Democratic presidential candidate Hillary Clinton has proposed a change in the top capital gains tax rates. Under current law, such capital gains have a two-tiered structure: short-term gains face a top rate of 43.4...
- Details on the Different Debt Ceiling Plans
Details on the Different Debt Ceiling Plans
By law, the national debt of the United States cannot exceed $14.294 trillion dollars, which it reached on May 16. This limit is set by Congress and is usually referred to as the debt ceiling. A law setting an overall hard limit on the amount the federal government can borrow was first established in 1917 and was originally $11.5 billion dollars; Congress has obviously raised the limit a number of times over the past century since.
In the past, increasing the debt ceiling was a relatively routine procedure that Congress performed once or twice a year, sometimes with some political theatre criticizing congressional and presidential irresponsibility. However, the current House of Representatives has a particularly high number of strong fiscal conservatives and has shown itself unwilling to raise the ceiling beyond the current $14.294 trillion dollars, either not at all or without some strong concessions that may address historically large deficits. The Treasury cannot borrow beyond this limit, and has relied on borrowing off-the-books against federal pension funds and other programs since May 16. However, on or about August 2, this source runs out, and the federal government will be unable to pay all of its bills without additional borrowing, and may eventually be forced to default on some of its obligations. It's unclear what will happen then - predictions range from nothing at all to economic Armageddon.
The current crisis is centered on disagreements over whether any debt limit increase should be tied to a deficit reduction deal, and if so, how large that reduction should be, and whether it is composed of only spending cuts or also includes revenue increases.
Here are some possible outcomes:
1. Congress and the President make a deal
There are a variety of approaches that have been proposed, which I'll summarize here:
a)"Cut, Cap, and Balance." This is the plan favored by the Republican Study Committee and many of the more conservative House freshmen, and has already passed the House. It would cut the federal deficit in half as soon as the next fiscal year, accomplished entirely through spending cuts, and limits future spending to 18% of GDP. It also requires the House and the Senate to vote on a Balanced Budget Amendment to the Constitution by the end of the year. Despite its success in the House, the plan was tabled by the Democratic-controlled Senate and is unlikely to pass, and President Obama has indicated that he would veto it should it reach his desk. The plan also introduces a supermajority requirement to pass tax increases, which critics charge will make the deficit worse.
b)The Coburn Plan. Sen. Tom Coburn (R-OK) has introduced legislation which raises the debt ceiling, in return for reducing the deficit by $9 trillion over the next ten years (or an average of $900 billion a year)-by far, the most far reaching and dramatic proposal. $1 trillion of that $9 trillion comes from new revenue generated by eliminating certain tax expenditures, and the other $8 trillion is spending cuts, of which $2.6 trillion comes from Medicare and Medicaid changes, and another $1 trillion comes from the defense budget. A significant number of House members oppose any revenue increases (even if they come from eliminating tax expenditures), and political reluctance to reduce spending for Medicare, Medicaid, and defense cuts, make it a plan that has something in it for everyone to hate and unlikely to pass in the near term.
c)The McConnell Plan. This approach, proposed by Sen. Mitch McConnell (R-KY) and receiving heavy criticism for its political nature, establishes in law a procedure by which the debt ceiling can be raised over the next couple of years. First, the president submits to Congress a formal request to raise the ceiling. Congress then votes to approve or disapprove the request, but the President is allowed to veto Congress's disapproval and raise the debt ceiling anyway. Democrats dislike it as it is designed to embarrass them politically during an election year, and conservative Republicans do not like it as it does not reduce the deficit.
d)The Reid Plan and the Boehner Plan. These two competing plans are the most recent attempts at a compromise and are actually more similar than many people realize. Both are composed entirely of spending cuts rather than tax increases, and are similar in size and scope. My colleague Ryan Rosso has a post up explaining their similarities and differences, but the main difference is with the politics and the timing: Boehner's plan raises the debt limit in two steps and requires a second vote prior to the next presidential election, whereas Reid's plan raises the limit enough to get us past 2012. Reid also counts savings from winding down operations in Afghanistan and Iraq, while Boehner refuses to count such a wind-down as savings since it will happen anyway. Boehner's plan looks as if it will pass the House, but its prospects after that are uncertain.
e)Some other compromise. President Obama has expressed his desire for a "balanced approach" that includes both spending cuts and revenue increases, but a sticking point is a number of Republicans that have taken a firm stand against any proposal that includes tax hikes. If history is any guide, unusual events can lead to unusual congressional actions. For example, during the 2008 financial crisis, the House initially rejected the bank bailout bill, but after the Dow Jones average dropped 777 points the next day, Congress reversed course and passed the same bill only a few days later. Other possibilities might involve abolishing the debt ceiling entirely, exempting Social Security from the debt limit (which would provide a few trillion in breathing room), or reinstating the president's power to impound appropriated funds. Critics of the debt limit argue that it is redundant to require Congress to approve borrowing to pay for spending it has already approved, and that creates uncertainty and makes it ineffective in reducing spending.
2. The Validity of Public Debt Clause. Section 4 of the 14th amendment states that "The validity of the public debt of the United States, authorized by law... shall not be questioned." Some commentators have argued that this clause makes any default unconstitutional and renders the debt ceiling meaningless. Under this theory, President Obama could instruct the Treasury to borrow above the limit by making the argument that the Constitution requires it. Most experts, however, are skeptical of this line of reasoning, and the White House has ruled it out of consideration.
3. Default. Opinions differ on how catastrophic a default would be but it is important to realize that "default" can happen on a number of obligations and not necessarily for interest payments on the federal debt (something which might truly cause economic Armageddon). Tax revenue comes into the Treasury year-round and, while not nearly enough to pay for the entire cost of government, can still pay for a significant portion of it. The government may have the leeway to prioritize certain payments over others (although this is disputed), but if they could, interest payments could be prioritized over other spending. The practical effect of default is likely to be similar to a government shutdown: among other things, nonessential government employees will stay home (or be paid in IOUs) until the crisis is resolved.
4. More exotic solutions. There's no shortage of creative ideas floating around. One solution involves the U.S. Treasury minting trillion-dollar coins, which it technically has the authority to do. Such a move is not likely to be politically popular.
Join the Tax Foundation's fight for sound tax policy Go
Tax Policy Blog
The official weblog of the Tax Foundation.
Tax By State
For information on your state, select it from the drop-down menu.
Ask a Tax Expert
Contact information for Tax Foundation policy staff Ask