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

By :: November 10th, 2010

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.

15Comments

  1. Anonymous  ::  2:00 pm on November 11th, 2010:

    The biggest problem I have with the tax expenditures reform is not getting rid of the most obvious one, the deductibility of state income taxes. There is no reason the federal government should be subsidizing high state income taxes; people with 200k taxable income should pay the same federal income taxes, whatever state they live in. If the states don't want to have double taxation, they can make the federal tax paid deductible for state taxes. Otherwise, I like the proposal a lot, though I would want them to eventually phase out all of the mortgage tax deduction rather than only that over 500K.

  2. Anonymous  ::  2:29 pm on November 11th, 2010:

    Slide 23, the Zero Plan, says “Eliminate all $1.1 trillion of tax expenditures.” Seems to include the State and Local Deduction. Am I missing something?

  3. Anonymous  ::  6:42 pm on November 11th, 2010:

    Why shouldn't this budget deficit be paid off by long term increased taxation of those who benefited

    from the bailouts and war, in proportion to their benefit?

    Certainly a person who has repeatedly acquired little wealth though

    working ( as every other American to support his family ) will have

    received almost no benefit from having his property protected by a war

    – what tax loss should he suffer compared to other incomes and

    corporations?

    Privileging Capital Gains with a lower tax – while these are exactly

    the people who have received the greatest benefit from war.

    Nor, has this average person received any benefit at all from the

    Financial Industry scandal.

    And they want to “FIX” social security? Who are these jerks in office

    claiming to represent us.

    This plan is garbage!!

  4. Anonymous  ::  6:55 pm on November 11th, 2010:

    Who will be hurt? I mean seriously. The weight of all the fiscal mischief of the last three decades is being put squarely on the shoulders of those least able to bear the weight of it.

    God bless America.

  5. Anonymous  ::  7:05 pm on November 11th, 2010:

    This is certainly tough (on folk they do not care about)but hardly creative or credible. It would not even be passed by their own committee, which is why it was dumped out there without notice or any normal process.

    With only clawback for fraud on the part of all the fraud of only those convicted of defrauding the federal government, to say nothing of those not even challenged, the deficit would disappear overnight, though it might cost some to claw the money out of offshore hiding places like the Caymans, or various places that fund themselves with the gold of Modern Piracy.

    In two years my electric bills alone have doubled, even as I have used less electricity, and the Social Security does not even pay the Mortgage (also up 50% even though a “fixed” rate)but there is no cost of living increase in Social security payments.

    So the way to pay off the deficit is to take more from folk who have little or nothing? Quite aside from the Humanitarian grounds the best place to get the money is where the money is instead of where it is not, and the Gang Of Pirates have got nearly all of it, so that is the best place to get it back from!

  6. Anonymous  ::  7:09 pm on November 11th, 2010:

    Once again, I always find it interesting that Anytime someone(Commission) makes suggestions for reducing the deficit, it ALWAYS includes reductions to the Corporate tax rate. It's just another shell game that, if it passes, will be balanced on those in society least capable of bearing the impact.

    It's funny how every time we acquiesce to Corporate America's demands NOTHING seems to trickle down. People really need to wake-up and realize that voting for the Republican/Corporate mantra is NOT in their own self-interest, regardless of how many fear-mongering,propaganda ads they view.

    Some how I doubt this is what the Founding Fathers had in mind.

  7. Anonymous  ::  7:15 pm on November 11th, 2010:

    These proposals while heading in the right direction have failed in the single most important respect. The biggest reduction MUST come from reducing expenditures incurred by the Federal Government itself. The first step has to be the complete elimination of ALL Federal pensions. Federal employees should have 401ks where the contributions are provided by deductions from individual salaries just like the private sector. This will eliminate 680 billion dollars PER YEAR. If we combine that by simply mandating a reduction of federal employment levels of 30% across the board and let the remaining employees figure out how to run the Govt on that. We should then create a law to immediately ban all Members of Congress from receiving subsidized health benefits for them and their families and require them to purchase the benefits privately on the open market. I can guarantee that ALL healthcare problems will be fixed by this time next year.

  8. Anonymous  ::  7:43 pm on November 11th, 2010:

    Lower rates do not necessarily mean a tax cut. They're also closing “loopholes”. So we could see the same (or more) total revenue from the corporate income tax, just from different corporations (many would lose their loopholes).

  9. Anonymous  ::  7:56 pm on November 11th, 2010:

    The plan is designed to repair an economy decimated primarily by Wall Street and banks on the backs of seniors and lower income taxpayers. It may be tough on private citizens, creative in that it predictably benefits corporate interests, but only credible if you share their vision of who should pay for it and who should reap the benefits from deficit reduction.

  10. Anonymous  ::  12:44 am on November 12th, 2010:

    If the panel would like to make revenue-neutral reforms to the tax system, that's one thing. It is not the thing that they were asked to do, which is balance the budget in a long-term fashion. Therefore, the idea of cutting spending to pay for tax cuts is a non-starter.

  11. Anonymous  ::  1:02 am on November 12th, 2010:

    Conveniently, my least favorite idea.
    The 1986 reforms were designed to be revenue neutral, where getting more money in turn for spending cuts was their mandate here. I can't support any deficit reduction plan that says, step one, cut taxes for the rich.

  12. Anonymous  ::  6:50 am on November 12th, 2010:

    I'm nowhere close to being an economist but am very curious of the extreme viewpoints taken between the Monitor and the NY Times on this proposal, in particular the column of economist of Paul Krugman. The flavor of the Monitor's article is very favorable of the commision's plan and Krugman sees a disaster. I think it would be a good idea for Monitor reporters to look at what others say about this and at least comment at what could be a really bad outcome if this plan were adopted.

  13. Anonymous  ::  9:01 pm on November 12th, 2010:

    Every ox was gored by this proposal, from the anti-taxers to the defenders of Social Security. Whether this proposal is Dead on Arrival depends on several factors:

    – How China and other bondholding nations respond to continued gridlock. If bond prices crash and people dump our debt or our dollars, something will likely be done fairly quickly.

    – How much these proposals are the result of staff analysis vs. how much they are the result of Commission working groups. If these proposals bubbled up from the bottom, they might not be as dead as people think.

    – Whether the Lame Duck Session passes the $3 Trillion middle class tax cut (the $700 Billion cut on the wealthy is a Republican Party fantasy for which the votes don't exist, even for a temporary extension). If the tax cuts are extended, some portion of the Commission's recommendations must be adopted to avoid another world-wide financial panic. If gridlock reigns in the Lame Duck session, it will certainly reign in the next Congress and no tax cut will be forthcoming – so the Commission's recommendations can safely die.

    I posted a comparision between my suggestions to the Commission and their plan on my blog. Here is what I posted and sent to the Commission on Taxes:

    The Center for Fiscal Equity proposal is not dissimilar in terms of rates, although it would separate spending and taxes into three separate pots. Discretionary spending would be funded by a VAT of 13.3% (as above). In the transition, net incomes would increase by the VAT amount.

    Entitlement spending would be paid for with

    •an expanded business income tax on all businesses (including sole proprietors) on all value added and

    •would start by decreasing gross income to the new net income after the VAT and the employee contribution to Old Age and Survivors Insurance.

    • rates would then be increased to cover the full cost of retirement, but not at the expense of employee wages below their current net income for most employees at the lower end.

    •eliminates the home mortgage deduction and all state tax deductions, transfers Medicaid to the Federal Government and

    • increases the Child Tax Credit to $500 per month per child, makes it refundable and ends the EITC,

    •raising the minimum wage to $12 per hour so that there are no low wage jobs requiring tax benefits to subsidize marginal employers.

    The income tax would be reformed

    •The standard income tax deduction for families would be $100,000 (equivalent to $150,000 before Business Income Tax salary adjustment)

    •Income tax rates ranging from 4% to 28% for every additional $75,000 in family income.

    •Income taxes would fund net interest, debt retirement and overseas diplomatic and security operations and naval sea deployments.

    • Rates could go even higher when it becomes clear that the rich will bear most of the burden of paying the debt back – and if they don't, their children will.

    The Center ignores the gas tax, but agrees that a higher tax is a good idea.

  14. Nelson Gamble  ::  8:51 pm on February 23rd, 2011:

    Debt Settlement Or Bankruptcy? What do YOU think?

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