The President’s deficit commission hasn’t released its report yet, but the co-chairs—Erskine Bowles and Alan Simpson—have released their own proposal for how to get our deficit and debt under control over the long-term, while also making us more competitive globally.
The plan would reduce the deficit to 2.2% of GDP by 2015 (it was 9.9% of GDP in 2009), reduce deficit growth between now and 2020 by $3.8 trillion, and reduce debt as a percentage of GDP to 40% by 2037.
So how do they propose we do that? Their proposal has two main parts: reduce spending and increase tax revenue. Let’s take a quick look at how they plan to achieve this.
The Bowles-Simpson proposal includes serious tax reform. Their plan is to eliminate our current tax rates and create three tax brackets—eight percent, fourteen percent, and twenty-six percent. Along with lower tax rates, they would eliminate the Alternative Minimum Tax, the child tax credit and the mortgage interest deduction. For corporations, they would receive a twenty-six percent tax bracket, but the health insurance spending deduction would be eliminated.
This would eliminate $1.1 trillion of “tax expenditures,” e.g. it would increase tax revenues by eliminating deductions.
I certainly like their tax rates—they’re fair, but while they would be eliminating some of the largest deductions we have, they aren’t entirely reforming the tax code. This doesn’t simplify the tax code as much as it needs; our tax code would still be a labyrinth of rules, exceptions and exceptions to exceptions. We need tax reform that eliminates our tax code’s complexity, not merely re-works it to receive more revenue.
Eliminating the mortgage interest deduction is a strong step forward because it is one of the key elements funding an overemphasis on homeownership in the U.S. Removing that subsidy will help with a much needed societal adjustment.
While I do in general support eliminating the health insurance deduction, this must be done as a part of comprehensive healthcare reform—which this proposal is not. That deduction is a central pillar of our current employer-based health insurance system, and removing it without making other adjustments will force families into the individual health insurance market. This should be done in conjunction with something like what Paul Ryan proposed in his Roadmap plan, which would provide a large tax credit for individuals.
The plan calls for revenues to be capped at 21 percent of GDP and spending to be brought down to the same level. This element has angered Democrats, but it isn’t exactly radical—federal outlays were 18.4 percent of GDP in 2000 and 20 percent in 2007. 21 percent is, if anything, a charitable amount.
How do they achieve these spending cuts, though?
There isn’t serious reform here. In essence, their proposal is to hold growth of federal health spending to growth of GDP plus one percent, and they want to do this by paying doctors, healthcare providers and drug companies less, reforming tort law, placing a cap on catastrophic coverage and increasing cost-sharing.
This doesn’t address our actual healthcare problems, which are causing the increase in Medicare spending. We need real healthcare reform, too, not just a plan to pay less for it.
The first element of their Social Security reform is to add a guaranteed minimum benefit for minimum wage workers to ensure they stay above the poverty level. This, of course, doesn’t reduce cost—it increases it. To reduce costs, they are proposing to make the benefits formula more progressive (less benefits for the more well-off); index retirement age to increases in life longevity, so the retirement age would be 68 by 2050; changing the inflation measurement; and capture 90 percent of wages by 2050.
All decent changes, but this will shift Social Security away from how it is presented. No longer will it be a long-term savings plan for individuals, but a more or less direct welfare program. I’m not sure why Democrats are complaining about this proposal—it provides a new guaranteed benefit for the poor and shifts the burden even further toward the well-off.
Discretionary Spending Cuts
The plan would result in $200 billion in discretionary spending cuts by 2015; $100 billion from defense spending and $100 billion from other areas. This includes cutting the federal workforce by 10 percent, eliminating 250,000 contractors, slow growth of foreign aid, and eliminating all earmarks.
Overall, the plan is a serious step forward. Yes, there are elements I disagree with, and there are serious gaps, but this is a real plan that doesn’t shy away from killing sacred cows. Conservatives aren’t happy with tax increases and defense cuts (but, refreshingly, aren’t complaining too strongly); liberals are angry over the spending cap, tax rates and Social Security and Medicare reform; the housing industry loses their mortgage-interest deduction; and the agricultural sector will lose farming subsidies. There’s a lot of ideological and interest groups getting their toes stepped on here, and that’s good to see.
I’m happily surprised at how serious this proposal is. Credit to Bowles and Simpson for being willing to take so much flak for it.