Deficit Panel Co-Chair Plan Is Tough, Creative, and Credible, But What Next?

The co-chairs of President Obama’s much-maligned bipartisan fiscal commission have proposed a remarkable plan for both reducing the federal deficit and reforming the tax code. It is remarkable because it's tough, specific, credible, and even creative. On the spending side, it carefully spreads the pain throughout government. And on the tax side, it makes a strong case for reform and presents no less than three ways to get there.

The question, of course, is what will happen to this draft, proposed by panel co-chairs Erskine Bowles—who was chief of staff to President Clinton– and Alan Simpson—formerly a Republican Senator from Wyoming. Several of the commission’s own members already have expressed doubts about whether the group can reach consensus. Fourteen of the panel’s 18 members must agree to a plan before it can be sent to Capitol Hill for consideration.

Overall, the chairs propose $1 in new revenues for each $3 in spending cuts (a ratio similar to what Britain is considering). Given today’s sluggish economy, their changes would begin to bite in 2012, and they would eventually aim for balancing both spending and tax revenues at about 21 percent of Gross Domestic Product. The spending target may be a bit low given the needs of an aging population and the challenges of controlling health costs but it is certainly in the ballpark. The plan would stabilize the national debt by 2014 and reduce it to 40 percent of GDP by 2037—about half of today’s level.

I’ll put aside the spending proposals for now and focus on the Bowles-Simpson tax plan.

They are proposing a 1986-like reform aimed at broadening the tax base and dramatically lowering rates. It probably disappoints some by eschewing hot-button ideas such as a full-blown consumption tax or a broad-based energy tax (although it would raise gas taxes).

However, the plan will be plenty controversial. To start, it would raise about $750 billion in new revenues over 10 years and would tax capital gains and dividends as ordinary income. Either idea is enough to give conservatives apoplexy. Combined…I don’t even want to think about it. But Bowles and Simpson don’t stop there. They'd also curb a wide range of tax subsidies including the mortgage interest deduction and the exclusion for employee-sponsored health insurance.

Bowles and Simpson suggest three, um, roadmaps for getting there. One is the tax reform plan offered earlier this year by senators Ron Wyden (D-OR) and Judd Gregg (R-NH). Their proposal would reduce rates to 15, 25, and 35 percent, while repealing some tax expenditures and limiting others. They’d also eliminate some business subsidies while cutting the corporate rate from 35 percent to 26 percent. A second option would cap the benefit of all individual and business tax subsidies at about 85 percent if reform is not enacted by 2013.

But my favorite idea is zero-based tax reform. Start by eliminating all tax expenditures and sharply lowering rates to 8, 14, and 23 percent. Then, force Congress to raise rates should it choose to restore specific targeted tax subsidies. This strategy, in some respects, echoes the experience of the 1986 tax reform.

To be candid, this proposal is so provocative it almost seems as if Bowles and Simpson realize they have no chance of building consensus on their own commission. As a result, they may have decided to take their best shot now rather than watch their plan get nibbled to death. If so, it may not have been a bad idea. The fiscal panel may fade away in shame, but I have a feeling this plan may live on.