GREENSTEIN: On the deficit, talk is cheap

Mark Twain quipped that everybody complains about the weather but nobody does anything about it. Were he alive today, he might say the same about the budget deficit, about which many lawmakers of both parties are quick to complain but just as quick to dismiss reasonable steps to address it.

When President Obama released his budget blueprint in February, the most pervasive criticism from members of both parties was that it would not reduce projected deficits fast enough or deeply enough. But, as the debate has moved to Capitol Hill, lawmakers of both parties have picked apart many of the specific deficit-reduction measures of Mr. Obama's plan on both the spending and tax sides, while offering little if anything in return.

Congress will not make its final tax and spending decisions for 2010 and beyond until later this year. But if early actions are any indication, Congress will likely do less well than the president on the deficit front, due in no small part to actions by some of the same Senate and House members who decry “Obama's deficits.”

Let's start with spending - with farm subsidies in particular. The president proposed scaling back these subsidies, which analysts across the political spectrum have criticized for years. But due to strong, bipartisan opposition from farm-state lawmakers, meaningful savings in this area are not likely to materialize.

The president also proposed to scale back large overpayments to private insurers under “Medicare Advantage,” which covers millions of Medicare beneficiaries, something the Medicare Payment Advisory Commission - Congress' expert bipartisan advisory body on Medicare finances - has unanimously recommended. These insurers receive roughly $1,000 more per beneficiary than it would cost to cover the same people through traditional Medicare.

Eliminating the overpayments would save billions of dollars a year and strengthen Medicare's finances. Yet many members of Congress - including many self-described Republican “fiscal conservatives” - oppose eliminating the overpayments.

In addition, when the president embraced a long-standing Republican idea to require affluent Medicare beneficiaries to pay somewhat more for prescription drugs than less-well-off beneficiaries do, Democrats criticized the idea and the Senate defeated an amendment to the budget resolution to endorse it.

The story is much the same on the tax side.

Take the estate tax, which has shrunk considerably since 2001 and, under current law, would disappear next year. The president proposed to extend the tax permanently at its 2009 level, under which the first $7 million in value of a couple's estate is exempt from taxation. That would exempt from tax the estates of more than 99.7 percent of Americans who die.

Some in Congress, however, propose to further shrink or eliminate the tax, claiming it has a harsh impact on small businesses and farms. This argument is nonsense - the Urban Institute-Brookings Tax Policy Center has found that, under the 2009 rules, only 100 small business and farm estates in the entire nation would owe any estate tax in 2011. All the others will be exempt.

Nevertheless, the argument helped persuade the Senate to endorse raising the exemption to $10 million per couple and weakening the tax in other ways. This new tax break would benefit only the wealthiest 0.25 percent of Americans and would cost nearly $100 billion more than Obama's proposal over the first decade in which its effects would be fully felt, 2012-21. Although proponents used small businesses and farm estates as poster children to sell this amendment, the Tax Policy Center finds that they would receive less than one-half percent of its tax benefits. Wealthy Wall Street investors would be much bigger winners.

Or take Mr. Obama's proposal to let former President George W. Bush's tax cuts expire as scheduled in 2010 for families with incomes above $250,000.

Here, too, critics claim the proposal would cripple small business. History shows otherwise.

Under former President Bill Clinton, when the tax treatment of high-income families was similar to what Mr. Obama has proposed, small businesses created jobs at twice the rate as in the Bush years. Small-business employment rose by an average of 2.3 percent (756,000 jobs) per year under Mr. Clinton, compared with just 1 percent (367,000 jobs) under Mr. Bush, before the current recession started.

Nevertheless, the Senate voted to permanently extend the Bush tax cuts for people at the very top as long as they could claim a certain amount of “small business” income. That would likely create a new industry of tax-avoidance schemes through which high-income taxpayers devise ways to reclassify their income as “small business” income.

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