The Senate Gang of Six’s Budget Plan Aims at Taxes

By :: July 20th, 2011

The Senate’s bipartisan on again/off again Gang of Six has proposed an ambitious tax and spending package that closely follows the plan offered six months ago by the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson.

Their plan is not so much a budget as a framework. In some cases it is quite explicit. In others, it is annoyingly vague. Looking at its five page summary feels something like reviewing house blueprints that sometimes specify the size of the nails and other times show little more than a blank space over the garage.

So, for example, it calls for three individual tax brackets—not two, not four, but three. And it proposes to reduce tax preferences by $1 trillion over 10 years. It vows to trim such hot-button tax breaks as subsidies for health insurance, charitable giving, homeownership, and retirement. How? Well, that is to be determined later. All we know is that these tax breaks should be reformed but not eliminated.

It is also built upon an impenetrable tangle of process rules, multiple baselines, deadlines, and unenforceable instructions to future Congresses. Still, it is a framework for deficit reduction that has bipartisan support—in the Senate at least.  And that is more than anyone else has been able to accomplish.

I don’t mean to be too critical here. After all, it would be beyond foolhardy to try to draft a tax reform bill in the 12 days that are left before the government exceeds its borrowing limit. And with most of Washington (tea party House Republicans excepted) in a mad scramble to reach a deal, any deal, by early August, a budget framework that seems more political than substantive is about the best anyone can expect.

And the overall design of the plan not only makes sense, it has a feeling of inevitability about it. But be warned, the plan’s executive summary mixes and matches baselines so often that it is very hard to follow. Best I can tell, the plan calls for $500 billion in “downpayment” spending cuts and would reduce the deficit by about $3.7 trillion over 10 years. About $1.2 trillion would be new revenues (relative to what the Gang calls a “plausible” baseline), about $760 billion would come from entitlements such as farm subsidies, Medicare, and Medicaid, and the rest from other programs, including both domestic and defense spending.

The plan also brings to a close two fiscal fictions: It ends Congress’ annual game of pretending to cut Medicare physician payments and then, at the last minute, giving the docs a small raise. Congress has been playing this charade for more than a decade and it is past time it ends. It also repeals the Alternative Minimum Tax. While I am a big fan of permanently fixing the AMT, I’d like to know what happens to all those other tax breaks before I jump on the repeal bandwagon.

Will the plan fly? Too soon to tell, especially since it leaves so many questions unanswered.

But President Obama likes it, and so do an increasing number of senators—who at this point would probably vote for the menu at their favorite ribs joint if it would get them out of the debt limit mess.  The House’s tea partiers won’t support it.
After all it still includes a big tax increase (even though the Gang tries to soften the blow by carefully claiming the  Congressional Budget Office would score their plan as a $1.5 trillion tax cut—it’s another baseline thing).

But those hardcore House Rs may be about to cut themselves out of the game. So, just like every other deficit reduction plan that has surfaced over the past month, the fate of this one will be up to mainstream House Republicans and House Democrats. The Rs would have to accept tax increases/new revenues while the Ds would have to swallow cuts in projected Medicare spending and promised Social Security benefits.  Will enough of them buy what the Gang is selling? With polls saying the public has had about enough of Washington foolishness, they just might.