Paul Krugman's Poor Critique of the Deficit Commission

Paul Krugman was never going to be the head cheerleader for the president's deficit commission, doing somersaults and pumping pompoms for budget cuts. But I didn't expect his negative reaction to be so strident. There's a lot I disagree with in his column, so let's walk through it slowly.

First, he accuses the commission chairmen Erskine Bowles and Alan Simpson of caring more about cutting rates than reducing the deficit. Krugman writes:

The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. "Lower Rates" is the first point; "Reduce the Deficit" is the seventh.

Besides being petty, this is also unfair. The points Krugman is quoting are not the goals of the overall report. They are the goals of one chapter called "Comprehensive Tax Reform," on slide 22 of 50. It's not so scandalous that the goals of tax reform begin with tax reform.

Second, Krugman skewers the tax reforms themselves as an obvious transfer of wealth to the upper-class:

What the co-chairmen are proposing is a mixture of tax cuts and tax increases -- tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans -- the deductibility of health benefits and mortgage interest -- and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

The commission hasn't crunched the numbers to show how this report would change tax burdens, and I would oppose any plan that reverses the progressivity of the tax code. But Krugman's description of the plan's tax reforms are misleading.

He tacitly defends the tax-free status of health benefits and subsidies for expensive homes because the middle class likes them (or at least, he opposes their being stripped out in this plan). He neglects to mention that he supported taxing health care benefits during the debate over the Affordable Care Act. He also neglects to mention that the mortgage interest subsidy, which encourages upper-middle class Americans to take on more debt for bigger homes, represents exactly the kind of transfer of income upward that he criticizes in the report.

Stripping out most of the tax deductions, especially if we make a concerted effort to protect low-income items like the Earned Income Tax Credit and the Child Credit, would almost certainly make the tax code more progressive by giving rich folks fewer places to hide from their tax burden.

tax expenditure breakdown progressive.png
My suspicion is (without the final data, I can't be sure) the final tax plan will be considerably more progressive that Krugman suggests, for two reasons. First, the plan to treat capital gains and dividends as ordinary income will raise the effective tax rate of the richest Americans, who receive a higher share of income in investments that currently fetch lower rates. Second, the proposed tax brackets, at 13, 21, and 28 percent, are all lower than they were under Clinton. This would suggest that every family would pay a lower income rate than they did in 1999.

Third, Krugman criticizes the Social Security reforms, especially the plan to raise the retirement age, which would have the effect of reducing scheduled benefits:

While average life expectancy is indeed rising, it's doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

Social Security is a powerful and necessary program and should be reformed in small, slow, gradual ways. But Krugman fails to mention four things.

-- First, more than 40 percent of the Social Security fix comes from taxing higher income rather than from reducing benefits.

-- Second, this plan creates a new minimum benefit for low-income earners at 125% of the poverty line, which grows over time to 200% of the poverty line to ensure that for even the worst-off, Social Security fulfills its fundamental mission to reduce poverty.

-- Third, it directs the Social Security Administration to assist the early retirement of physical labor workers. We don't know what that means yet, but ideally it would protect working class families from draconian denials of benefits.

--Fourth, the retirement age won't reach 69 until 2075. That's six decades from now. I will be 90 years old. So we shouldn't talk about the age 69 as though it's a rule for today's economy. Compare the late 1940s economy and today, and that's kind of time frame we're talking about.

As I've said before, I have my doubts about this commission report, too. It is, after all, a center-right vision of our nation. But we're not doing anybody a service by cherry-picking quotes and providing incomplete analysis.