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Introducing Newt Gingrich's 2-2-2 Plan

December 8, 2011

If nothing else, former House Speaker and new GOP front-runner Newt Gingrich is all about keeping his options open. After all, Newt has gone through three religions and three wives. As it turns out, when it comes to Medicare, Social Security and the tax code, President Gingrich wants Americans to have options as well. In each case, Gingrich is offering voters a choice between the current system and a new one. Call it the 2-2-2 Plan. Of course, whatever you name it, the result the same: Newt Gingrich would deliver yet another massive windfall for the wealthy while draining trillions from the U.S. Treasury.
Gingrich's scheme for a budget-busting payout for the gilded class starts with his tax reform proposal. Like Rick Perry, taxpayers could choose to pay an optional flat tax rate (15 percent in Newt's case, 20 percent in Perry's proposal). The corporate tax rate would be slashed from 35 percent to 12.5 percent. Like, Perry, Gingrich would eliminate the capital gains tax altogether. (As the Washington Post recently explained the impact of the already historically low 15% capital gains tax rate, "Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.")
But as Suzy Khimm documented in the Washington Post, Gingrich's plan would produce an ever larger payday for the upper class than Rick Perry, while ensuring Treasury hemorrhages even more red ink:

Gingrich preserves deductions for corporations and rich individuals that Perry eliminates: He preserve deductions for charitable giving and mortgage interest to all Americans, whereas Perry only keeps them for families earning less than $500,000. Perry vows to eliminate all corporate tax deductions, while Gingrich would preserve them. As such, corporations and the richest Americans could stand to benefit even more under Gingrich's plan than Perry's.
Under Perry's plan, those with more than a million in income would save $500,000 in taxes by 2015, due to a 60 percent drop in their tax rate, and those benefits would be even bigger under Gingrich. According to the Tax Policy Center, Perry's plan would lower total projected government revenue by 27 percent--a $1 trillion loss in 2015 alone. Gingrich's plan, accordingly, would result in even bigger revenue loss.

Roberton Williams of the Tax Policy Center concurred with that assessment, concluding, "You would have about three-quarters of the revenue you would have under Perry, so you have a much bigger revenue hole."

On Social Security, too, a President Gingrich could unleash torrents of red ink for Uncle Sam. As the Wall Street Journal explained, Gingrich is just the latest Republican to call for the privatization of the nation's retirement security program:

Mr. Gingrich wants to let younger workers divert the 6.2% employee half of the Social Security payroll tax into private accounts, much like 401(k)s...The Gingrich accounts would be voluntary, allowing anyone to remain on traditional pay-as-you-go Social Security.

As it turns out, Gingrich's Social Security scheme introduces two threats - one familiar, one new -to the federal government's fiscal health. By allowing younger workers to contribute a portion of their payrolls taxes to private accounts, Gingrich would necessarily rob the Social Security system of trillions needed to pay current beneficiaries. As Matthew Yglesias described the problem for Newt and other would-be Republican reformers:

What privatizers want to say is that current retirees will keep getting benefits and future retirees will be okay despite our lack of benefits because we'll have private accounts. But current retirees can't get benefits if my money is in a private account. And my account can't be funded if I'm paying benefits for current retirees.

But Gingrich's proposal creates a second, more sinister risk for the U.S. budget. Gingrich would, as the Brookings Institution put it bluntly, "privatize gains, socialize losses." ThinkProgress explained that "should private accounts fail to deliver the same return as minimum Social Security benefits, the government would step in and make investors whole again":

The government guarantees that all workers with personal accounts will receive at least as much in retirement as they would under the current Social Security system. If someone with a personal account retires with benefits lower than those offered by the current system, the Treasury will send them a check to make up the difference. Thus, there is a legal government obligation that in a worst case scenario a retiree will be able to enjoy benefits at least as good as they would under the e traditional Social Security system.

Gingrich's scheme may have been inspired in Chile, but the moral hazard it creates in the form of government bailouts for bad investors would be all American.
On Medicare, too, Newt Gingrich wants to offer millions of American seniors a choice. They can stay in the current guaranteed insurance program or, as TPM explained, "purchase private insurance with a voucher":

Under Gingrich's proposal, Medicare won't be just another plan competing with the premium support system that seniors can purchase with a voucher, but a whole separate system in and of itself. If seniors think it's more generous and dependable than the private system, they can stick with it, period, making it tougher to keep costs down but also making it less disruptive for those who are used to the old system.

As the Wall Street Journal pointed out, "Mr. Gingrich's plan is merely a gloss on Medicare Advantage." As it turns out, per beneficiary costs for Medicare haven't only risen 40 percent more slowly than private insurance. As Ezra Klein pointed out in June, history already provides a guide with the private Medicare Advantage option currently chosen by 15 percent of today's beneficiaries

This isn't the first time we've tried to let private insurers into Medicare to work their magic. The Medicare Advantage program, which invited private insurers to offer managed-care options to Medicare beneficiaries, was expected to save money, but it ended up costing about 120 percent of what Medicare costs.

All in all, under Newt Gingrich's 2-2-2 Plan the rich would get much richer and the U.S. Treasury much poorer. That's an option the United States simply can't afford.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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