Dec. 2, 2012
To: Sen. Harry Reid, majority leader
Sen. Mitch McConnell, minority leader
Rep. John Boehner, speaker
Rep. Eric Cantor, majority leader
Rep. Nancy Pelosi, minority leader
You, lady and gentlemen, are negotiating the most important fiscal roadmap the United States has had to draw up in a century or more. Our future economic prosperity rides on what you do. You will be judged by history and the voters on your performance in this negotiation as on nothing you have previously done in public life.
As background for these negotiations, I offer the following primer:
1. Total tax revenue in the United States is lower today as a percentage of gross domestic product than in any of the wealthy northern democracies.
2. The federal government now taxes earnings from work (through income and payroll taxes) at a higher rate than it taxes investment income and capital gains. Unlike most developed countries, we have no national consumption tax.
3. U.S. businesses pay on average an effective tax rate (what they actually pay, not what the "official rate" is) of around 13 percent, about 3 points below the average of the world's northern developed economies, and lowest among the G-7 industrialized democracies.
4. Those Americans who have had their taxes go down the most in recent years are the wealthiest among us. The top 1 percent of taxpayers paid an effective average federal income tax rate of about 23 percent in 2008, about one-third less than what they actually paid in 1980, although their incomes grew in both real and relative terms since then.
5. The U.S. defense budget is larger than the military budgets of the next 14 biggest spenders combined. This conveys a rough sense of how much more we spend on defense than other countries, both absolutely and proportionately, and suggests there is room for prudent reductions.
And beyond that background, here are a few ideas I hope you'll keep in mind:
A good agreement among you will have three elements -- not just revenue and cuts, but also an investment component. We need to grow and to build, not just tax and diet.
Make sure to figure out how your agreement will affect state and local governments. They represent 15 percent of our GDP and employment. Senior officials in both Congress and the executive branch confirm privately that they normally pay little attention to the impact on local governments when shaping federal fiscal policy. The package you produce needs to encourage state and local stability, not force them into layoffs and cuts that will worsen the recession. For example: Tell any state that can slow the increase in Medicaid spending to 3 percent or less per year that it can keep half of the money saved vs. the rate Medicaid spending increased nationally the previous year.
Also on health, remember it is the growth in spending on Medicaid and Medicare that most needs to be slowed down. The recent penalties for hospitals admitting as many as one in five patients for a second time within a month of release is an example of the kind of measures that can incentivize cost-limiting behavior without sacrificing quality of care.
Tell the president you want him to find a federal job for any member of Congress who votes for the package and is defeated in 2014 because of that vote. If Abraham Lincoln did it, you and President Barack Obama can do it too.
And here's one other daring idea: Keep a list of all the breaks and gimmicks that lobbyists for special interests propose and then make them public at the end of the process. Let citizens see which ones wanted to feather their own nests and how they proposed to do it. And show us at this critical moment that you resisted private gain in favor of the public good.