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What's on the menu? US long-term debt scenarios
Net debt to GDP, percent
[Chart showing trends projected from 2010 to 2021]
Labels on chart: Reid-McConnell, Phase I; CBO Alternative Case; Reid Plan; Pres. Budget; Boehner 1 Plan; CBO Baseline; Gang of Six

[Text associated with chart lines]
All tax cuts extended; AMT indexed to inflation; no Medicare reimbursement cuts
Cuts to discretionary and entitlement spending
Defense cuts, discretionary spending reductions
Top two brackets return to 2001 levels; phase-out of itemized deductions; some discretionary spending cuts; Medicare reimbursement freeze
Discretionary and entitlement cuts (CPI chain weighting), limit on itemized deductions, "bracket creep" (faster migration to higher tax brackets)
All tax cuts return to 2001 levels; AMT no longer indexed to inflation; Medicare reimbursement cuts to Doctors proceed as planned
Tax rates lowered, combined with reduction in deductions to generate net tax revenue increase; cuts to discretionary and entitlement spending

Source: CBO, news reports, Gang of Six proposal, J.P. Morgan Private Bank.

I have a feeling that revenue increases will be a material (e.g., 25% or more) part of the deal. The Peterson Foundation’s sampling of 6 policy groups shown below indicate that 5 of 6 recommend revenue increases compared to where we are today; the Heritage Foundation’s “Woody Guthrie Memorial Budget Plan” is the only exception. What kind of revenue increases? Raising the top two brackets, which would affect joint filers with adjusted gross incomes above $212,300, would raise $450-$700 billion over 10 years (depending on whether you use OMB or CBO numbers). If they cannot agree to raise rates, another option (as in the Gang of Six plan) would be reductions in the deductibility of state and local taxes, sales taxes, mortgage interest, etc. As this gets sorted out, let’s hope everyone recognizes that the US tax system is already progressive. As shown in the chart below, effective Federal tax rates for low earners have dropped to zero over the last decade, even after including FICA taxes. News reports that the US tax system is regressive make me want to throw hamburgers at the screen.

[Table: Revenues and Spending as a % of GDP]
Fiscal year 2011 | Revenues 15.3% | Spending 24.1%
Fiscal years 1950-1969 | Revenues 17.5% | Spending 18.1%
Fiscal years 1970-2010 | Revenues 18.0% | Spending 20.8%

Estimates for 2035:
CBO alternative case | 19.5% | 33.9%
American Enterprise | 19.9% | 22.8%
Bipartisan Policy Center | 23.1% | 23.7%
Center for Am. Progress | 23.8% | 23.2%
Economic Policy Institute | 24.1% | 27.8%
Heritage Foundation | 18.5% | 17.7%
Roosevelt Institute | 22.9% | 24.8%
Source: OMB, CBO, Peterson Foundation 2011 Fiscal Summit.

[Chart: What a progressive income tax system looks like]
Combined effective federal income and FICA tax rates
[Graph lines for High earners, Median earners, Low earners from 1955 to 2010]
Source: Tax Policy Center.

Europe: Finally (!!), but now what?
For the first time since 2009, it felt last week like European policymakers were trying to get out in front of things. In exchange for a modest amount of “private sector involvement”, Germany agreed to more generous financing terms for Greece, Ireland and Portugal, and an expanded role for the EU-IMF lending facility (see following page). What would the plan accomplish if implemented? While Greek debt to GDP ratios would remain well over 125% of GDP (the IMF estimate for next year is a ridiculous 170%), Greece’s near-term financing obligations would decline, due to debt buybacks, exchanges into long maturity bonds, and interest grace periods on new EU loans. More broadly, the plan also allows for money to be lent to countries before they enter into an IMF program, for recapitalization of banks. All things considered, it’s the broadest defense of the Monetary Union so far. On paper, it even looks like a free ride for holders of Greek paper that don’t participate in the debt exchanges (they would be paid at par). So, what’s not to like? Well, there are still questions about Greece:
** There’s a big difference between generous financing terms and generous economic terms. Greece must still meet an enormous 5%-6% primary budget surplus target (government revenues less spending, pre-interest) during a recession
** Greece must execute on its asset sale targets, despite having little success or experience doing this in the past

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