Another week, another bipartisan report on eliminating the federal budget deficit and trimming the national debt — this one from former Sen. Pete Domenini (R., N.M.) and Democrat Alice Rivlin. Here, from their op-ed published in today’s Washington Post, are the highlights:
To ensure a more robust recovery, we propose a one-year “payroll tax holiday” for 2011, suspending Social Security payroll taxes for employers and employees. We also would phase in the steps to reduce deficits and debt gradually beginning in 2012, so the economy will be strong enough to absorb them.
We would stabilize the debt held by the public at less than 60 percent of gross domestic product, an internationally recognized standard; reduce annual deficits to manageable levels; and balance the “primary” budget (everything other than interest payments) by 2014.
We would dramatically simplify the tax system, establishing individual tax rates of 15 and 27 percent (from the current high of 35), cutting the corporate tax rate to 27 percent (from 35 today), ending most deductions and credits while simplifying the rest, and ensuring that nearly 90 million households no longer have to file returns. To reduce the debt, we would supplement our spending cuts with a 6.5 percent “debt-reduction sales tax.”
We would strengthen Social Security so it can pay benefits for the next 75 years by gradually raising the amount of wages subject to payroll taxes; slightly reducing the growth in benefits for the top 25 percent of beneficiaries; raising the minimum benefit for long-term, low-wage workers; indexing benefits to life expectancy; and changing the calculation of cost-of-living adjustments to better reflect inflation. We would not raise the age at which senior citizens can begin receiving benefits.
We would control health-care costs — the biggest driver of long-term deficits — by reforming Medicare and Medicaid while, starting in 2018, capping and then phasing out the tax exclusion for employer-provided health care. We would reform medical malpractice laws and help address the health costs tied to rising obesity by imposing a tax on high-calorie sodas.
We would freeze domestic discretionary spending for four years and defense spending for five, both at 2011 levels, and then limit their future growth to the rate of growth in the economy.
Finally, we would cap domestic and defense discretionary spending (with tight exceptions for true emergencies) and trigger across-the-board cuts if the caps are breached; enact a strict pay-as-you-go statutory rule for tax cuts or expansions of entitlements; and enact long-term budgets for major entitlements while creating a Fiscal Accountability Commission that would recommend policy changes every five years if entitlements are exceeding their budgets.
At first glance, I don’t like this plan as much as the Bowles-Simpson plan introduced last week. Adding a consumption tax on top of an income tax is a certain recipe for becoming a high-tax nation. History teaches us that the chances of the new, lower income tax rates staying low are poor, and that the sales tax would rise inexorably from the initial 6.5 percent.
It would also take some pretty bulletproof legislation to make sure the sales tax proceeds only went toward debt reduction. And even then, the target for the public debt of 60 percent of GDP would be above historical levels. That makes for a pretty weak target.
There are some similarities between the two proposals, including cuts to farm subsidies and tax deductions. But overall, for now, I think the Bowles-Simpson plan looks like a better starting point.
I also wanted to point out an online tool that illustrates that deficit-cutting is actually pretty easy. It’s on the New York Times’ website, and it offers you a menu of spending cuts and tax hikes to bridge the expected budget gaps in 2015 and 2030.
Even though the spending cuts were rather limited — there’s no option to cut entire federal bureaucracies, for instance — I was able to put the budget in surplus rather painlessly: more than $6.50 in spending cuts for every $1 in additional taxes. And even those additional taxes are more of what I consider a tax reform: the Bowles-Simpson plan for cutting or eliminating deductions and credits while lowering marginal rates.