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CRFB Makes Recommendations On A US 'Debt Failsafe'

by Mike Godfrey,, Washington

04 May 2011

The United States Committee for a Responsible Federal Budget (CRFB) has looked at the designing of a debt failsafe, or trigger, to fulfil the call by President Obama, as part of his new budget framework, “to hold Washington - and to hold me - accountable and make sure that the debt burden continues to decline".

The President’s debt failsafe, proposed in his deficit reduction framework in mid-April, would kick in with across the board spending and tax expenditure cuts if, by 2014, US public debt as a share of gross domestic product (GDP) were not projected to be declining by 2020. Some programmes, including social security and Medicare benefits, would be exempted, and Obama’s trigger would also include a mechanism to ensure that it does not exacerbate an economic downturn.

Over the past two years, the CRFB said that its Peterson-Pew Commission on Budget Reform (PPCBR) has studied various budget reforms, with a particular focus on targets and triggers. It developed a budget reform framework similar to the President’s proposal, as well as other target and trigger frameworks, including one to help keep an enacted budget deal on track.

The PPCBR, however, has recommended that an actual medium-term target should be set to stabilize publicly-held debt at a reasonable level – it considers a maximum of 60% of GDP by 2018, and that it should be brought closer to historical levels of below 40% of GDP thereafter – and that a trigger be applied immediately, at the time medium-term and annual debt targets are established.

It pointed out that a trigger that is not applied for three or more years would not apply as much immediate pressure on negotiators as one that is made effective sooner. Later application also may encourage policy makers to “back load” budget savings rather than act more quickly to slow debt growth, because they face no immediate punitive automatic adjustments for delay.

Furthermore, the PPCBR has recommended that a trigger should include both revenues and spending and be applied to the broadest base possible, affecting nearly all voters and interests. It had originally recommended a 50-50 divide between spending cuts and revenue increases, but has adapted its recommendations to a 2-to-1 spending cuts to revenue increases ratio.

For example, a percentage surcharge could be applied to the taxes owed by each taxpayer, or an adjustment to income or payroll tax rates. However, the PPCBR has said that, while adjusting rates may be problematic given both the complexity of the tax laws and variations in taxpayers’ circumstances an adjustment to tax rates if applied to all filers would ensure that even many taxpayers in the lowest income tax bracket and those with negative tax liability (taxpayers receiving refundable credits) would feel the effects of a triggered adjustment.

Another option, it has considered is a trigger that, when applied, adjusts tax expenditures. In 2010, revenue losses resulting from tax expenditures were estimated to total over USD1 trillion. A haircut could therefore be applied to the value of all tax expenditures.

TAGS: tax | economics | fiscal policy | budget | United States

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