008; U.S. Bureau of the Census 2012).

In recognition of the crisis of wage theft, states and localities have begun drafting ordinances to protect workers’ paychecks from this fundamental danger. The Progressive States Network, a national organization of state legislators, has identified the key elements of effective policy for combating wage theft. These include requirements that employers keep detailed pay records and allow employees to receive a detailed explanation of how each paycheck was calculated; the right of state authorities to inspect employers’ records; workers’ private right of action to sue for unpaid wages as individuals or in class actions; protection of complainants against retaliation by their employers; and the provision of attorney fees, damages, and penalties as part of the enforcement process (Judson and Francisco-McGuire 2012b). Yet corporate lobbies have been working hard to prohibit exactly such enforcement mechanisms. In the past two years, these efforts came to a head in Florida.

Florida’s legislature abolished the state’s Department of Labor in 2002 (Florida Senate 2010). Further, the state attorney general has failed to bring a single case of wage theft in recent years. Thus, the only means for seeking enforcement under current law is for employees to turn to the Legal Aid Society, which relies entirely on volunteer attorneys (Reid 2011; Hernandez and Stepick 2012). In 2010, Miami-Dade County instituted the nation’s first broad municipal wage theft law, providing enforcement through a streamlined process similar to small claims courts, at no cost to taxpayers. In its first year, the county prosecuted over 600 claims of stolen wages, and recovered over $1.7 million in illegally withheld pay (Judson and Francisco-McGuire 2012a).

Rather than embracing such successful “paycheck protection,” however, the U.S. Chamber of Commerce and allied business lobbies urged legislators to overturn the Miami-Dade ordinance and prohibit other localities from adopting similar laws.7 It is hard to conceive of a more fundamental form of “paycheck protection” than guaranteeing against wage theft. Yet even while promoting SB29 and HB64, the Chamber of Commerce is actively working to make it harder for workers to ensure they are paid for their work.

What is ‘paycheck protection’ really about?

Muzzling political opponents of a corporate economic agenda

If “paycheck protection” laws like those under consideration in Missouri will not expand workers’ rights and do not grant employees new rights to control whether money taken out of their paychecks is used for political purposes, what are such proposals truly aimed at?

In part, the bills may represent a political agenda, particularly for those who may view unions as, in the words of columnist George Will, “transmission belts conveying money to the Democratic Party” (Will 2011). Conservative strategist Grover Norquist famously labeled unions one of the key “pillars” of the Democratic Party that must be broken so that Republicans can establish a political “dynasty” (Norquist 2001). Norquist has specifically championed “paycheck protection” as a means of “reduc[ing] union campaign donations” (Alliance for Worker Freedom 2013). Shortly before the opening of the current legislative session, Missouri House Speaker Tim Jones echoed these sentiments, noting that “money is extremely important to the labor unions…they are the biggest opponents to us on that level,” and stressing that “Democrats in this state rely on that money” (Hancock and Cooper 2013).

For some of its supporters, then, the value of “paycheck protection” legislation lies largely in shutting off campaign funding to political opponents. But for the most powerful corporate lobbies, “paycheck protection” may represent an ambition that is larger than simple partisan politics.

Silencing workers’ voice: the increasingly ambitious target of ‘paycheck protection’ legislation

As ALEC, the Chamber of Commerce, and allied corporate lobbies have refined the language of “paycheck protection” proposals over the past two years, it increasingly appears that the goal of such legislation is simply to silence workers’ voice in politics.

As described earlier, the original “paycheck protection” text—California’s Proposition 226 in 1998—mandated simply that dues could not be spent on politics without the annual written consent of each union member (California Secretary of State 1998). ALEC’s model legislation of that year declared that “it is the purpose of this Act to protect workers’ rights to control their own political contributions [and] to ensure that workers’ political contributions by compensation deduction are voluntary and fully informed” (American Legislative Exchange Council 1998). As discussed earlier, even this reasoning was misleading, and the proposal conveyed no new rights to employees. In recent years, however, the corporate lobbies have moved beyond the 1998 vision and taken much more ambitious steps toward silencing unions’ political voice entirely.

In 2011, a majority of the states that considered “paycheck protection” bills were “right to work” states.8 In such states, it is already law that no employees can pay any amount of union dues unless they voluntarily choose to sign up as union members. Employees can choose at any time, on any day of the year, to cancel their membership and thus pay no dues whatsoever. Thus, every individual paying dues is, by definition, doing so by personal, voluntary choice.

What, then, is the purpose of “paycheck protection” laws in states that already have “right to work” laws? For employees who have not affirmatively chosen to be dues-paying union members, “paycheck protection” laws will have no effect whatsoever; they will not be asked each year whether they would like to contribute to union political activities. The only impact of such a law, then, is to impose a costly bureaucratic machinery precisely for those employees who have specifically chosen to be full dues-paying members. Rather than enhancing employee choice, “paycheck protection” bills in these states serve primarily to frustrate the choice that has already been made by those employees who voluntarily contribute union dues.

The “paycheck protection” measure recently adopted in the “right to work” state of Alabama stands in direct contradiction to ALEC’s 1998 insistence that “workers have a right to control their own political contributions” (American Legislative Exchange Council 1998). Act 761, authored by Majority Leader and ALEC member Sen. James Waggoner and currently under court injunction, prohibits payroll deduction of dues for any “membership organization which uses any portion of the dues for political activity” (Alabama Secretary of State 2010). Thus, rather than insisting on workers controlling where their money goes, the bill removes from workers the ability to choose to contribute to political causes. Moreover, the law identifies “political activity” very broadly—including “public opinion polling,” “any form of political communication,” “any type of political advertising,” “phone calling for any political purpose,” or “distributing political literature of any type.” Thus, for union members to make voluntary dues contributions through the payroll system, their unions would have to disavow any type of political activity conducted with any part of the organization’s budget.

California’s Proposition 32, a failed 2012 ballot initiative backed with tens of millions of dollars from corporate and anti-union advocates, similarly aimed to completely ban the use of payroll deductions to pay dues that may be used for political activities, even if employees submitted annual written authorization indicating their desire to make such voluntary contributions.9 Copycat bills have been proposed in Mississippi and New Hampshire.10

In all these cases, it appears that the true agenda of those advocating “paycheck protection” is not to enhance freedom of association but to cripple the ability of organized workers to participate meaningfully in the political process.

Perhaps the clearest instance of silencing workers was in North Carolina, where in early 2012 the legislature voted to prohibit school teachers from paying voluntary union dues through the public payroll system. Public employees in North Carolina have no rights to collective bargaining. Thus, school teachers do not have collective bargaining agreements with local boards of education; rather, the North Carolina Association of Educators (NCAE) is strictly an advocacy organization. In 2011, after Republican legislators supported a plan to cut education funding by $1 billion, NCAE organized a demonstration by thousands of teachers; the dues prohibition was broadly understood as retaliation for this protest and similar activism in support of increased school funding (Butts 2012). North Carolina has a “right to work” statute, but under the preexisting law, employees had the option to “authorize in writing the periodic [payroll] deduction…[of] voluntary contributions for the employees’ association.”11 The new statute eliminated that right for school district employees (General Assembly of North Carolina 2011).

Teachers argued against the bill on exactly the terms that “paycheck protection” advocates originally invoked. “We should have the right to choose what we decide is taken out of our paycheck,” explained Durham Association of Educators President Kristy Moore (Butts 2012). An unsuspecting reader might think this statement came from ALEC itself. In fact, however, ALEC, the U.S. Chamber of Commerce, and other anti-union advocates do not support employees’ right to choose whether or not to support union political activities; they only support the right to not support such efforts.

Getting unions out of the way of the corporate economic agenda

The effective silencing of organized workers is central to the political strategy of the nation’s largest corporate lobbies. Even in its current weakened state, the labor movement remains the most significant obstacle that the U.S. Chamber of Commerce and other corporate associations face in their effort to enact a broad economic agenda. The labor movement is the only vehicle through which millions of working Americans collectively pool sufficient resources—in the form of both financial contributions and organized volunteer efforts—to serve as an effective political counterweight to this agenda. Eliminating union political activity promises to leave the corporate lobbies with an increasingly free hand to shape economic policy.

It is important to note that the agenda corporate lobbies seek to advance has relatively little to do with unions per se. The most powerful advocates of “paycheck protection”—ALEC, the Chamber of Commerce, Americans for Prosperity, and similar well-funded corporate lobbies—are seeking to enact a sweeping economic agenda. Among other elements of this agenda, these lobbies support:

• Abolition of state and federal minimum wages.12
• Adoption of more NAFTA-style “free trade” treaties that will make it easier for American corporations to send work to Vietnam, Malaysia, and other low-wage countries (American Legislative Exchange Council 2010b).
• Privatization of social security.13
• Opposition to employees having a legal right to even a single paid sick day.14
• Reductions in unemployment insurance benefits, and restrictions on laid-off workers qualifying for unemployment insurance.15
• Increased hours of work for teenagers.16
• The right of employers to import low-wage foreign “guest workers” to work in construction, health care, hospitality, and other large sectors of the economy where work can’t physically be moved abroad.17
• Rules allowing employers to monitor and restrict employees’ comments on social media websites, even during non-work hours.18
• Rules allowing employers to deny unemployment insurance to employees who violate any workplace rule, even if their job performance is otherwise exemplary.19
• Allowing those who make their money buying and selling stocks on Wall Street to pay a significantly lower tax rate than normal employees.20
• Reinstatement of tax cuts for the wealthiest Americans (Turkel 2010; Hailey 2012; U.S. Chamber of Commerce 2013).
• Barriers to employee lawsuits against employers for sex, race, or age discrimination.21

None of these issues can be termed “union issues.” They have nothing to do with labor law, union governance, union dues, or the terms of collective bargaining agreements. Yet on all these issues, unions serve as the primary obstacle that stands in opposition to the corporate vision of economic reform. The corporate lobbies’ efforts to weaken unions’ political voice is likely driven at least as much by this policy agenda as by anything to do with the terms of union contracts.

This is likely what the legislative director of the Kansas Chamber of Commerce meant when—testifying in support of a bill that would deny public employees the right to make even voluntary payroll deductions for union political activities and that would ban unions from endorsing candidates for public office—he explained that “I need this bill passed so we can get rid of public sector unions” (Marso 2013; Stafford 2013). For the U.S. Chamber of Commerce and like-minded corporate lobbies, getting rid of unions would constitute a critical step toward implementing their economic agenda.

It is certainly the Chamber of Commerce’s right to hope that its political opponents are silenced. But enacting the sweeping Chamber-ALEC agenda by stifling the opposition’s political voice is a poor prescription for Missouri workers.

—Gordon Lafer is a political economist and an Associate Professor at the University of Oregon’s Labor Education and Research Center. He has written widely on issues of labor and employment policy. Lafer has testified as an expert witness before the U.S. Senate, the House of Representatives, and numerous state legislatures. In 2009–2010, he served as Senior Labor Policy Advisor for the U.S. House of Representatives’ Committee on Education and Labor.

—The author would like to thank Debbie Levy for her invaluable research assistance on the paper.

Endnotes

1. The organization is the Educational Alliance, whose chief financial backer was Howard F. Ahmanson, a member of the board of trustees of the Chalcedon think tank. Ahmanson was also the single largest financial supporter of Proposition 226. Chalcedon’s mission includes “the necessity of a return to Biblical law” and the conviction that “it is not only our duty as individuals, families, and churches to be Christian, but it is also the duty of the state, the school, the arts and sciences, law, economics, and every other sphere to be under Christ the King.”

2. Jones is Missouri state chairman for ALEC and a member of ALEC’s Education Task Force (Sourcewatch 2013).

3. UnitedHealth Group had revenues of $110 billion and after-tax profits of $5.5 billion in 2012 (UnitedHealth Group 2012).

4. SB29, Chapter 105.504 (3), stipulates that “no public labor organization” can use payroll deductions for political purposes without employees’ authorization, but makes no similar restrictions on non-labor organizations using payroll deductions. The text of HB64 (Sec 123.028.4) says only that “a labor organization” needs annual approval before using payroll deductions for politics.

5. Following Citizens United, corporations can use general treasury funds to make independent expenditures advocating the election or defeat of given candidates, but in federal elections and most states’ elections they cannot use them to make contributions directly to candidates’ campaigns. The Tennessee law allows corporations to use treasury funds for direct campaign contributions in state elections. Both bills were sponsored by Sen. Bill Ketron—a member of ALEC’s Tax and Fiscal Policy Task Force—and Rep. Glen Casada, former chairman of the Tennessee House Republican Caucus. Rep. Casada defended the logic of his bill by explaining that “the Supreme Court has opined that this [corporate political spending] is free speech,” and corporate money lets politicians educate voters about their positions. “It takes money to get information out,” Casada explained. “The more information you can get out to voters, the better they can make their mind up on who they want to support” (Casada 2011a, 2011b).

6. Police and firefighters are the only public employees who have the right to collective bargaining in Texas, and then only if the city or town that employs them has voted by referendum to grant such rights.

7. The Chamber of Commerce, Retail Federation, and other employer associations promoted Senate Bill 862, which mandated that “a county, municipality, or political subdivision of the state may not adopt or maintain in effect any law, ordinance, or rule that creates requirements, regulations, or processes for the purpose of addressing wage theft. The text of the bill is posted on the Florida Senate’s website at http://www.flsenate.gov/Session/Bill/2012/0862/BillText/Filed/HTML. For business lobbies’ support of the bill, see News Service of Florida, “Wage Theft Bill Passes House Judiciary Despite Objections,” Sunshine State, February 24, 2012. http://www.sunshineslate.com/tag/hb-609.

8. Such laws were proposed in 13 states, including the “right to work” states of Alabama, Arizona, Florida, Kansas, Mississippi, South Dakota, and Tennessee.

9. The full text of Proposition 32 can be found at http://ballotpedia.org/wiki/index.php/Text_of_California_Proposition_32_(November_2012)/. On funding of Proposition 32, see among others John Logan, “The Shadowy Dark Money Groups Behind California’s Proposition 32,” Truthout.org, November 5, 2012, http://truth-out.org/speakout/item/12535-the-shadowy-dark-money-groups-behind-californias-proposition-32?tmpl=component&print=1.

10. Mississippi’s Senate Bill 2044, authored by ALEC Task Force member Sen. Merle Flowers, completely bans payroll deductions for union political activities, in both the public and private sectors, even for those who voluntarily choose to contribute, no matter how many authorization documents they might sign (Mississippi Legislature, 2011 Regular Session, Senate Bill 2044, An Act Relating to the Right to Work, http://legiscan.com/gaits/text/239490. Sec. 4(2): “Deductions for political activities shall not be deducted from the wages, earnings or compensation of an employee”). In New Hampshire, House Speaker and ALEC member William O’Brien introduced a bill that would have banned any employer, public or private, from deducting any amount of union dues from employee payrolls, no matter the purpose of the dues. (New Hampshire House of Representatives, 2012 Session, House Bill 1163: An Act relative to withholding union dues from wages, http://www.gencourt.state.nh.us/legislation/2012/HB1163.html). The bill repeals existing state statute RSA 275:48, I(b)(1), which lists union dues as a permissible subject of payroll deductions, as long as the employer has written authorization from the employee. The statute lists nine other broad categories of permitted deductions, none of which are challenged by this statute.

11. N.C. GEN. STAT. § 1438-426.40A(g).

12. ALEC promotes model legislation that calls for complete abolition of the minimum wage, arguing that such laws “represent an unfunded mandate on business by the government, and…make it difficult for small business…to hire new employees due to artificially high wage rates.” The free market “forces of supply and demand,” the bill’s preamble insists, “are more capable than the government” at determining fair wages (American Legislative Exchange Council, Starting (Minimum) Wage Repeal Act, 1996 Sourcebook of American State Legislation, www.alecexposed.org). The U.S. Chamber of Commerce similarly opposes even the federal minimum wage, arguing that the law “is counterproductive to job growth” and asserting that, as a matter of principle, “we don’t think the government ought to be in the business of setting wages.” The chamber likewise opposes any states or localities setting minimum wage rates higher than the federal. Indeed, the chamber’s ranking of state employment policies marks down any state that doesn’t actively prohibit localities from enacting their own living wage laws (U.S. Chamber of Commerce spokesman Randy Johnson, quoted in Dave Boyer, “Democrats Debate Timing of Wage Bill,” Washington Times, May 6, 2002, http://www.highbeam.com/doc/1G1-85928951.html; U.S. Chamber of Commerce, The Impact of State Employment Policies on Job Growth: A 50-State Review, 2011).

13. The U.S. Chamber of Commerce, which opposed the creation of Social Security in 1935, calls for converting Social Security from a defined-benefit to a defined-contribution system, converting payments into a system of IRA-type “Personal Retirement Accounts” that would be invested in the stock market by private financial management firms and would not guarantee any level of support whatsoever for retirees. See U.S. Chamber of Commerce, “Personal Retirement Accounts,” http://www.uschamber.com/issues/retirementpension/socialsecurity/personal-retirement-accounts; “Social Security: The Problem,” http://www.uschamber.com/issues/retirementpension/socialsecurity/social-security-problem; and Lauren Levenstein, “Protestors Fan Out to Save Social Security—But the Chamber’s Still Opposed,” U.S. Chamber Watch, Public Citizen, April 17, 2011, http://www.fixtheuschamber.org/tracking-the-chamber/protesters-fan-out-save-social-security-chambers-still-opposed.

14. The U.S. Chamber of Commerce argues that granting employees a legal right to paid sick leave would “interfere with an employer’s ability to maintain a reliable, stable workforce, and…exacerbate well-documented employee misuse of [medical leave laws].” Corporate lobbies have worked to defeat efforts at establishing a right to paid sick leave in New York City, San Francisco, Seattle, and Washington, D.C., and in the states of Connecticut, Massachusetts, and Vermont. In an even more ambitious effort, successfully supported by Wisconsin Manufacturers and Commerce (that state’s Chamber of Commerce), Wisconsin legislators retroactively abolished the right to sick leave that had been established in Milwaukee, approved by 68 percent of voters in a 2008 referendum (U.S. Chamber of Commerce, Labor and Immigration: Policies, Positions, and Activities 2008, U.S. Chamber, Washington, D.C., 2008; Campaign for a Healthy Denver and ROC United, The National Restaurant Association: Behind the Fight Against Working Families and an Economy That Works for All, October 2011, page 1, http://familyvaluesatwork.org/wp-content/uploads/2011/10/NRA-CO-Report-and-Coversheet.pdf; see Joel Dresang, “Researcher Sees Both Sides of Sick Pay Debate,” Journal Sentinel, November 21, 2008, http://www.jsonline.com/business/34916009.html). The Milwaukee ordinance had guaranteed a minimum of one hour of paid sick leave for every 30 hours worked, up to a maximum of nine sick days per calendar year; firms with less than 10 employees had a maximum of only five days per year (Pamela Ploor and Mike Fischer, “Milwaukee Paid Sick Leave Ordinance Revived by Court of Appeals,” March 2011, http://www.quarles.com/milwaukee_paid_sick_leave_ordinance_2011/#_ftn2; Wisconsin Manufacturers and Commerce, “Wisconsin Business Climate Improves in 2011,” December 20, 2011, http://www.wmc.org/news/press-releases/wisconsin-business-climate-improves-in-2011).

15. The Missouri Chamber of Commerce calls for unemployment insurance “reform” of this type in Missouri Chamber of Commerce & Industry, Labor & Industrial Relations Policy Council, 2012, http://www.mochamber.com/mx/hm.asp?id=laborandindustrialrelations. The U.S. Chamber of Commerce ranks each state’s unemployment benefits, reserving the highest grades for states that require employers to pay the most limited taxes in support of the unemployment insurance system; provide the most meager benefits to unemployed workers; and force those out of work to go one week with no pay before being eligible for benefits (U.S. Chamber of Commerce, The Impact of State Employment Policies on Job Growth: A 50-State Review, Washington, D.C., 2011). ALEC’s ultimate goal for unemployment compensation may be glimpsed in the organization’s model “Full Employment Act,” which completely eliminates welfare, unemployment, and food stamp benefits, instead requiring that jobless Americans be forced to work at minimum wage, for public or private employers, in order to earn any such benefits. Anyone who turns down any minimum wage job offered them is immediately cut off from unemployment benefits. The forced-work would be paid at 90 percent of the state minimum wage, but not less than the federal minimum; food stamp recipients who are aged, blind, or disabled would be exempted from the forced-work requirement (American Legislative Exchange Council, Full Employment Act, 1995; Sourcebook of American State Legislation, Alecexposed.org).

16. For example, Michigan legislators passed a bill, championed by a wide range of business lobbies and low-wage employers’ associations, including the Chamber of Commerce, the Small Business Association, NFIB, the Grocers Association, the Lodging and Tourism Association, the Licensed Beverage Association, and the Association of Home Builders, that increased from 15 to 24 the number of hours high school students may work during a school week. Perhaps most outspoken was the Michigan Restaurant Association, which, despite a statewide unemployment rate of 10.6 percent, told legislators that “many restaurants cannot find enough adult labor to fill available positions” and need the teenagers to stay afloat (http://www.house.mi.gov/SessionDocs/2011-2012/Minutes/COMM062111.pdf; Andy Deloney, Vice President for Public Affairs, Statement of the Michigan Restaurant Association in Support of House Bill 4732, House Commerce Committee, June 21, 2011, http://house.michigan.gov/SessionDocs/2011-2012/Testimony/Committee4-6-21-2011-4.pdf). There was also at the time no evidence of a boom in restaurant work; from June 2011 to June 2012, employment in leisure and hospitality services increased by only 4,000 statewide, while the retail trade sector lost 8,000 jobs (Michigan Department of Technology, Management and Budget, news release, “Michigan’s June Unemployment Rate Increases Slightly,” July 18, 2012, http://www.michigan.gov/documents/dtmb/LMI-JulyRelease_392680_7.pdf).

17. The U.S. Chamber of Commerce created the Essential Worker Immigration Coalition (EWIC), the primary organization of employer associations lobbying for a liberal guest worker program. EWIC advocates for the right of employers to import hundreds of thousands of lower-wage foreign workers not only in seasonal agriculture but also in the year-round construction, health care, hospitality, and other service industries (U.S. Chamber of Commerce, Essential Workers, http://www.uschamber.com/issues/immigration/essential-workers; Statement of U.S. Chamber of Commerce President Thomas Donahue before the Senate Subcommittee on Immigration, May 26, 2005, http://www.uschamber.com/sites/default/files/testimony/tjdimmigrationtestimony52605final.pdf; Statement of Elizabeth Dickson, on behalf of U.S. Chamber of Commerce, before House Committee on Education and the Workforce, July 19, 2006, http://immigration.uschamber.com/uploads/sites/392/TWP%20testimony%20Dickson%207-19-06.pdf).

18. The National Labor Relations Board recently ruled against the increasingly common practice of employers prohibiting employees from saying anything critical or “disrespectful” about their workplaces—even on personal Facebook pages, posted at home during non-work hours. The U.S. Chamber of Commerce has spoken out in opposition to the board’s policy. See for example Steven Greenhouse, “Even if It Enrages Your Boss, Social Net Speech Is Protected,” New York Times, January 21, 2013, http://www.nytimes.com/2013/01/22/technology/employers-social-media-policies-come-under-regulatory-scrutiny.html?pagewanted=all&_r=0,).

19. Four states have recently adopted laws that embrace such principles. For example, in a bill the Nashville Business Journal described as backed with the “full-throated support” of the Chamber of Commerce and the NFIB, Tennessee legislators adopted a new statute—whose authors are almost all ALEC members—that redefines “misconduct” to include any “violation of an employer’s rule, unless the claimant can demonstrate that: (A) The claimant did not know, and could not reasonably know, of the rule’s requirements; or (B) The rule is unlawful or not reasonably related to the job environment and performance.” The statute specifically cites “deliberate disregard of a written attendance policy” as grounds for deeming a worker ineligible for unemployment benefits. NFIB was quick to inform employers that a key “takeaway” from the bill is to “make sure you have a written attendance policy that each employee has reviewed and signed,” so that any unexcused absences may be used to terminate employees without recourse to unemployment insurance. Thus, the nearly 40 million Americans who have no sick leave can be fired if they have to stay home with a sick kid, and they’re ineligible for unemployment benefits (Tennessee General Assembly, Bill Summary: SB 3658, The “Unemployment Insurance Accountability Act of 2012,” http://wapp.capitol.tn.gov/apps/billinfo/BillSummaryArchive.aspx?BillNumber=SB3658&ga=107; Brian Reisinger, “Businesses Push Efforts to Reform Tennessee Unemployment,” Nashville Business Journal, March 16, 2012, http://www.bizjournals.com/nashville/print-edition/2012/03/16/tennessee-reform-unemployment.html?page=all; http://www.nfib.com/tennessee/nfib-in-my-state-content?cmsid=60149).

20. Like other corporate lobbies, the U.S. Chamber of Commerce argues that “taxes on capital gains should be as low as possible” (Statement of the U.S. Chamber of Commerce before the Senate Finance Committee and House Ways and Means Committee, Joint Hearing on Tax Reform and the Tax Treatment of Capital Gains, September 20, 2012, http://www.uschamber.com/sites/default/files/120920taxreform_testimony.pdf).

21. The U.S. Chamber of Commerce has long opposed legislation that would allow victims of employment discrimination to establish discrimination based on an employer’s track record and without having to prove the specific intent of individual supervisors, or laws that would allow victims of discrimination to sue for compensatory and punitive damages, rather than solely to recover back wages; the chamber argues that establishing such rights amounts to “further increasing the opportunity for frivolous legislation.” ALEC likewise promotes model legislation that opposes comparable worth laws, arguing that “a government mandate such as Comparable Worth…artificially drives up the costs of engaging in economic activity [and] invariably constricts job creation and growth”; in any case, it argues that, when one controls for the proper variables, women are already being paid just about the same as men. ALEC’s model language further seeks to deny victims of discrimination the right to sue for punitive damages, deeming such rights “a serious economic threat to all employees and employers whose welfare depends on the prosperity that our free enterprise system affords” (U.S. Chamber of Commerce, Key Vote Letter on S. 3220, the “Paycheck Fairness Act,” June 4, 2012, http://www.uschamber.com/issues/letters/2012/key-vote-letter-s-3220-paycheck-fairness-act; American Legislative Exchange Council, Resolution Opposing Comparable Worth Legislation, adopted by the ALEC Board of Directors, September 1999; www.alecexposed.org).

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Norquist, Grover. 2001. “The Coming Bush Dynasty.” American Spectator, February.

Orange Net News. 2006. “Election Watch 2006: Education Alliance Back in Battle for OUSD,” September 19. http://greaterorange.blogspot.com/2006/09/election-watch-2006_19.html

Palmer, Gary. 2012. “Viewpoint.” Alabama Policy Institute, December 17. Palmer is president of the API.

Reid, Andy. 2011 “Religious Group: Palm Beach County’s Wage Theft Fight Falls Short: Business Leaders Fighting Push for Local Wage-Theft Law.” Sun Sentinel, November 10. http://articles.sun-sentinel.com/2011-11-10/news/fl-stealing-wages-palm-20111110_1_wage-theft-religious-group-legal-system

Sabato, Larry. 1998. The Real Story Behind ‘Paycheck Protection’: The Hidden Link Between Anti-Worker and Anti-Public Education Initiatives. National Education Association.

Schmitt, John. 2010. The Wage Penalty for State and Local Government Employees. Center for Economic and Policy Research. http://www.cepr.net/documents/publications/wage-penalty-2010-05.pdf.

Snyder, Rick. 2012. “Governor Signs Bill to Ensure Proper Use of Public Resources.” March 16. http://www.michigan.gov/snyder/0,4668,7-277-57577_57657-273521–,00.html

Sourcewatch. 2013. Missouri Legislators With Ties to ALEC. http://www.sourcewatch.org/index.php/Missouri_ALEC_Politicians.

Spencer, Jack. 2012. “School Districts Will Soon No Longer Be Responsible for Deducting Teacher Union Dues.” Michigan Capitol Confidential, Mackinac Center for Public Policy, March 8 (quoting Rep. Joe Haveman). http://www.michigancapitolconfidential.com/16580.

Stafford, Eric. 2013. Quoted in “Kansas Chamber of Commerce Lobbyist: Bill Is Needed to End Public Sector Unions.” Huffington Post, January 23. http://www.huffingtonpost.com/2013/01/23/kansas-chamber-of commerce_n_2536360.html?view=print&comm_ref=false.

Tennessee Chamber of Commerce & Industry. 2012. “2011–12 Tennessee Chamber Positions.” Business Insider, Summer, p. 18.

Turkel, Amanda. 2010. “Chamber of Commerce’s Lobbying to Extend Bush Tax Cuts Would Reap Millions for Wealthy Backers.” Huffington Post, November 29. http://www.huffingtonpost.com/2010/11/29/chamber-commerce-lobbying-millions bush-tax-cuts_n_789155.html.

UnitedHealth Group. 2012. “Form 10-K for the Year Ended December 31.” www.unitedhealthgroup.com/investors/~/media/D6237677FB704A47B3F09D005A6A4C16.ashx.

UnitedHealth Group. 2013a. “About.” http://www.unitedhealthgroup.com/main/AboutUs.aspx.

UnitedHealth Group. 2013b. “Company History.” http://www.umr.com/oss/cms/UMR/aboutUs/companyHistory.html;

U.S. Bureau of the Census. 2012. Statistical Abstract of the United States: 2012. “Table 321, Robbery and Property Crimes by Type and Average Value Lost: 1990 to 2009.” http://www.census.gov/compendia/statab/2012/tables/12s0321.pdf

U.S. Chamber of Commerce. 2013. “Individual Taxes.” http://www.uschamber.com/issues/econtax/bush-tax-cuts

U.S. Department of Labor. 2008. “Wage and Hour Division: 2008 Statistics Fact Sheet.” December. http://www.dol.gov/whd/statistics/2008FiscalYear.htm

Vanguard Group. 2013. “Vanguard Total Stock Market Fund Index Shares.” https://personal.vanguard.com/us/FundsSnapshot?FundId=0085&FundIntExt=INT.

Vardon, Joe. 2011. “Kasich Moves on From Loss on Issue 2.” Columbus Dispatch, November 16. http://www.dispatch.com/content/stories/local/2011/11/16/kasich-moves-on-from-loss-on-issue-2.html

Wilce, Rebekah. 2013. A Reporter’s Guide to the ‘State Policy Network’: The Right-Wing Think Tanks Spinning Disinformation and Pushing the ALEC Agenda in the States. Center for Media and Democracy. http://www.prwatch.org/node/11909.

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Williams, Erica, Michael Leachman, and Nicholas Johnson. 2011. State Budget Cuts in the New Fiscal Year Are Unnecessarily Harmful. Center on Budget and Policy Priorities. http://www.cbpp.org/cms/?fa=view&id=3550

Yokley, Eli. 2012. “Split on ‘Right to Work,’ Republicans Begin Alternative Push for ‘Paycheck Protection.’” Politico, December 18. http://politicmo.com/2012/12/18/split-on-right-to-work-republicans-begin-alternative-push-for-paycheck-protection/

Last year, the Congressional Progressive Caucus (CPC) introduced the People’s Budget, a budget alternative for fiscal year (FY) 2012, which would have achieved fiscal sustainability while investing in economic recovery, strengthening the middle class, and protecting vital social insurance programs (Social Security, Medicare, Medicaid, and the Affordable Care Act). For FY2013, the CPC has released the Budget for All as an alternative to President Barack Obama’s budget request for FY2013 (referred to hereafter as “the president’s budget”) as well as to provide a stark contrast to the vision set forth by the House Republican Budget Resolution for FY2013 (the budget proposal released by Rep. Paul Ryan, or “the Ryan budget”).

The CPC solicited the assistance of the Economic Policy Institute (EPI) Policy Center in analyzing and scoring the specific policy proposals in the Budget for All and modeling their cumulative impact on the federal budget over the next decade. The policies in the Budget for All reflect the decisions of the CPC leadership and staff, not those of EPI.1 Upon CPC’s request, the nonpartisan Citizens for Tax Justice (CTJ) independently scored the major individual income tax reforms proposed by the Budget for All. All other policy proposals have been independently analyzed and scored by EPI based on a variety of other sources, notably data from the Congressional Budget Office (CBO), Joint Committee on Taxation (JCT), Office of Management and Budget (OMB), Tax Policy Center (TPC), and Social Security Administration (SSA).

This working paper will explain the budget baseline assumptions, policy choices, policy impacts, and budgetary modeling used in developing the Budget for All. Where policies in the Budget for All have been carried over from the People’s Budget, this working paper draws accordingly from the People’s Budget: A technical analysis (Fieldhouse 2011a), the EPI Policy Center’s analysis of last year’s CPC budget alternative.2

A credible baseline

The CBO March 2012 baseline (CBO 2012a)—known as the current law baseline—is the starting point for modeling the budgetary impacts of the policies proposed by the Budget for All. The current law baseline, however, has proven in the past to be a poor metric of likely budget policy and fiscal sustainability because it assumes Congress will allow all temporary tax and spending provisions to expire on schedule (many of which are actually renewed on an annual basis). Consequently, we compare the Budget for All with both the current law baseline as well as with a current policy baseline. Our current policy baseline assumes that the automatic enforcement spending cuts scheduled to take effect in FY2013 by the Budget Control Act (P.L. 112-25), i.e., the debt ceiling deal, do not occur, overseas contingency operations (OCO, or funding for overseas military operations) are gradually wound down,3 the scheduled reduction in Medicare physician payments is prevented (i.e., the “doc fix” is maintained), the 2001 and 2003 income tax cuts are continued, the American Recovery and Reinvestment Act (ARRA) expansion of refundable tax credits is maintained, the 2011–12 estate and gift tax cuts are continued, the 2011 parameters of the alternative minimum tax (AMT) are indexed for inflation, and the business tax extenders (routinely extended credits such as the research and experimentation credit) are continued.4

Any gimmick-free budget modeled from the current law baseline must acknowledge the budgetary impact of these current policies. The Budget for All credibly does so through a combination of baseline adjustments and policy changes. The current law baseline, modified by these baseline adjustments, comprises the “CPC adjusted baseline.”

The first current law baseline adjustment assumed is the removal of discretionary spending caps and automatic sequestration cuts in the Budget Control Act (BCA) from the CBO March 2012 baseline. The BCA was a two-phase package of spending cuts negotiated in exchange for raising the statutory debt ceiling (typically an unpopular but pro forma vote), trading a dollar of spending cuts for every dollar of increased borrowing headroom. The first phase enacted discretionary spending caps to reduce outlays, and the second phase established a Joint Select Committee on Deficit Reduction (JSC), which was tasked with finding at least $1.2 trillion in budgetary savings over the next decade. In the event that the JSC failed to agree to a package of deficit reduction—and it did indeed fail at this task—the BCA set a second-phase automatic enforcement trigger (or sequestration) that would cut further into discretionary and, to a lesser degree, non-exempt mandatory spending. The scheduled sequestration cuts are front-loaded, meaning they decrease as a share of GDP with time, posing an unnecessary risk to the fragile economic recovery. To avoid this near-term fiscal drag and to maintain discretionary budget policy, the Budget for All removes both the spending caps and sequestration cuts currently in the March 2012 baseline, which would, all else equal, allow for outlays to increase by $1.5 trillion over FY2013–22.5 Specifically, nondefense discretionary (NDD) outlays would increase by $582.7 billion, defense discretionary outlays would increase by $768.9 billion, nondefense mandatory outlays would increase by $134.2 billion, and defense mandatory outlays would increase by $155 million (CBO 2012a).6

The Budget for All would additionally maintain the so-called AMT patch to reflect the likelihood that this Congress, as well as future Congresses, will prevent an increase in the number of households seeing tax increases as a result of falling under the alternative minimum tax (AMT); without this patch the number of households subject to the AMT would rise from roughly four million households in 2011 to some 31 million in 2012 and beyond (TPC 2012a).7 Maintaining the AMT patch over FY2012–22 results in revenue loss of $813.1 billion (CBO 2012b).

Lastly, the Budget for All would maintain Medicare physician payments at current rates, rather than seeing the 27 percent reduction in reimbursements that would result under current law (Aizenman 2011). Maintaining the “doc fix” over FY2012–22 increases spending by $325.5 billion over the entire budget window (CBO 2012b).

These summarize the CPC modifications to the CBO baseline. Unless otherwise specified, all subsequent policy modifications described in this technical analysis are scored relative to the CBO March 2012 baseline, as adjusted by these three policies (hereafter referred to as the “CPC adjusted baseline”). The impact of policy modifications will be contrasted with the CPC adjusted baseline, and also with the current law and current policy baselines.

Budget priorities and policy choices

The policy options comprising the Budget for All fall into six broad categories: investing in job creation and economic growth, realigning Department of Defense priorities, building on health care reform, reforming government, strengthening Social Security for future generations, and reforming and modernizing the tax code. What follows is a detailed description of the policy choices included in the Budget for All and the outlay or revenue impact of those policies.

I. Investing in job creation and economic growth

Many of the policy choices in the Budget for All are driven by the current economic context as well as labor market projections over the short and medium term. The Great Recession led to the loss of more than 8.7 million jobs and an unemployment rate that remains above 8 percent more than 30 months after the official end of the recession (and more than four years since the economic downturn began). Though the labor market has made steady gains thus far in 2012, the total jobs gap (the number of jobs needed to return to pre-recession unemployment and labor-force participation rates) remains around 10 million: 5.3 million jobs lost since the onset of the recession that have yet to be regained, plus 4.7 million jobs not gained since the start of the recession, but needed to keep up with population growth (Shierholz 2012). Sustained, high unemployment resulting from years of depressed demand for goods and services has led to lower revenue collections and higher spending on automatic stabilizers such as unemployment insurance. Many of the policies in the Budget for All are aimed at reversing this trend.

To highlight the importance of not enacting policies that may slow the rate of economic growth in the near term, note that the improved rate of employment growth experienced over the last three months (an average of 245,000 jobs added per month) would have to continue for another five years before the economy would return to pre-recession unemployment rates (Shierholz 2012). In their January 2012 Budget and Economic Outlook (CBO 2012b), the CBO projected continued slow recovery over the next two years due to the lingering effects of the financial crisis and the recession, as well as the fiscal drag (spending cuts and tax increases) scheduled under current law. According to the CBO’s projections, real GDP will grow by 2 percent in 2012 and only 1.1 percent the following year, before accelerating in 2014.8 In the fourth quarter of 2011, economic output remained $883 billion (5.4 percent) below potential—the level of output associated with full employment and non-inflationary resource utilization—and the CBO projects the output gap will persist through 2018 (CBO 2012c; Department of Commerce 2012). The CBO projects the unemployment rate will remain around 7 percent at the end of calendar year 2015 (CBO 2012b).

Beyond near-term economic and labor market distress, ample evidence exists that there is a large longer-run deficit in needed physical infrastructure investments in the U.S. economy. Even stronger evidence exists arguing that human capital investments, like universal high-quality pre-kindergarten educational programs, would yield enormous returns that would make the overall economy richer. Lastly, the looming threat of global climate change argues for significant resources to be spent mitigating greenhouse gases (GHGs) and putting the economy on a low-GHG track in the decades to come. In short, we would argue that any federal budget proposal that does not include measures to meet these pressing priorities (priorities that are, in fact, at least as pressing as the need to simply close long-run budget gaps between spending and revenue) should be judged as sorely lacking.

Furthermore, the more front-loaded these investment efforts are, the better it is for an American economy that will likely be contending with high unemployment for years to come. Debt-financed public investments in the next few years would greatly help efforts to drive down joblessness, and the cost of this debt—measured by the long-term costs of borrowing—is historically low. Not only can we afford to front-load public investments today rather than tomorrow, but it also makes economic sense to do so.

The Budget for All would finance $793 billion in job creation policies over FY2012–22 ($690 billion over FY2013–22). Roughly half of these investments are frontloaded over FY2012–14 to address the ongoing jobs crisis, but other investments to create jobs, as well as investments in transportation and revitalizing U.S. manufacturing, are sustained over the entire budget window. Specifically, the Budget for All would spend an additional $246.7 billion for a surface transportation reauthorization bill, $227 billion for direct job creation programs, $183.7 billion to reinstate the Making Work Pay tax credit, and $135.2 billion in tax credits targeted toward innovation and revitalizing manufacturing, all over FY2012–22. Additionally, the budget would finance $1.6 trillion worth of investments in the NDD budget, relative to the CPC adjusted baseline.

Transportation and infrastructure investments

The Budget for All would adopt the surface transportation reauthorization proposal from President Obama’s budget request for FY2012: a six-year, $556 billion reauthorization.9 The plan would rebuild and modernize the national surface transportation infrastructure and expand investments in highways, highway safety, passenger rail, and high-speed rail, among other projects. The proposal includes $50 billion in immediate investments for FY2012, for supporting near- and long-term economic growth by improving roads, bridges, transit systems, border crossings, railways, and runways. These are investments that will boost economic activity and employment in the near and long term, particularly in industries suffering from protracted unemployment. The administration’s proposal would also allocate $53 billion for high-speed rail and expanded access to light rail over the next six years (OMB 2011b).10

Additionally, the plan would establish a National Infrastructure Bank (I-Bank), which would provide loans and grants to support individual projects and broader activities of significance to our nation’s economic competitiveness. The Budget for All would adopt the six-year plan to establish the I-Bank as presented in the president’s FY2012 budget (as part of the six-year surface transportation reauthorization proposal). Over the first six years of the budget window, the Budget for All would invest $5 billion per year in an I-Bank, for a total investment of $30 billion over FY2012–22.

Relative to current law, this surface transportation reauthorization proposed by the Budget for All would increase outlays by $246.7 billion over FY2012–22 ($240.8 billion over FY2013–22). Additionally, the Budget for All would reclassify Highway Trust Fund outlays as mandatory spending, as repeatedly proposed in the president’s budget requests.11 Accordingly, $486.1 billion in surface transportation outlays are reclassified from discretionary to mandatory spending over FY2013–22 (CBO 2012d).

Direct job creation

The last time the United States faced un- and under-employment as widespread and prolonged as what has been experienced in the last four years, the federal government successfully put millions of Americans back to work through the Civilian Conservation Corps, Public Works Administration, and Works Progress Administration. To alleviate the jobs crisis, the Budget for All would adopt Congresswoman Jan Schakowsky’s (D-Ill.) Emergency Jobs to Restore the American Dream Act of 2011 (H.R. 2914). This direct job creation package would invest $113.5 billion in both 2012 and 2013, and was recently estimated to create roughly two million jobs over the next two years.12 The Emergency Jobs to Restore the American Dream Act would make investments in local communities in a number of ways. It would fund the jobs necessary for large-scale school rehabilitation projects as well as restoration and rehabilitation of parks and public lands; create part-time work-study jobs for hundreds of thousands of eligible college students; fund the hiring and rehiring of teachers, police officers, and firefighters; fund grants to hire health care providers; create a community corps of citizens to do much-needed work on the local level, including energy audits, addressing blight, rural conservation work, housing rehabilitation, and recycling and reclamation of reusable materials; and would create jobs in early childhood care and education by providing additional funding for Early Head Start.

Job creation tax measures

The Budget for All would both reinstate the Making Work Pay (MWP) tax credit and finance a number of business tax credits aimed at expanding manufacturing and insourcing jobs to the United States. The MWP refundable tax credit was the largest tax provision included in ARRA. The credit replaced 6.2 percent of earned income up to a maximum of $400 ($800 for joint filers) for working individuals who are not claimed as dependents. In December 2010, Congress replaced the MWP credit with a costlier 2-percentage-point payroll tax holiday, as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (H.R. 4853). But the payroll tax cut was not targeted (making it more expensive than MWP), the lower income replacement rate resulted in a tax increase on households making under $20,000 ($40,000 for joint filers), and worries have been raised that the structure of the payroll tax cut threatens to undermine the dedicated funding source of Social Security (Fieldhouse 2011c).13 The Budget for All lets the payroll tax holiday expire on schedule on January 1, 2013, and reinstates the MWP tax credit for 2013–15. Reinstating MWP through 2015 would cost $183.7 billion over FY2013–22.14

Beyond investing in refundable tax credits, the Budget for All would devote $135.2 billion over FY2012–22 for tax credits to foster innovation, manufacturing, and insourcing jobs to the United States. The largest such credit would provide a permanently enhanced research and experimentation tax credit, as proposed in the president’s budget. This would cost $99.3 billion over FY2012–22 (JCT 2012). Other job creation tax policies in the Budget for All include a temporary 10 percent tax credit for new jobs and wage increases; a new manufacturing communities tax credit; additional tax credits for investment in qualified property used in qualified advanced energy manufacturing projects; a tax credit for the production of advanced technology vehicles; a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles; and doubling the amount of expensed start-up expenditures.15 Additionally, the Budget for All would adopt the president’s proposals to develop a national network of manufacturing innovation institutes and to help entrepreneurs and small businesses access capital. Collectively, these policies would cost $35.9 billion over FY2012–22.16 See Table 2 for specific policy scores, which come from JCT’s re-estimate of the president’s budget request (JCT 2012).

Frontloaded and sustained public investments

In addition to these targeted job creation measures, transportation investments, and tax credits,

the Budget for All invests heavily in the NDD budget, which houses a range of critical public investments in areas including education, workforce training, energy, basic scientific research, and health, among other areas. These public investments are again front-loaded in the Budget for All to support economic activity as well as to sustain essential government investments and services during the continuing economic weakness projected over the near term. As noted earlier, the BCA enacted deep cuts to both the nondefense and defense discretionary budgets, and the Budget for All would repeal $582.7 billion in NDD spending cuts embedded in the CBO March 2012 baseline.

Beyond removing the effects of the BCA, the Budget for All would finance an additional $1.7 trillion in NDD budget authority (BA) over FY2012–22, which translates to a $1.6 trillion increase in NDD outlays over this period.17 In the near term, NDD BA is increased by $75 billion for the remainder of FY2012, $150 billion for FY2013, and $200 billion for FY2014. These front-loaded investments will complement targeted job creation measures and sustained transportation investments in accelerating a return to an economy operating nearer its potential. Sustaining these investments is also critical for building the country’s stock of public and human capital.

The Budget for All would finance $175 billion in NDD BA for FY2015 and $150 billion in each of FY2016–19, beyond which time these investments are maintained as a share of the economy. The Budget for All would apportion these increases to the budget functions as follows: 10 percent for International Affairs (Function 150); 5 percent for General Science, Space, and Technology (F250); 10 percent for Energy (F270); 5 percent for Natural Resources and Environment (F300); 5 percent for Commerce and Housing Credit (F370); 5 percent for Community and Regional Development (F450); 15 percent for Education, Training, Employment, and Social Services (F500); 10 percent for Health (F550); 20 percent for Income Security (F600); 10 percent for Veterans Benefits and Services (F700); and 5 percent for Administration of Justice (F750). Over FY2012–22, the Budget for All would increase outlays for International Affairs by $156.2 billion; General Science, Space, and Technology by $78.1 billion; Energy by $156.2 billion; Natural Resources and Environment by $78.1 billion; Commerce and Housing Credit by $78.1 billion; Community and Regional Development by $78.1 billion; Education, Training, Employment, and Social Services by $234.3 billion; Health by $156.2 billion; Income Security by $312.4 billion; Veterans Benefits and Services by $156.2 billion; and Administration of Justice by $78.1 billion. It should be noted that the NDD BCA cuts removed by the Budget for All have not been apportioned by budget function, but all of these functional increases would be larger relative to current law.

In aggregate, these public investments would increase NDD outlays by $2.1 trillion over FY2012–22 relative to current law. Under the Budget for All, NDD spending as a share of GDP would average 4 percent of GDP, slightly above the historical average over FY1962–2011 of 3.9 percent of GDP (OMB 2012c).18 By FY2022, NDD spending would total 3.5 percent of GDP, compared with 2.5 percent of GDP under current law, 2.4 percent of GDP under the president’s budget (OMB 2012d), and just 2.1 percent of GDP under the Ryan budget for FY2013 (see Figure E). By the end of the budget window, NDD outlays under the Budget for All would be 38.2 percent higher than levels projected under current law, 45.9 percent higher than those of the president’s budget, and 64.8 percent higher than those of the Ryan budget (CBO 2012a; House Budget Committee 2012).

These NDD investments bring the total job creation and public investments in the Budget for All to $2.4 trillion above the CPC adjusted baseline over FY2012–22, or $2.9 trillion over current law (see Table 2). Investments and job creation measures would exceed $300 billion per year over FY2013–15 relative to current law, providing fiscal support for faster economic recovery.

II. Realigning Department of Defense priorities

Growth in spending by the Department of Defense

Discretionary spending by the Department of Defense has grown sharply from $295 billion (3 percent of GDP) in FY2000 to $699.8 billion (4.7 percent of GDP) in FY2011 (CBO 2012b).19 For FY2012, discretionary Department of Defense outlays are projected to total $672.5 billion (4.3 percent of GDP), including $614 billion (4 percent of GDP) in non-emergency outlays, i.e., excluding funding for overseas wars (CBO 2012a).20 Additional funding for military operations for Afghanistan, Iraq, and other combat missions has totaled $1.4 trillion over FY2001–12, of which $1.3 trillion went to the Department of Defense (CBO 2012b).21 These overseas contingency operations (OCOs) have been financed almost entirely off-budget in emergency supplemental appropriations bills. The president’s budget requested $96.7 billion in BA for OCOs in FY2013 and includes a $44.2 billion annual placeholder thereafter, for total costs of $494.2 billion over FY2013–22 (OMB 2012a).22

Over the last three years, a rare consensus has emerged among a wide range of Washington policymakers: Any credible, balanced deficit reduction plan must tackle spending by the Department of Defense. Budget proposals ranging from the president’s budget requests to reports from the National Commission on Fiscal Responsibility and Reform, the Bipartisan Policy Center, and Our Fiscal Security, among others, all agree that future budgets must “bend the curve” of defense spending. Other proposals have stressed that OCOs should be placed on budget or financed by a war tax.23 Along with this newfound political resolve, specific plans have emerged for realigning our defense priorities. Notably, the Sustainable Defense Task Force (SDTF), a bipartisan group of defense experts, released a report in June 2010 that detailed a series of options, which, if taken together, would save $960 billion over a decade (SDTF 2010).

The BCA included reductions to spending by the Department of Defense, but much of this reduction—particularly from the automatic sequester—is not expected to materialize, as reflected in the current policy baseline.24 The CBO March 2012 baseline includes a $260.3 billion reduction in Department of Defense outlays from the first BCA phase of discretionary spending caps and a $508.6 billion reduction in Department of Defense outlays from the second BCA phase of automatic sequesters, both over FY2013–22.25 But the sequester was a blunt instrument intended to force action by the JSC—it is not obvious that it is consistent with realistic and maximally efficient spending reductions. Under the automatic enforcement mechanism, Department of Defense budget authority reductions are roughly held constant in nominal dollars instead of being gradually phased in, which is problematic for two reasons. First, the reduction in budget authority falls from 0.34 percent of GDP in 2013 to 0.23 percent of GDP in 2022, front-loading cuts in a manner adverse to economic recovery. Second, spending and acquisition reforms are more feasibly implemented on a gradual basis. As noted above, the Budget for All removes these effects of the ill-conceived BCA in its baseline policy adjustments, and all policies are scored relative to this CPC adjusted baseline.

Responsibly end the war in Afghanistan and other overseas contingency operations

The Budget for All provides a reasonable defense spending trajectory consistent with a sustained but on-time reduction of military operations in Afghanistan and other overseas contingency operations. The Budget for All provides $128.7 billion in OCO budget authority for FY2013 (the funding level in the CBO March 2012 baseline), after which time all OCO funding is ended.26 This funding level is intended to be more than sufficient to safely and deliberately withdraw American soldiers from Afghanistan and other military operations on the administration’s stated timetable.27 Responsibly ending OCOs would save $1.1 trillion over FY2013–22, relative to the CBO baseline. Relative to the OCO placeholders in the president’s budget, this withdrawal would reduce BA by $365.5 billion and outlays by roughly $335.9 billion.

Reduce base spending by the Department of Defense

The Budget for All would also gradually phase in reductions in non-emergency funding for the Department of Defense, which would cumulatively reduce outlays by $749.3 billion over FY2013–22, relative to the CPC adjusted baseline. Budget authority for National Defense (F050) over FY2013–22 was compiled by CPC staff and provided to the EPI Policy Center. The savings are well within the bounds of those identified as reasonable by the SDTF report (SDTF 2010).

The Budget for All would gradually reduce active duty military personnel strength through attrition; sharply reduce private contracting; and overhaul weapons acquisitions, modernization, and strategic capabilities. No savings are assumed from military personnel wages, pensions, or TRICARE, the military health care program for active duty personnel, military retirees, and their dependents. As noted earlier, International Affairs (F150) outlays would be increased by $156.2 billion over FY2012–22.

Taken in conjunction with responsibly ending foreign military operations, the realignment of conventional and strategic forces would result in $1.9 trillion worth of savings, relative to the CPC adjusted baseline.

III. Building on health care reform

Access to quality, affordable health care is a key component of rebuilding a strong middle class. Spiraling health care costs have strained the budgets of families in recent decades, as growth in the cost of health benefits has contributed to real wage and salary stagnation. Health care excess cost growth—the growth in per capita national health care expenditure exceeding per capita GDP growth—poses a grave challenge for families, businesses, state and local governments, and the federal government. Further, policies that merely shift costs from the federal budget to consumers, businesses, and state and local budgets are not, we would argue, responsible solutions, but are instead myopic attempts to fix an accounting problem while leaving the underlying economic problem unresolved.

The Budget for All would adopt policies that build on the Patient Protection and Affordable Care Act of 2010 (ACA) to ensure access to affordable, quality care and expand coverage to millions of Americans. The Budget for All thus does not rely on benefit cuts or reducing beneficiary rolls to find budgetary savings. The approach to health care policy taken in this budget is diametrically opposed to the approach taken by House Budget Committee Chairman Paul Ryan (R-Wis.) in his Chairman’s mark, i.e., the Ryan budget (House Budget Committee 2012). The Budget for All would implement a public insurance option, negotiate drug prices with pharmaceutical companies, adopt the administration’s reforms for drug development, and take steps to reduce fraud and waste in Medicaid, all for estimated ten-year cost savings of $278 billion (above the savings projected from the implementation of the ACA). Additionally, the Budget for All would crack down on Medicare Hospital Insurance (HI) payroll tax avoidance (ten-year savings of $13.1 billion) and end subsidies for junk and fast food advertising to children to promote health (ten-year savings of $15 billion). The Ryan budget, on the other hand, relies on Medicare cost-shifting as well as dramatic cuts to Medicaid and the Children’s Health Insurance Program (CHIP) in order to achieve budgetary savings—savings that would principally finance large tax cuts for the most affluent American households.

The Ryan budget would lead to an eventual replacement of Medicare’s coverage guarantee with a voucher system that would gradually shift more and more costs from the federal government to seniors. The CBO notes that under this plan, average real spending for new enrollees in Medicare would be significantly less than under either current law or current policy baseline scenarios. By 2050, Ryan’s Medicare plan would spend 35 percent less for new enrollees than under current law, and 42 percent less than under current policy (CBO 2011c). The CBO recently estimated that Medicare is currently 11 percent cheaper than an equivalent private insurance plan—an efficiency premium that compounds over time but that the Ryan budget would forsake (CBO 2012e). While CBO notes that the exact implications of reduced spending are difficult to project, they could very likely include higher costs faced by beneficiaries, reduced access to health care, diminished quality of care, and less investment in new, high-cost technologies. In regards to Medicaid, CHIP, and the ACA health insurance exchange subsidies, the Ryan budget would halve spending in those areas between now and 2040 (while under current law, spending in those areas would double, due simply to population and health care cost growth). The Center on Budget and Policy Priorities estimated that the Ryan budget would cut $2.4 trillion over ten years from Medicaid and other health programs for people with low or moderate incomes (CBPP 2012).

The Budget for All would take a decidedly different approach. It would build on the efficiency and savings already passed under the ACA, which is expected to reduce deficits by $210 billion over FY2012–21 and decrease budget deficits by roughly half a percent of GDP in the following decades, saving literally trillions of dollars (CBO 2011a).

Public insurance plan

The Budget for All would begin building on the efficiencies already enacted in the ACA by implementing a public insurance option to compete with private insurance plans. Beginning in 2014, the ACA will establish health insurance exchanges, through which individuals and families may purchase private coverage. This will increase choice and competition relative to today’s largely fragmented, regional insurance markets. With the addition of a public option, the Secretary of the Department of Health and Human Services would administer a public health insurance plan to be offered alongside private plans through the exchanges. The public plan would exploit economies of scale to negotiate payment rates for prescription drugs, would pay physicians roughly 5 percent more than Medicare reimbursement rates, and would pay hospitals and providers comparable rates as paid under Medicare. Based on the potential for administrative and other savings, the CBO estimates that insurance premiums for the public plan would be roughly 5–7 percent lower than those of private plans offered in the insurance exchanges (CBO 2011b).

According to the CBO, this option would produce savings of $88 billion over FY2012–21 (CBO 2011); extrapolating to the new budget window, we estimate that a public insurance option would save $104.1 billion over FY2013–22. Over the decade, outlays would fall by $31 billion (due to a reduction in targeted subsidies for the purchase of insurance in the exchanges), and revenues would increase by $73.1 billion (largely resulting from interactions with the tax exclusion for employer-sponsored health insurance).

Negotiate drug prices with pharmaceutical companies

The Budget for All would implement the president’s proposal to align Medicare drug payment policies with Medicaid policies for lower-income beneficiaries. Under current law, drug dispensers pay specified rebates for drugs consumed by Medicaid beneficiaries, while Medicare Part D (the prescription drug benefit) plan sponsors negotiate drug prices with manufacturers at unspecified levels. When enacted, Medicare Part D failed to harness the purchasing power of the federal government to negotiate wholesale prices for pharmaceutical drugs. There are substantial differences in the rebate amounts and net prices for brand-name drugs; Medicare receives lower rebates and pays higher prices than Medicaid (OMB 2011a). Additionally, Medicare per capita spending is growing significantly faster in Part D than in Parts A or B (HI and Medical Insurance, respectively). This proposal would allow Medicare to receive the same rebates that Medicaid receives for brand-name and generic drugs provided to low-income beneficiaries. OMB estimates this policy would save $155.6 billion over FY2013–22 (OMB 2012a).

Adopt administration proposals for drug development

The Budget for All would additionally adopt the administration’s proposals to build on the ACA by prohibiting brand-name and generic drug companies from delaying the availability of new generic drugs and biologics. The high cost of prescription drugs causes hardship for many Americans and can result in people forgoing medications or skipping doses. These proposals would increase the availability of generic drugs and biologics by authorizing the Federal Trade Commission (FTC) to prohibit companies from entering in “pay-for-delay” agreements that block consumer access to safe and effective generics. A 2010 FTC study found that these types of agreements delayed entry of generics and cost consumers as much as $3.5 billion per year (OMB 2011a). The administration’s proposals would additionally accelerate access to affordable generic biologics by modifying the length of exclusivity on brand-name biologics, shortening the exclusivity period for brand-name biologic manufacturers from 12 years to seven years. Reducing this period would increase availability and encourage faster development of generic biologics. Together, these proposals would save $14.8 billion over FY2013–22 (OMB 2012a).

Reduce waste, fraud, and abuse in Medicaid

The Budget for All is committed to reducing waste, fraud, and abuse where possible, and would pursue responsible Medicaid savings by enacting the following policies previously outlined by the administration (OMB 2011a):

• requiring manufacturers that improperly report items for Medicaid drug companies to fully repay states by directing them to pay a “rebate” equal to the amount the state paid for those items
• tracking high prescribers and utilizers of prescription drugs in Medicaid, and using monitoring systems to look for fraud and abuse by providers or beneficiaries
• enforcing Medicaid drug rebate agreements to ensure Medicaid is receiving proper prices and rebates
• increasing penalties on drug manufacturers for fraudulent non-compliance with drug rebate agreements
• requiring drugs to be properly listed with the Federal Drug Administration in order to receive Medicaid coverage, as is required for Medicare
• prohibiting states from using federal funds as the state share of Medicaid or CHIP, unless authorized under law

By pursuing these and other policies to reduce waste, fraud, and abuse in Medicaid, the Budget for All would save $3.2 billion over FY2013–22 (OMB 2012a).28

Narrowing Exceptions for Withholding Taxes (NEWT) Act

Medicare HI payroll taxes are assessed on all wages and salaries, either 1.45 percent paid by both the employer and employee, or the full 2.9 percent paid by the self-employed. Under current law, however, the Medicare payroll tax for the self-employed can be circumvented using an S corporation, a type of “pass-through” entity. The losses and gains of S corporations are passed onto their shareholders’ individual income tax base, but these profits are not included in the base for the Medicare HI tax.

The Budget for All would enact the Narrowing Exceptions for Withholding Taxes (NEWT) Act (H.R. 3840), which would broaden the Medicare HI tax base to include S corporation income for the employee-shareholders of professional services business with three or fewer principal shareholders.29 These have been identified as the most likely to abuse the system by artificially over-reporting profits and under-reporting wages and salaries. This loophole closer was included in the House-passed American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), and was estimated to raise $11.2 billion over FY2010–20 (JCT 2010), including $6.3 billion in off-budget revenue effects. Extrapolating from this score, we estimate that the Budget for All would raise $13.1 billion in revenue over FY2013–22 by enacting the NEWT Act, of which $9.7 billion is on-budget and $3.4 billion is off-budget.

End tax deductions for the direct advertising of unhealthy foods to children

To promote public health and achieve budgetary savings, the Budget for All would enact H.R. 4310—a bill to amend the Internal Revenue Code of 1986 to protect children’s health by denying any deduction for advertising and marketing directed at children to promote the consumption of food at fast-food restaurants or of food of poor nutritional quality. The JCT estimated that H.R. 4310 could raise between $15–19 billion in revenue over ten years; the Budget for All books the low end of this revenue estimate as savings.30

IV. Reforming government

The Budget for All would pursue other policy changes to strengthen democracy and reform government programs that are of broader scope than defense, health, Social Security, or tax proposals. These include public financing of elections, comprehensive immigration reform, reducing agriculture subsidies, and restoring solvency to the unemployment insurance system, which has been greatly strained by the recession. We estimate these policies would result in net savings of $90.5 billion over FY2013–22.

Public financing of elections

The Budget for All is dedicated to leveling the playing field and reducing the influence of money in politics and campaigns. It would invest in the public financing of elections by dedicating $10.9 billion toward the Fair Elections Now Act (S. 752 and H.R. 1826).31 Introduced in 2009 by Sens. Dick Durbin (D-Ill.) and Arlen Specter (D-Pa.), and Reps. John Larson (D-Conn.) and Walter Jones, Jr. (R-N.C.), the Act would allow federal candidates to choose to run for office without relying on large contributions, money bundlers, or donations from lobbyists. Additionally, the Fair Elections Now Act would free politicians from constant fundraising obligations, allowing them to focus more time on constituents and policymaking.

Participating candidates would raise a large number of small contributions from their local communities (capped at $100 per person per year) in order to qualify for Fair Elections funding (Fair Elections Now 2012). After meeting the small contributions qualifications, candidates would receive Fair Elections funding in the primary and the general election. For House races, candidates would receive $900,000, split 40 percent for the primary and 60 percent for the general election. For Senate races, candidates would receive $1.25 million, plus $250,000 per congressional district in their state. The primary-general election funding split would be the same as for House races. Qualified candidates could also receive additional matching Fair Elections funds if they continued to raise small donations from their constituents. Donations of $100 or less would be matched by $5 from the Fair Elections fund for every $1 raised, limited to three times the initial allocation of money for the primary, and again for the general election. Additionally, Fair Elections would help to offset the excessive cost of purchasing media coverage. Participating candidates would receive a 20 percent reduction from the lowest broadcast rates, could receive media vouchers, and would have the opportunity to exchange those vouchers for cash with their national political party committee.

Comprehensive immigration reform

The Budget for All would enact comprehensive immigration reform, establishing a path to citizenship for undocumented immigrants. Comprehensive immigration reform would result in more taxpayers paying income and payroll taxes and would also qualify residents for child, tuition, and other tax credits as well as benefits earned by social insurance contributions. Based on the CBO’s score of Senate Amendment 1150 to the Comprehensive Immigration Reform Act of 2007 (S. 1348), we estimate that the Budget for All’s comprehensive immigration reform would raise $48.3 billion in revenue and increase mandatory outlays by $22.7 billion over FY2013–22, for net savings of $25.6 billion (CBO 2007).32 Specifically, off-budget revenue (e.g., Social Security contributions) would increase by $57.1 billion, and on-budget revenue would decrease by $8.8 billion. On-budget mandatory outlays (i.e., the refundable portion of tax credits) would increase by $21.5 billion, and off-budget mandatory outlays (e.g., Social Security benefits) would increase by $1.2 billion.

Unemployment insurance solvency

Unemployment insurance (UI) is a critical component of the social safety net; it kept 3.2 million Americans out of poverty in 2010 (Census Bureau 2011). However, states were unprepared for a recession of this magnitude and the accompanying prolonged rise in unemployment and UI claims, which have drained many states’ UI trust funds. As of March 22, 2012, outstanding loans from the Federal Unemployment Account (FUA), the federal loan fund to help states finance UI during downturns, totaled $40.1 billion owed by 28 states and the U.S. Virgin Islands (Department of Labor 2012).

The Budget for All would enact Sen. Dick Durbin’s Unemployment Insurance Solvency Act (S. 386), which would improve the solvency of state unemployment trust funds by temporarily suspending states’ interest payments on FUA debt owed to the federal government. Beginning in 2014, the Unemployment Insurance Solvency Act would also raise the Federal Unemployment Tax Act (FUTA) annual wage base from $7,000 to $15,000 per covered worker, indexing the revised wage base to wage growth for subsequent years. Finally, it would reduce the net FUTA rate from 0.8 percent to 0.38 percent (thus keeping the FUTA tax paid by employers for workers who had reached the FUTA threshold at the current annual amount of about $56 per employee in the first year of implementation).33 We estimate that the Budget for All would save $36.1 billion over FY2013–22 by enacting these reforms.

Scale back agriculture subsidies

The president’s budget request proposed $30.3 billion in mandatory savings from agriculture subsidies, and the Budget for All adopts the following reforms to agriculture subsidies from the president’s budget (OMB 2012a): The Budget for All would eliminate direct payments, which are based on historical crop production rather than current yields or market prices, for savings of $22.7 billion over FY2013–22 (OMB 2012e). The Budget for All would lower insurance companies’ rate of return on investment for participating in crop insurance from 14 percent to 12 percent, for savings of $1.2 billion over ten years (OMB 2012e). The Budget for All would also revise the base for capping crop insurance administrative expenses from the unusually high premiums in 2010 to the more tempered 2006 levels ($0.9 billion, adjusted for inflation), which would save $2.9 billion over ten years (OMB 2012e).34 Lastly, the Budget for All would slightly reduce the premium for catastrophic (CAT) coverage policies, thereby lowering reimbursement to crop insurance companies and saving $255 million over ten years.

Additionally, the Budget for All would reduce the subsidy for producers’ crop insurance premiums from roughly 60 percent to 50 percent, which the CBO estimated would save $11.8 billion over FY2012–21 (CBO 2011). Extrapolating from this score, we estimate that this reduction in premiums would save $12.7 billion over FY2013–22. Added to the reforms proposed in the president’s budget, these policies in the Budget for All would save $39.7 billion over FY2013–12.35

V. Strengthening Social Security for future generations

The Budget for All recognizes that none of the pressing long-run budget challenges facing the country stems from Social Security. The program, by law, cannot borrow and must spend only what it takes in from dedicated revenue sources and what it has accumulated in the Social Security Trust Fund by running past surpluses. The Budget for All also recognizes that millions of Americans rely on the economic security that comes from the Social Security system. While poverty has risen dramatically as a result of the Great Recession, poverty rates among seniors have actually edged down, largely because of the economic security afforded by Social Security. The Census Bureau estimates that Social Security kept 20.3 million Americans out of poverty in 2010 (Census Bureau 2011).

The Budget for All preserves Social Security benefits. It does, however, correct the revenue shortfall that stems from rising wage inequality in recent decades, which has allowed more and more of the earnings of high-income workers to escape taxation. Currently, wages and salaries above $110,100 are not subject to the payroll tax, meaning that high-income individuals pay less as a share of their income than everyone else. As income inequality has widened, a greater share of income has accrued above this taxable maximum, with the percent of earnings covered by the program slipping from 91 percent in 1983 to just 83 percent in 2009 (CBO 2011b).36

The Budget for All proposes phasing out the taxable maximum over five years and crediting high earners with increased benefits based on higher contributions stemming from eliminating the payroll tax cap. This policy alone would solve almost 100 percent of the very long-term (75-year) shortfall facing Social Security (SSA 2011).37 Revenue would increase by $1.45 trillion while outlays due to larger benefit payments would rise by $27.3 billion. On net, this policy would increase the Social Security Trust Fund by $1.4 trillion over the ten-year budget window.

VI. Reforming and modernizing the tax code

Individual income tax reforms

The U.S. tax code has seen effective tax rates paid by households at the top of the income distribution fall markedly since the 1950s and 1960s (Piketty and Saez 2007). The income cutoff for married joint filers in the highest tax bracket has fallen from roughly $3 million in the early 1950s (adjusted to current dollars) to $1 million in 1970, to $379,000 in 2011.38 The top marginal tax rate applied above that top income cutoff has fallen from just over 90 percent in the 1950s, to 70 percent in the 1970s, to 50 percent in the mid-1980s, and to 35 percent for most of the past decade (TPC 2011a). While the share of total taxes paid by the highest-income 1 percent of households has increased (as pre-tax income gains have gone disproportionately to upper-income earners), effective federal tax rates—measuring overall progressivity—have fallen from 37 percent for the top 1 percent in 1979 to 29.5 percent in 2007 (CBO 2010).

Beyond the reductions in individual income tax rates, the reduction in the statutory capital gains tax rate—from 28 percent in 1987, to 20 percent in 1997, to just 15 percent in 2003—has substantially lowered effective tax rates for households receiving a large share of their income as investment income, typically those at the very top of the income distribution. Likewise, the rate on qualified dividends, which until recently was taxed as ordinary income, was cut from 39.6 percent to just 15 percent in 2003. This preferential treatment of capital income over earned income is highly regressive because capital income is heavily concentrated at the top of the income distribution and because many high-income individuals have the ability to reclassify their compensation as investment income. The TPC estimates that for 2011, 70.5 percent of capital gains and dividends taxes were paid by the highest-income 1 percent of households and 48.8 percent by households in the top 0.1 percent (at income cutoffs of $533,000 and $2.2 million, respectively) (TPC 2011b).39 In recent testimony before the Senate Finance Committee, economist and tax expert Leonard Burman identified the lower rate on capital gains as “the biggest loophole” and argued that “tax breaks on capital gains undermine the progressivity of the tax system” (Burman 2011). Indeed, the preferential treatment of capital income gives rise to the highly publicized, remarkably low effective tax rates paid by Berkshire Hathaway CEO Warren Buffett and former Massachusetts Governor Mitt Romney (Buffett 2011, Fieldhouse 2012).

In his 2012 State of the Union address, President Obama called for tax reform adhering to the “Buffett Rule,” which states that millionaires should not pay a lower effective tax rate than middle-class households: “If you make more than $1 million a year, you should not pay less than 30 percent in taxes.” The Congressional Research Service recently concluded, “Tax reforms that are consistent with the Buffett rule would likely include raising tax rates on capital gains and dividends” (Hungerford 2011). The Budget for All would reform the individual income tax code in accordance with the Buffett Rule, restoring a higher degree of progressivity—so that effective tax rates rise with income—and raising more revenue from those best able to contribute.40

Gradual reduction of Bush-era income tax rate cuts

The Budget for All gradually phases out most of the George W. Bush-era individual income marginal tax rate cuts over the next decade. The 33 percent and 35 percent brackets from tax year 2012 are allowed to expire on schedule on January 1, 2013 (reverting to prior rates of 36 percent and 39.6 percent, respectively), as proposed in the president’s budget request for fiscal year 2013. As in the president’s budget, the taxable income threshold for entering the 36 percent bracket from the 28 percent bracket would be raised so that no households with adjusted gross income (AGI) under $200,000 ($250,000 for joint filers) would see a marginal tax rate increase. Unlike the president’s budget request, however, the personal exemption phase out (PEP) and the limitation on itemized deductions (Pease) would be fully reinstated on schedule. The 25 percent and 28 percent brackets would be temporarily extended while the economy remains weak, delaying their scheduled reversion to 28 percent and 31 percent, respectively. The modified 28 percent bracket would be maintained through tax year 2016 but then allowed to revert to 31 percent on January 1, 2017. The existing 25 percent bracket would be maintained through 2018 but then would be allowed to revert to 28 percent on January 1, 2019.

The 10 percent bracket, the extension of the 15 percent tax rate for joint filers, marriage penalty relief expanding the standard deduction for joint filers, and the $5,000 extension of the Earned Income Tax Credit (EITC) phase out for joint filers would be continued for the full decade. The Budget for All also proposes maintaining family and education incentives included in the 2001 and 2003 tax cuts, including the higher $1,000 child tax credit, dependent care credit, adoption credit, employer-provided child care credit, and preferential tax treatment of Coverdell Education Savings Accounts, employer-provided education assistance, student loan interest, select tax-free scholarships, and tax-exempt bonds for school construction. Additionally, the Budget for All would permanently extend the ARRA expansion of refundable tax credits, specifically the third EITC tier for larger families, the lower $3,000 earnings threshold for the refundable portion of the child tax credit, and the American Opportunity [tuition] Tax Credit (AOTC).

Beyond this phase-out of the Bush-era reduction in the top four marginal income tax rates, the Budget for All would adopt the five higher marginal tax rates from Rep. Jan Schakowsky’s (D-Ill.) Fairness in Taxation Act of 2011 (H.R. 1124). Effective January 1, 2013, the following brackets and rates would be added to the income tax code: a 45 percent bracket starting at taxable income above $1 million; a 46 percent bracket starting at taxable income above $10 million; a 47 percent bracket at taxable income above $20 million; a 48 percent bracket at taxable income above $100 million; and a 49 percent bracket at taxable income above $1 billion.41 (See Appendix II for the new individual income tax rate structure.)

Across this modified rate structure, the Budget for All would also tax all capital gains and dividends as ordinary income, repealing the preferential tax treatment for long-term capital gains. (Qualified dividends are scheduled to again be taxed as ordinary income starting January 1, 2013, so revenue is only raised from increasing rates on capital gains, relative to current law.) Equalizing the tax treatment of investment income and income derived from work would be retroactively made effective January 1, 2012, to deter a flood of capital gains realizations at the current top 15 percent preferential rate, as occurred before the Tax Reform Act of 1986 (which also equalized the tax treatment of investment income and ordinary income).42

The collective budgetary impact of these policy modifications to the individual income tax were scored by the nonpartisan Citizens for Tax Justice (CTJ) using the Institute on Taxation and Economic Policy (ITEP) microsimulation model, which is similar to models used by official scorekeepers at the Treasury Department and the Joint Committee on Taxation.43 As noted earlier, the baseline adjustments include patching the AMT for the entire budget window, and CTJ scored these tax policies accordingly.44 This score of taxing capital gains as ordinary income takes into account behavioral responses of capital gains realizations to higher capital gains tax rates.45 Based on CTJ’s comprehensive score, the Budget for All’s individual income tax reforms would cost $2.2 trillion over FY2013–22, relative to current law, because of the extension of certain Bush-era tax cut provisions and the expansion of refundable tax credits.46

These tax policies would, however, save $1.7 trillion relative to full continuation of the Bush-era tax cuts and even save $1.3 trillion relative to President Obama’s individual income tax proposal.47 Adding the Fairness in Taxation Act brackets (the 45–49 percent rates) and taxing capital gains as ordinary income is estimated to raise $1.1 trillion over the ten-year window, relative to the Obama policy rate structure (Obama policy).48 Sunsetting the 28 percent and 25 percent tax brackets in 2017 and 2019, respectively, would raise an additional $216.6 billion over the budget window, relative to maintaining Obama policy.

Repeal the step-up basis for capital gains

For assets sold by the individual who purchased them, capital gains taxes are assessed on the difference between the sale price and the purchase price, known as the basis for capital gains. For assets bequeathed to heirs, however, the basis price for the heirs is reset to the market value at the time of transfer (rather than the purchase price). This step-up basis for capital gains at death allows families to avoid capital gains taxation altogether and exacerbates the lock-in effect (where individuals delay selling assets because of capital gains taxation). Because the step-up basis enables the circumvention of the capital gains tax altogether, it is also a costly tax expenditure. The OMB estimates that the step-up basis for capital gains at death will amount to $182.2 billion in lost revenue over FY2013–17 (OMB 2012b). To complement the taxation of capital gains as ordinary income, the Budget for All would also repeal the step-up basis for capital gains. Extrapolating from the OMB estimate, repeal would raise $433.8 billion over FY2013–22.

Limit tax preferences for upper-income households

Itemized deductions and other tax expenditures that reduce taxable income are regressive because their value—a filer’s marginal tax rate—rises with income. Itemized deductions are particularly regressive because they do not benefit tax filers claiming the standard deduction (typically lower-income workers). For example, the home mortgage interest deduction—the second most costly tax expenditure—is worth 35 cents on the dollar to someone with a taxable income of $1 million, but just 15 cents on the dollar to an itemizing married couple (filing jointly) with $60,000 in taxable income. It has no value at all for a family taking the standard deduction, and the majority of tax filers do not itemize deductions. In 2009, only 45.7 million tax returns itemized deductions, just 32.5 percent of the 140.5 million tax returns that year (IRS 2012a, 2012b).

The Budget for All would decrease the regressivity of itemized deductions while maintaining incentives built into the tax code by limiting to a maximum of 28 percent the rate at which itemized deductions can reduce tax liability. This policy would only affect itemizing tax filers currently in the top two income brackets. The president’s budget requests for FY2010–12 all proposed limiting the rate at which itemized deductions can reduce tax liability to a maximum of 28 percent. In tax year 2019, the Budget for All would expand this limit on upper-income tax preferences to the proposal in the president’s budget request for fiscal year 2013, which expanded the 28 percent limit to specified above-the-line deductions and exclusions.49 The policy would also be harmonized with a similar limitation added to the Alternative Minimum Tax. This would make many tax expenditures less regressive and costly while affecting only 2.2 percent of tax filers (TPC 2011c).

Replace the tax exclusion for interest income on state and local bonds with a direct subsidy for the issuer

Bonds issued by state and local governments receive preferential tax treatment. Interest from public purpose state and local government bonds can be excluded from a bondholder’s AGI. According to the OMB, the exclusions on interest from state and local bonds for public and other tax-preferred purposes will result in forgone revenue of $306.2 billion over FY2013–17, making this preference one of the costliest tax expenditures (OMB 2012b). This preferential tax treatment acts as an indirect subsidy, reducing borrowing costs for state and local governments. The current tax treatment also confers a disproportionately large tax benefit upon upper-income earners.

The Budget for All would replace the tax exclusion for interest with a direct subsidy to borrowers (i.e., state and local governments), which would be a more cost-effective way of reducing their borrowing costs. Under this policy, state and local governments would make taxable interest payments to borrowers and receive a 15 percent subsidy from the federal government for the interest paid on those bonds. This would simplify the tax code, increase budgeting transparency, and more cost-effectively subsidize borrowing by state and local governments. According to the CBO, this policy would generate $142.7 billion over FY2012–21 (CBO 2011b). Extrapolating from this score, we estimate that the Budget for All would raise $176.2 billion over FY2013–22 by replacing this tax exclusion with a direct subsidy.

End the exclusion of foreign-earned income

All U.S. citizens are taxed on their worldwide income regardless of residency. The tax code, however, currently allows U.S. citizens living abroad to exclude up to $95,100 of foreign earnings from their taxable income (IRS 2012c). Foreign residents may also exclude or deduct some of the value of housing allowances and meals provided by their foreign employers. According to the OMB, the exclusion of foreign-earned income will result in forgone revenue of $32.2 billion over FY2013–17 (OMB 2012b). Extrapolating from this score, we estimate that the Budget for All would raise $71.3 billion over FY2013–22 by ending this tax exclusion. Expatriates would still be able to credit any taxes paid to foreign governments against U.S. tax liability.

Deny the home-mortgage interest deduction for vacation homes and yachts

The tax code currently allows taxpayers to deduct interest paid on up to $1 million in secured mortgage debt for primary and/or secondary residences. Additionally, homeowners can deduct interest on up to $100,000 of debt from home equity loans on primary or secondary residences, regardless of their purpose. The IRS defines a qualified home as “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities” (IRS 2011). Consequently, the home mortgage interest deduction can be applied to vacation homes and yachts—wholly unrelated to the goal of promoting home ownership. The Congressional Black Caucus (CBC) Alternative Budget for Fiscal Year 2012 proposed denying the home mortgage interest deduction for vacation homes and yachts (by limiting the deduction to a primary residence), which was estimated to raise $12.5 billion over FY2012–21 (CBC 2011). The Budget for All would also adopt this policy to deny the home mortgage interest deduction for both vacation homes and yachts. Extrapolating from the CBC’s policy score, we estimate that this reform would raise $12.8 billion over FY2013–22.

Corporate income tax reform

Business interests have successfully lobbied a plethora of tax loopholes into the corporate income tax since the last comprehensive reform of the tax code—the Tax Reform Act of 1986. The Budget for All would eliminate some of the more egregious tax loopholes and enact progressive tax reforms, dedicating the savings to public investments and deficit reduction.

Reform the U.S. international tax system

The Budget for All would adopt the president’s recommendations to reform the U.S. international tax system, which the JCT estimated would raise $168.3 billion over FY2013–21 (JCT 2012).50 Deferring the deduction of interest expense related to deferred income would save $59.8 billion.51 Determining the foreign tax credit on a pooling basis (on the consolidated earnings and foreign taxes paid by all subsidiaries of a multinational corporation) would save $57.1 billion. Taxing excess returns associated with transfers of intangibles offshore would generate $19.2 billion.52 Disallowing the deduction for non-taxed reinsurance premiums paid to affiliates would save $12.9 billion. Modifying rules for dual capacity taxpayers would save $9.6 billion. Preventing the use of leveraged distributions from related foreign corporations to avoid dividend treatment would raise $3.1 billion. Taxing the gain from sales of partnership interest on a look-through basis would raise $2.5 billion. Limiting earnings stripping by expatriated entities (limiting the deductibility of interest paid so U.S. firms could not inappropriately reduce tax liability from U.S. operations) would generate $1.8 billion. Clarifying tax rules to limit shifting of income through intangible property transfers would generate $1 billion. Extending Section 338(h)(16) to certain asset acquisitions would raise $960 million. Removing foreign taxes from a Section 902 corporation’s foreign tax pool when earnings are eliminated would save $354 million.53

Eliminate oil and gas preferences

The Budget for All would also adopt the proposals contained in the president’s budget to eliminate tax preferences carved out over the years for fossil fuel producers, which the JCT estimated would raise $24.9 billion over FY2013–21 (JCT 2012).54 Eliminating this tax code spending would help level the playing field between renewable energy sources and fossil fuels, complementing the pricing of carbon.55 For oil and natural gas production, the policy would repeal percentage depletion for oil and natural gas wells, the expensing of intangible drilling costs, the exception to passive loss limitation for working interests in oil and natural gas properties, the deduction for tertiary injectants, and the preferential two-year amortization for independent producers’ geological and geophysical expenditures (the amortization period would rise to seven years). For coal production, policies include repeal of the expensing of exploration and development costs, the percentage depletion for coal and hard mineral fossil fuels, and the preferential capital gains treatment for royalties.56

Ending Excessive Corporate Deductions for Stock Options Act

Under current law, corporations are allowed to treat stock options asymmetrically for tax and shareholder reporting purposes. When stock options are realized, a corporation is allowed to deduct the value of options at realization (marked to market) for tax purposes, but allowed to report only the value of options when granted to the public, regulators, and investors. This stock option loophole has recently been highlighted by Facebook, which will likely claim around $7.5 billion in deductions as some 187 million options are exercised (Yang 2012). Facebook will be deducting options valued at roughly $40 per share for tax purposes but, when reporting on profitability to investors and the public, stock options granted to co-founder Mark Zuckerberg will be reported as only six cents per share. Because of the stock option loophole, Facebook will erase all of its tax liability for the year and be refunded roughly $500 million for previously paid taxes—savings of roughly $3 billion (CTJ 2012b).

The Budget for All would close this loophole by enacting the Ending Excessive Corporate Deductions for Stock Options Act of 2011 (S. 1375), which would save $25 billion over FY2013–22 (Levin 2011).57 Corporations would only be allowed to deduct as much as they expense on their financial statements, and the deduction for stock options would be capped at $1 million, harmonizing the tax treatment of stock options with the cap on deductibility of other executive compensation.

Employee Misclassification Prevention Act

Employers are required to withhold employees’ income taxes, withhold employees’ share of payroll taxes, and pay their own share of payroll taxes for all employees—but are not required to do any of this for independent contractors. The lack of withholding requirements for independent contractors allows for tax evasion and encourages the re-classification of employees as independent contractors. Misclassifying an employment relationship, particularly treating employees as independent contractors, reduces an employer’s tax liability but also undermines labor protections, denying workers access to workers’ compensation and overtime pay. The Budget for All would enact the Employee Misclassification Prevention Act (H.R. 3178), which would increase reporting requirements and impose stiffer fines on violators and repeat offenders misclassifying their employees. The Employee Misclassification Prevention Act has not been scored, so the Budget for All instead books the $7.6 billion in additional revenue the JCT estimated would be raised by the president’s budget’s proposal to issue guidance about worker classification and require reclassification of all misclassified workers.58 This is meant as a conservative estimate.

Repeal the lower-of-cost-or-market (“LCM”) method of inventory accounting

The Budget for All would also adopt the president’s budget’s proposals to repeal the lower-of-cost-or-market (“LCM”) method of inventory accounting, which the JCT estimated would raise $3 billion over FY2013–21 (JCT 2012).59 LCM inventory accounting results in asymmetric tax treatment of inventory valuation and understates businesses’ taxable income.

Excise taxes and corrective tax policies

Besides taxing work and savings, the government also levies corrective excise taxes to reflect goods’ truer societal costs. Taxes on consumer goods such as cigarettes, alcohol, and gasoline are all meant to reflect their negative social externalities. Intuitively, taxing harmful goods or services can be more desirable than taxing productive things (i.e., work and savings). A number of excise and corrective tax policies would be enacted in the Budget for All. These include a financial transactions tax, a financial crisis responsibility fee, carbon pricing, and reinstating Superfund taxes. On net, these policies would save $1.9 trillion over FY2013–22.

Tax financial transactions and speculation

Small taxes on transactions of financial products have the potential to raise large sums of revenue while dampening speculative trading and encouraging more productive investment. The federal government collected general revenue from a stock transfer tax and issuance tax from 1914 to 1966, and a small tax on share issuance and transfers is still in place to finance the operations of the Securities and Exchange Commission (Pollin, Baker, and Schaberg 2002).

The Budget for All would institute a financial transactions tax that would raise $849.5 billion over FY2013–22. This is a corrective tax, meant to dampen speculative financial trading. This policy was scored (taking behavioral responses into consideration) by the Tax Policy Center for the Peter G. Peterson Foundation’s Fiscal Solutions Initiative.60 The specified financial transactions tax base was set to tax stock transactions at 0.25 percent, bond transactions at 0.004 percent, option premiums at 0.25 percent per year to maturity, foreign exchange transactions at 0.004 percent, and futures and swaps at 0.01 percent. (Rates are set on a range of financial assets to minimize tax arbitrage opportunities.)

Financial crisis responsibility fee

The Budget for All would impose a fee on the largest financial institutions, encouraging large firms to decrease their liabilities and helping to rectify the problem of “too big to fail” financial institutions that was all too apparent during the financial crisis. The proposal would also help to level the playing field between small financial institutions (which do not benefit from an implicit government guarantee because they are not viewed as “systematically important” by credit markets) and larger financial institutions. Specifically, the budget would impose a leverage tax on large banks with more than $50 billion in assets to meet the $90 billion revenue targets set by the president’s budget request for FY2011, recouping almost three-fold the net taxpayer cost of the Troubled Asset Relief Program (TARP).61

Price carbon

Pricing carbon through either a carbon tax or the auctioning of permits would reduce the emission of GHGs, widely believed to be causing global warming, and also yield significant revenue on an annual basis. This proposal would price carbon at $20 per metric ton of CO2 emissions (CO2e) starting in 2013, indexing the initial price at a 5.6 percent annual rate. The TPC has estimated that this policy would generate $1.2 trillion in revenue over FY2013–22.62 Based on the same policy parameters, the CBO estimates that CO2e would be reduced by 20 percent by 2025 and 50 percent by 2050 (CBO 2011b).

Without other changes, pricing carbon has the potential to be regressive, as many low-income households likely spend a large share of their income on carbon-intensive energy such as gasoline and heating fuel. To address this possibility, the Budget for All would rebate a portion of the revenue from carbon abatement to low- and middle-income households. Based on TPC’s score of this policy, we estimate that rebating 25 percent of total carbon pricing revenue as refundable tax credits would produce net savings of $897.2 billion over FY2013–22; this is expected to hold harmless roughly the bottom 25 percent of households by income.

Reinstate Superfund taxes

The Budget for All would adopt the president’s proposal to reinstate Superfund taxes, which would raise an estimated $19.7 billion over FY2013–22 (JCT 2012). The Environmental Protection Agency (EPA) Superfund program was once predominantly funded by dedicated taxes, but it is now largely funded by general revenue. A stable source of funding would allow for better planning for multiyear hazardous chemical waste cleanup than reliance on year-to-year appropriations. This policy would re-impose an excise tax of 9.7 cents per barrel of crude or refined petroleum, an excise tax of $0.22 to $4.87 per ton on various chemicals, and a corporate environmental income tax of 0.12 percent on corporations’ modified AMT income exceeding $2 million.63

Wealth taxes

Restoring progressive taxation of inherited wealth

The tax on large estates and gifts is the most progressive federal tax and the only existing federal tax on the transfer of wealth (TPC 2011d), but it has been greatly reduced in scope over the last decade. The Bush-era tax cuts gradually increased the estate tax exemption from a scheduled $1 million ($2 million for married couples) to $3.5 million ($7 million for married couples) while reducing the top rate from 55 percent to 45 percent in 2009. The Bush-era tax cuts completely eliminated the estate tax in 2010, exempting bequeathed estates valued in billions of dollars from paying any inheritance tax for one year.64 As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), Congress reinstated the estate tax at a record exemption of $5 million ($10 million for married couples) and at a lower 35 percent rate for 2011–12, the most generous parameters since 1931 (Jacobson, Raub, and Johnson 2011). Between the exemption and estate tax planning, however, effective rates are much lower than the statutory marginal rate; the effective rate on taxable estates has never exceeded 22 percent and fell below 15 percent in 2011 (TPC 2011e). The exemption also means that the reach of the estate tax is minimal; only 0.13 percent of deaths will trigger any estate tax liability in 2011, down slightly from 0.24 percent if the 2009 parameters had been maintained (TPC 2011f).

Under current law, the estate tax is scheduled to revert to an exemption of $1 million ($2 million for married couples) and a top 55 percent rate on January 1, 2013. CBO’s March 2012 current law baseline includes $515.7 billion in estate and gift tax revenue over FY2013–22 (CBO 2012a). A continuation of the temporary estate and gift tax parameters enacted in December 2010, however, would decrease revenue by $433 billion over FY2013–22, relative to current law (OMB 2012a).

Progressive estate tax reform

The Budget for All would enact progressive estate tax reform by lowering the exemption and adding a progressive schedule of higher marginal tax rates than under current policy. Starting January 1, 2013, the exemption for the estate tax would be lowered to $2.5 million ($5 million for married couples). The taxable portion of estates beyond these exemptions would be subject to a progressive series of marginal tax rates as follows: a 45 percent rate up to $10 million; a 50 percent rate up to $50 million; a 55 percent rate up to $500 million; and a 65 percent rate on the portion of estates worth more than $500 million. Family farms would also be allowed to lower the value of their farmland by $3 million when calculating estate tax liability. This estate tax reform is a modified version of Sen. Bernie Sanders’ (I-Vt.) Responsible Estate Tax Act of 2010 (S. 3533), but with the exemption lowered to $2.5 million from $3.5 million (to $5 million from $7 million for married couples).65 If implemented January 1, 2013, we estimate that the Responsible Estate Tax Act would result in $243 billion in revenues over FY2013–22 relative to current law, and raise $190 billion more than current estate tax policies.66 There is no official score of the modified version of the Responsible Estate Tax Act, so the Budget for All books $243 billion in revenue loss relative to current law—a conservative estimate—but still $190 billion more than current policies.

High-net-worth surcharge

The Budget for All would work toward reduced inequality, greater progressivity in the tax code, and deficit reduction by instituting a small annual surcharge on high-net-worth individuals. Specifically, the Budget for All would phase in a tax on net wealth over $10 million, beginning with a 0.1 percent tax in 2013. The tax would be increased by 0.1 percentage point annually until reaching a 0.5 percent tax in 2017, beyond which the surcharge would remain a constant 0.5 percent on net wealth exceeding $10 million.

We estimate that this policy would increase revenues by $319.1 billion over FY2013–22. The base for this policy score was provided to the EPI Policy Center by economist Edward Wolff of New York University, who estimated that a 1 percent tax on wealth over $10 million would raise $58.7 billion in 2009 and affect just 0.4 percent of the population. The EPI Policy Center adjusted this figure using net wealth data from the Federal Reserve Flow of Funds data, inflating the 2009 revenue estimate with the growth in household net wealth from 2009 through the fourth quarter of 2011 (Federal Reserve 2012). From there, revenue was statically scaled down from a 1 percent to 0.5 percent tax and held constant as a share of GDP. The revenue score, including phase-in period, was calculated in calendar years and then adjusted to fiscal years.

Adding it all up

The Budget for All approaches budgeting by emphasizing economic responsibility in the near term and fiscal responsibility in the longer term. In the first few years of the budget window, the Budget for All runs bigger budget deficits than projected under either current law (bigger deficits through FY2016) or current policy (bigger deficits through FY2013). The near-term increase in deficits is overwhelmingly driven by spending increases to support economic recovery (and, to a much lesser extent, targeted job creation tax credits). Relative to current law, the Budget for All invests $1.1 trillion over FY2012–15, which includes job creation spending and tax measures, greater public investments in the non-defense discretionary budget, and undoing both phases of the BCA. The job creation measures are particularly front-loaded to address current economic needs: 51 percent of total job creation measures are allocated over FY2012–14, when economic support is most needed (see Table 2).67

By running larger deficits in the near term, the Budget for All delays reaching primary balance until 2016, one year after it is reached under current law. Slowing the rate at which deficit reduction is implemented is a key part of fostering economic recovery; as noted earlier, the fiscal drag scheduled under current law is projected to slow real GDP growth to just 1.1 percent in 2013. The primary spending increase proposed over FY2013–17 totals $1.3 trillion, relative to current law, and $1.0 trillion, relative to current policy.68 Revenues in the Budget for All are $697 billion higher than under current law over the same period, and $3 trillion higher than projected under current policy.

In the latter half of the budget window, the Budget for All shifts its focus to longer-term fiscal responsibility, back-loading deficit reduction for a strengthened economy but insuring the full funding of those public investments that are vital for long-term growth. The primary spending increase proposed over FY2018–22 totals $1.0 trillion, relative to current law, and $823 billion, relative to current policy.69 Over the same period, revenues are $1.7 trillion higher than under current law and $4.8 trillion higher than under current policy. Whereas spending increases are heavily front-loaded in the first half of the budget window, progressive revenue increases ramp up to a greater extent in the latter half of the window, avoiding a bigger fiscal drag than would occur if fiscal retrenchment took hold prematurely. Revenue increases, particularly on upper-income households, are also expected to have much less of an adverse effect on growth than government spending cuts, particularly while large output gaps persist.

The policies outlined in this document result in a deficit of less than 1 percent of GDP from FY2017 through the end of the ten-year window. By FY2022, the Budget for All runs a deficit of $180 billion, or 0.7 percent of GDP (see Figure A). At the end of the ten-year window, the Budget for All would run a deficit $123 billion (0.5 percent of GDP) lower than projected under current law and $1.1 trillion (4.6 percent of GDP) lower than projected under current policy. Cumulative deficits over FY2013–22 are $79 billion higher than under current law and $6.8 trillion lower than under current policy.70 The Budget for All would see debt held by the public peak at 80.4 percent of GDP in FY2014, before dropping to 70.6 percent of GDP by FY2018 and 62.3 percent of GDP by FY2022 (see Figure B). By FY2022, the Budget for All gets debt held by the public within 1 percentage point of GDP of levels projected under current law, and 27.2 percentage points lower than projected under current policy. The Budget for All accommodates larger deficits than the Ryan budget over FY2012–16 and smaller out-year deficits over FY2017–22 (see Figure C). The Budget for All achieves the same level of debt held by the public by the end of the ten-year budget window as the Ryan budget, but without making harmful cuts to the social safety net and discretionary programs (see Figure D). In fact, the Budget for All achieves an equivalent level of debt while preserving the safety net, protecting the middle class, and investing heavily in job creation measures.

Appendix I: Mechanics of budget modeling

The Economic Policy Institute has scored the policies proposed by the Budget for All and modeled their cumulative impact relative to the CBO March 2012 baseline. Table 1 stacks the major policy alterations to the CBO March 2012 baseline and broadly separates policy proposals into four categories: baseline adjustments, revenue policies, spending policies, and Social Security reform. All policies are depicted as the net impact on the primary budget deficit (excluding net interest) rather than impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects (i.e., refundable portions of tax credits), and some policies in the spending adjustments include revenue effects. These are treated separately for modeling purposes, and are reflected as such in Summary Tables 1–6. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal impulse to the primary budget deficit, and the unified budget deficit is adjusted accordingly.71

In some instances it is necessary to extrapolate from existing official scores (e.g., those from CBO, JCT, and OMB) to adjust from a previous budget window to the FY2013–22 budget window. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score. Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in Summary Tables 1–6 as such.

Unless otherwise specified, all tax policies are assumed to be implemented January 1, 2013. Tax policies modeled from scores starting before FY2013 assume 75 percent of the revenue score for that year (for the three fiscal quarters in calendar year 2013). More broadly, fiscal year scores are calculated as 25-75 weighted average calendar year scores where necessary.

Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling. Many of the individual income tax proposals, however, were collectively modeled by the CTJ using the ITEP microsimulation and accordingly account for interaction effects, including those with the AMT and refundable tax credits. Additionally, many of the corporate income tax policies have been taken from the JCT’s re-estimate of the president’s budget request for fiscal year 2013; these policies have been stacked and should have minimal interaction effects.

Appendix II: Individual income tax rate schedule

As detailed in Section VI, the Budget for All phases out Bush-era individual income tax rate cuts for the top four marginal rates in three steps: 2013, 2017, and 2019. Additionally, five higher tax brackets are added at income thresholds at and above $1 million in taxable income in 2013. The schedule of individual income tax rates across filing status and years of implementation are presented in Appendix II Tables A, B, and C. Taxable income thresholds are presented in 2012 dollars for the 10–39.6 percent brackets and 2013 dollars for the 45–49 percent brackets. All tax brackets would be adjusted for inflation beyond 2013.

Endnotes

1. Many of the policies included in the budget, however, overlap with policies in Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Reasonability, a progressive budget plan released by Our Fiscal Security (OFS), a partnership of The Century Foundation, Demos, and the Economic Policy Institute (see Fieldhouse and Thiess 2010).

2. In addition to drawing from The People’s Budget: A technical analysis (Fieldhouse 2011a), analysis of certain progressive revenue proposals has been drawn from For Joint Select Committee, many good options: Progressive revenue proposals would narrow budget gap by trillions (Fieldhouse 2011b), EPI’s analysis of Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction (OMB 2011a), and supplemental revenue options.

3. The CBO’s current law baseline assumes that supplemental OCO spending grows with inflation.

4. These policy adjustments are found in Tables 1–6 of CBO’s January 2012 Budget and Economic Outlook (CBO 2012b). Specifically, the number of troops deployed in overseas military operations is assumed to be reduced to 45,000 by 2015 (resulting in $838 billion in primary spending reduction). Additionally, removing the automatic Budget Control Act sequester cuts increases primary spending by $984.5 billion, the “doc fix” increases primary spending by $325.5 billion, maintaining the AMT patch reduces revenue by $813.1 billion, continuing individual income and estate tax provisions reduces revenue by $4.6 trillion (which includes the ARRA expansion of refundable credits), and maintaining the business tax extenders reduces revenue by $850.8 billion (all over FY2012–22). Debt service is adjusted accordingly, increasing interest outlays by $1.1 trillion. The only temporary tax provision assumed to expire is the two-percentage-point employee-side payroll tax cut, which is scheduled to expire at the end of 2012.

5. The current policy baseline assumes that only the second phase sequestration cuts do not occur.

6. Function tables for the CBO March 2012 Updated Budget Projections: Fiscal Years 2012 to 2022 (CBO 2012a) were provided by House Budget Committee minority staff. The scheduled mandatory sequestration cuts include $117 billion from Medicare (budget authority, not outlays) and $48 billion from other non-exempt programs (CBO 2012b).

7. Without the AMT patch, the reach of the tax expands because the AMT was not indexed for inflation and because the George W. Bush-era income tax cuts reduced individual income tax liability without correspondingly adjusting the AMT.

8. This is measured by the change from the fourth quarter of the previous calendar year.

9. The score for FY2022 is extrapolated from the FY2012–21 budget window using CBO’s projections for CPI-U (CBO 2012b).

10. See Department of Transportation, p. 121 (OMB 2011b), for a full description of the administration’s proposed FY2012 surface transportation reauthorization bill.

11. All programs that spend out of the Highway Trust Fund have budget authority (BA) defined as mandatory, but outlays are characterized as discretionary.

12. H.R. 2914 would allocate $113.5 billion in each of FY2012 and FY2013, but the timeframe for the Emergency Jobs to Restore the American Dream Act bill has been shifted in the Budget for All to allow for more feasible implementation halfway into FY2012. Other than the timing of grants, the legislation is unaltered. Adjusting from calendar years to fiscal years, the proposal as modified for the Budget for All would increase outlays by $85.1 billion in FY2012, $113.5 billion in FY2013, and $28.4 billion in FY2014 (see Table 2). EPI recently estimated that the original bill would increase nonfarm payroll employment by 1.1 million jobs in FY2012 and 1.1 million jobs in FY2013 (see Fieldhouse and Thiess 2011). In line with those estimates, Rep. Schakowsky’s staff estimates that the bill would support two million jobs.

13. The MWP credit was reduced (i.e., phased out) by 2 percent of adjusted gross income (AGI) above $75,000 ($150,000 for joint filers).

14. This estimate is based on the Urban-Brookings Tax Policy Center’s analysis of Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility (Fieldhouse and Thiess 2010) as adapted and independently scored for the Solutions Initiative and funded by the Peter G. Peterson Foundation. The Peterson Foundation convened organizations with a variety of perspectives to develop plans addressing the nation’s fiscal challenges. The American Enterprise Institute, the Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, the Heritage Foundation, and the Roosevelt Institute Campus Network each received grants. All organizations had discretion and the independence to develop their own goals and propose comprehensive solutions. The Peterson Foundation’s involvement with this project does not represent endorsement of any plan. The final plans developed by all six organizations were presented as part of the Peterson Foundation’s second annual Fiscal Summit in May 2011.

15. See the Treasury Department’s FY2013 Green Book, pp. 27–33, for a full explanation of the administration’s proposal (Department of the Treasury 2012).

16. While the Budget for All is a proposal for the FY2013–22 budget window, certain policies—particularly job creation policies—have been proposed for the current fiscal year (FY2012). The FY2012–22 11-year window is sometimes referenced when budgeting priorities impact FY2012.

17. Congress appropriates budget authority (BA) for discretionary budgeting priorities, but there is a lag in the spendout of these authorized appropriations, known as outlays. Outlays are the relevant variable for economic growth and the budget deficit, and this analysis will focus on discretionary outlays accordingly. Budget authority is referenced on occasion to detail budgeting priorities.

18. Highway trust fund outlays are kept as discretionary outlays instead of being reclassified as mandatory for the sake of historical comparison in these calculations and in Figure E.

19. Discretionary defense outlays in nominal dollars. GDP shares also calculated using nominal dollars. See Table F-4 (CBO 2012b).

20. Function level breakdowns of the CBO March 2012 Updated Budget Projections: Fiscal Years 2012 to 2022 (CBO 2012a) were provided by House Budget Committee minority staff.

21. Funding is measured in BA, not outlays. See CBO (2012b), p. 71, for a year-by-year breakdown of spending on Afghanistan, Iraq, and other war-related activities since 2001.

22. The administration proposes capping OCO funding for FY2013–21 at $450 billion and set the $42.2 billion BA placeholder accordingly.

23. For example, see The Future is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth, p. 8 (Galston and MacGuineas 2010).

24. Similarly, the sequester is not assumed to take effect in the CBO’s Alternative Fiscal Scenarios. See The Budget and Economic Outlook: Fiscal Years 2012 to 2022, p. xiii (CBO 2012b).

25. The CBO baseline also includes a much smaller $155 million reduction in mandatory spending by the Department of Defense (over FY2013–21).

26. This includes $117.3 billion for National Defense (050) and $11.4 billion for International Affairs (150).

27. Congressional Research Service experts assessed that a similar policy of maintaining baseline funding for one fiscal year in the Congressional Progressive Caucus Budget Alternative for Fiscal Year 2012 (the People’s Budget) would be more than sufficient to ensure safe and deliberate withdrawal from Afghanistan and Iraq. See The People’s Budget: A technical analysis, p. 11 (Fieldhouse 2011a).

28. The administration’s proposals in the FY2013 budget lack specificity (see pp. 111–12 in OMB 2012b). The descriptions listed are from the more specific policy proposals in Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction (see p. 41 in OMB 2011a).

29. These professional services businesses include those related to health, lobbying, financial services, consulting, accounting, law, engineering, architecture, performing arts, and athletics.

30. There is no year-by-year score of this proposed 2010 act, so we assume the low end of JCT’s estimate ($15 billion) and hold annual savings constant in real dollars. The source for this is a November 22, 2010, letter to Rep. Dennis Kucinich (D-Ohio) that is not publicly available.

31. Specifically, $1 billion is allocated for FY2013, and funding is adjusted for inflation thereafter. Fair Elections Now estimates that the bill could cost between $700 million and $850 million annually—the $1 billion dedicated real funding stream is meant to be slightly conservative (Fair Elections Now 2012).

32. We simply shift CBO’s score from the FY2008–17 budget window to the FY2013–22 budget window. The Budget for All assumes no increase in spending subject to appropriations specifically for comprehensive immigration reform. See Table 2 for the allocation of public investments and increases in non-defense discretionary spending.

33. The statutory 6.2 percent rate is offset by a credit of 5.4 percentage points for states with no delinquent loans, for a net tax rate of 0.8 percent. The statutory rate would be reduced to 5.78 percent, for a net rate of 0.38 percent.

34. Administrative costs do not fluctuate with commodity prices (which have risen recently, driving up premiums), and this reform will not impede administration or delivery of crop insurance.

35. The savings from lowering the crop insurance premium to 50 percent are added to the president’s savings, less the $3.3 billion in savings from the more modest crop insurance premium proposals in the president’s budget. The incremental $9.4 billion in savings is distributed proportionately, relative to the proposal in the CBO’s Reducing the Deficit: Spending and Revenue Options, p. 26 (CBO 2011b).

36. See p. 169 (CBO 2011b).

37. The long-range actuarial balance is -2.22 percent of taxable payroll. Eliminating the Social Security cap and not crediting greater benefits along with contribution increases would more than solve the long-term shortfall. Crediting benefits along with contribution increases, which the Budget for All does, would solve around 97 percent of the long-term (i.e., 75-year) shortfall.

38. The income cutoffs for married joint filers in the top marginal tax bracket (TPC 2012b) have been adjusted to February 2012 dollars using CPI-U-RS.

39. TPC distributional analysis is measured in tax units for tax year 2011. Cash income cutoffs are measured in 2011 dollars.

40. For a broader discussion of why it is appropriate to ask the highest-income households to contribute more in taxes, see Fieldhouse and Shapiro (2011).

41. The taxable income cutoffs cited are for the single, married filing jointly, and head of household filing statuses. The income cutoffs would be halved for the married filing jointly status, with the 45 percent rate starting at taxable income above $500,000 and the top 49 percent rate starting at taxable income over $500,000,000. These new brackets would be indexed to inflation beyond 2013.

42. No revenue increase has been scored, however, from retroactively taxing capital gains and dividends as ordinary income for tax year 2012. Unless otherwise specified, all tax changes are assumed to take effect January 1, 2013.

43. See ITEP (2012) for an overview of the ITEP microsimulation model.

44. Due to data limitations, the ITEP microsimulation model scored no revenue effects from the top 48 percent and 49 percent tax brackets, implying a slightly conservative estimate.

45. CTJ’s methodology for estimating behavioral responses (i.e., the elasticity of capital gains realization to capital gains tax rates) can be found in the Appendix to their recent report Policy Options to Raise Revenue (CTJ 2012a).

46. CTJ scored this policy in calendar years, which have been adjusted to fiscal years using a 25-75 split. This score includes all refundable tax credit outlay effects, which total $358.2 billion over FY2013–22 in both the president’s budget request and the Budget for All. Net of these outlay effects (which are scored as mandatory outlays in the Budget for All), these policies would result in $1.8 trillion of revenue loss over the ten-year budget window. Over the ten-year window, outlay effects from maintaining certain Bush-era income tax changes include $48.1 billion for maintaining the 10 percent tax bracket, $4.1 billion for expanding the 15 percent rate bracket and standard deduction for married couples filing jointly (i.e., marriage penalty relief), $34 billion for expanding the EITC, $139 billion for increasing the child tax credit to $1,000, $1.8 billion for maintaining the dependent care tax credit, and $0.4 billion for maintaining the adoption tax credit. Outlay effects from maintaining the ARRA expansion of refundable tax credits include $13.7 billion for maintaining the third EITC tier for larger families, $86.2 billion for lowering the $3,000 earnings threshold for the refundable portion of the child tax credit, $3.9 billion for expanding the child and dependent care tax credit, and $27 billion for maintaining the AOTC. See footnote 2 of the Joint Committee on Taxation’s re-estimate of the president’s budget request for fiscal year 2013 (JCT 2012).

47. The ARRA expansion of refundable tax credits is excluded from the cost of the Bush-era tax cuts but included in President Obama’s tax proposal and the Budget for All.

48. Under current law (i.e., assuming the Bush-era income tax cuts expire as schedule on January 1, 2013), CTJ estimates that repealing the capital gains preference in itself would raise $533 billion over the next decade (CTJ 2012a).

49. See the Treasury Department’s FY2013 Green Book, pp. 73–74, for a full explanation of the administration’s proposal (Department of the Treasury 2012).

50. See Section XI of the Joint Committee on Taxation’s re-estimate of the president’s budget request for fiscal year 2013 (JCT 2012).

51. Multinationals are currently able to deduct some of the interest cost related to deferred source income from controlled foreign subsidiaries not subject to U.S. taxation.

52. Excessive transfer pricing of intangible assets to controlled foreign companies would be treated as Subpart F income subject to taxation regardless of whether income is repatriated.

53. See the Treasury Department’s FY2013 Green Book, pp. 85–100, for a full explanation of the administration’s proposals to reform the U.S. international tax system (Department of the Treasury 2012).

54. See Section XIII of the Joint Committee on Taxation’s re-estimate of the president’s budget request for fiscal year 2013 (JCT 2012).

55. See the subsection entitled “Price carbon” later in this working paper.

56. See the Treasury Department’s FY2013 Green Book, pp. 111–124, for a full explanation of the administration’s proposals to eliminate fossil fuel preferences (Department of the Treasury 2012).

57. The JCT score of S. 1375 is not publicly available, so we apportion the cumulative $25 billion revenue increase to hold annual savings constant in real dollars.

58. See the Treasury Department’s FY2013 Green Book, p. 148, for a full explanation of the administration’s proposals to increase certainty with respect to worker classification (Department of the Treasury 2012).

59. See the Treasury Department’s FY2013 Green Book, p. 131, for a full explanation of the administration’s proposal to repeal LCM inventory accounting (Department of the Treasury 2012).

60. This estimate is based on the Urban-Brookings Tax Policy Center’s analysis of Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility, as adapted and independently scored for the Solutions Initiative and funded by the Peter G. Peterson Foundation. See endnote 14.

61. The CBO estimated that a 0.15 percent leverage tax on covered liabilities of banks with assets exceeding $50 billion would raise $70.9 billion over FY2012–21 (CBO 2011a). Extrapolating from this score, such a leverage tax would raise $75.4 billion over FY2013–21. The Budget for All would set the tax rate (and, if needed, tax base) to raise the $90 billion revenue targets in the president’s budget for fiscal year 2011, which is well below the societal cost of the financial crisis. The CBO currently estimates the net taxpayer subsidy of TARP at $34 billion (CBO 2011d).

62. This estimate is based on the Urban-Brookings Tax Policy Center’s analysis of Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility, as adapted and independently scored for the Solutions Initiative and funded by the Peter G. Peterson Foundation. See endnote 14.

63. See the Treasury Department’s FY2013 Green Book, pp. 126–27, for a full explanation of the administration’s proposals to increase certainty with respect to worker classification (Department of the Treasury 2012).

64. For instance, former New York Yankees owner George Steinbrenner, who passed away in 2010, bequeathed an estate worth $1.1 billion. Zero federal tax was paid on this inheritance, whereas estate tax liability would have been closer to $500 million under 2009 parameters and $600 million under 2001 parameters of the estate tax (Wall Street Journal 2010).

65. See Sanders Bill Restores Estate Tax on Billionaires (Sanders 2010).

66. This score is modeled from a June 25, 2010, JCT letter to Sen. Sanders that is not publicly available. JCT estimated that the Responsible Estate Tax Act would result in $191.8 billion in revenue loss over FY2010–20, relative to current law.

67. Of $792.6 billion of targeted job creation measures, $405.9 billion is spent out over FY2012–14. These targeted job creation measures exclude the increase in NDD spending which would also boost employment, but is less front-loaded. In addition to these targeted job creation measures, NDD outlays would increase by $304.1 billion over FY2012–14, relative to the CPC adjusted baseline, compared with an increase of $1.6 trillion over FY2012–22

68. The total spending increase (including debt service) proposed over FY2013–17 totals $1.4 trillion, relative to current law, and $951 billion, relative to current policy.

69. Over FY2018–22, total outlays (including debt service) in the Budget for All are $1.1 trillion higher than under current law, but $9 billion less than under current policy.

70. Cumulative deficits over FY2012–22 are $245 billion higher than under current law and $6.7 trillion lower than under current policy.

71. Debt service is calculated by the CBO’s debt service matrix for the March 2012 baseline.

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Buffett, Warren. 2011. “Stop Coddling the Super-Rich.” New York, N.Y.: The New York Times, August 14. http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=2

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