Final debt commission vote anti-climactic, as three plans released already lay out way forward

Jon Ward | Contributor

President Obama’s deficit commission must appear on the national stage Wednesday and announce something: it may be a proposal approved by a majority of its 18 members, but most money is on an irresolvable split that makes a final product impossible.

So while there will be some drama this week around the outcome of the panel’s deliberations – the commission won’t vote on the report until Friday – it will be in many ways anticlimactic. The real groundwork for what is to come in the months ahead – the hard work of actually making choices when spending cuts and deficit reduction become a necessity – has already been laid by the commission in the past few weeks.

Even if the panel somehow reaches an agreement on a set of proposals, Congress is not bound to take it up. So no matter what, the final report is likely to be disregarded for the most part until the nation’s leaders are forced by an emergency to look to it for answers.

All of this is what commission co-chair Alan Simpson, a former Republican senator from Wyoming, was referring to earlier in November when he said that “it won’t matter whether two of us have signed this or 14 or 18,” referring to the number over votes needed for passage out of the panel.

His prediction was that when the national debt nears the federal limit early next year, requiring Congressional action to raise the ceiling, there will be a “political bloodbath” that will send lawmakers scurrying for ideas like the ones laid out in commission proposals.

That kind of thinking is likely what prompted Simpson and fellow co-chair Erskine Bowles, a former White House chief of staff to President Bill Clinton, to release their own draft plan in early November. The week after that, Rep. Jan Schakowsky, a liberal Illinois Democrat, released her own plan. That was followed one day later by a third proposal from the Bipartisan Policy Center, spearheaded by commission member Alice Rivlin, a former budget director for Clinton, and former Republican Sen. Pete Domenici of New Mexico.

These three plans – the liberal Schakowsky plan, the center-right Rivlin/Domenici plan, and the centrist Bowles/Simpson plan – are the construction material that Simpson predicted will be picked up in the coming months if, in fact, it takes a political or economic crisis to force action in Congress. Rivlin/Domenici and Bowles/Simpson have a number of things in common, while Schakowsky’s plan is a liberal jeremiad that features a large number of new and higher taxes.

Here are the defining elements of the three potential paths forward (click here for a full comparison chart):

1. The size of the federal government is a statistically measured concern in two out of three plans, but not the liberal plan.

Both the Bowles/Simpson and Rivlin/Domenici plans are highly conscious of how high federal spending and revenues are as a percentage of the economy, or gross domestic product. These are the most traditional and reliable markers for how big the federal government is.

Current spending levels are at about 23.6 percent of GDP, according to the Heritage Foundation’s Brian Riedl, which is higher than at any point in U.S. history since World War II. And federal spending is on pace to reach 26.5 percent by 2020.

After World War II, President Harry Truman reduced the size of government from about 40 percent of GDP to 20 percent of GDP. It dipped down to 18 percent under President Dwight Eisenhower, went up above 20 percent under President Jimmy Carter, and went back down to 18 percent under President Bill Clinton.

Under President George W. Bush, the size of government rose from roughly 18 percent to 22 percent, the biggest increase under any president since Franklin Delano Roosevelt.

Bowles/Simpson is a bit more aggressive on this measure. Their plan recommends reducing spending to 21 percent of GDP, and capping federal revenues at the same level. Rivlin/Domenicinsets a goal of reducing spending to 23 percent of GDP by 2020, and a revenues limit of 21.4 percent by 2020.

Both Rivlin/Domenici and Bowles/Simpson also recommend getting the national debt down to 60 percent of the economy, or gross domestic product. The national debt is currently projected to reach 67% of GDP in 2011, 85% by 2020, and 100% by 2024.

Bowles was forceful on this point Tuesday, as are most economists, warning that if the nation’s creditors and global markets deduce that the U.S. is no longer a trustworthy debtor, they will react “quickly and decisively.”

“The nation’s outlook will grow far more ominous if America’s creditors lose confidence in the federal government’s commitment to address its debt problem – which will increase interest rates. A loss of confidence in the markets could also send the value of the dollar plunging overseas, which could trigger runaway inflation and still higher interest rates,” the Rivlin/Domenici plan reads.

“Rising debt and rising interest costs could evolve into a ‘death spiral,’ with the two feeding off one another in an ever-more vicious cycle. No one knows when such a catastrophe might occur, but no prudent nation would put itself at such risk.”

None of these three things – spending, federal revenues, or the national debt – are discussed in relation to their share of the economy in Schakowsky’s plan.

2. Tax deductions and loopholes are firmly in the crosshairs, and the centrist and center-right plans advocate broad tax reform.

All three plans take aim at loopholes and exemptions in the code. Bowles was most exercised at a press conference Tuesday about the $1.1 trillion “tax earmarks” that are in the federal budget each year. But while the Bowles/Simpson and Rivlin/Domenici plans both seek to eliminate all or most of the deductions so that rates can be lowered and the base of taxpayers broadened, the Schakowsky plan is mostly an anti-corporation play that seeks to increase government revenues through taxing the wealthy.

Bowles/Simpson shows $751 billion in savings from 2012 to 2020, while Rivlin/Domenici shows $435 billion in savings during that same period. Schakowsky, meanwhile, has $132 billion in savings in 2015.

Bowles/Simpson and Rivlin/Domenici both phase out or reduce most loopholes but simultaneously lower income and corporate tax rates and shrink the number of tax brackets to three and two, respectively. Schakowsky’s plan has no discussion of lowering rates, however, and would levy a number of new and higher taxes: a 1.5 percent surtax on corporate income, $17 billion in new taxes on executive compensation, and an increase in rates that corporations pay for the use of public resources.

As for closing loopholes, all of Schakowsky’s proposals are aimed at big business and investors.

Schakowsky would limit the deductibility of financial corporate debt interest payments, giving them an after tax credit of 25 percent rather than a pre-tax deduction, and says that would bring in $77 billion. And she would tax dividends from foreign sources, for an estimated revenue increase of $34 billion.

One populist proposal that could gain bipartisan support would be to eliminate the deduction for business meals and entertainment – bringing in $10 billion – though that would raise the issue of similar privileges for government workers and officials which are paid for directly by taxpayer funds.

Bowles/Simpson laid out three tax reform proposals, but the one that has drawn the most attention – which they indicated Tuesday will be in the final product – is the elimination of all deductions, with the tax rates for each bracket going up by a small amount each time you add an exemption back on.

For example, if all deductions and loopholes are gotten rid of, Bowles and Simpson argue that the bottom brackets of 10 and 15 percent, scheduled to combine into one 15 percent bracket if the Bush tax cuts are allowed to expire, could be reduced to 8 percent. The middle two brackets – 25 and 28 percent, scheduled to rise to 28 and 31 percent next year – could be moved down to 14 percent. And the top rates – 33 and 35 percent, scheduled to rise to 36 and 39.6 percent next year – could move down 23 percent.

If you add the child tax credit and the Earned Income Tax Credit back on, the three brackets would move up to 9 percent, 15 percent and 24 percent.

Rivlin/Domenici would make more detailed changes to how individuals can take advantage of deductions for mortgage interest, charitable contributions, and investments. The goal is to make the deductions simpler and more available to people of all incomes, more expedited by changing some from refunds to credits, and to limit them somewhat.

Bowles/Simpson would lower the corporate tax rate, currently among the highest in the industrialized world at 35 percent, to between 26 and 28 percent. Rivlin/Domenici would lower it to 27 percent. Schakowsky would maintain the current rate.

3. Each plan has a renegade revenue raiser.

Look for these one-touch features to see some action in public debate in the coming months, because they’re relatively easy to implement.

The Rivlin/Domenici plan would introduce a 6.5 percent sales and consumption tax, which they labeled a “Debt Reduction Sales Tax.” This is different from a Value Added Tax, or VAT, which increases taxes on goods at every stage of production.

Bowles/Simpson would raise the gasoline tax by 15 cents, gradually, starting in 2013.

Schakowsky wants to increase the estate tax, or death tax. The estate tax was at zero this year but is set to go up to 55 percent on the largest estates, with a bottom threshold exemption of $1 million. Schakowsky would increase the exemption to $3.5 million for individuals and $7 million for couples, but would set the top rate at 65 percent on estates of more than $500 million.

4. Rivlin/Domenici is the most aggressive on entitlements.

All three plans have one thing in common: they would all raise the amount of wages subject to Social Security taxes to 90 percent of income. It is currently at 86 percent but slated to be at 82 percent by 2020, according to Bowles and Simpson. They would also all eliminate the current cap of $106,800, above which no income is taxed.

But Schakowsky would add another tax, a 3 to 4 percent “legacy tax” on the last 10 percent of income not hit by regular social security taxes.

In contrast, Rivlin/Domenici would give a one-year payroll tax holiday, which they said would cost $650 billion but produce 2 to 7 million new jobs, based on a Congressional Budget Office estimate.

Rivlin/Domenici and Bowles/Simpson share a few other things in common: they would both lower annual Cost of Living adjustments by making them more accurately reflective of inflation. The conservative and centrist plans would also boost payments for the poorest elderly citizens, and for the oldest of them as well. And both plans would reduce benefits for the wealthiest recipients.

Bowles/Simpson took a lot of flak for proposing that the retirement age be raised to 68 in 2050 and 69 in 2075.

But that is a trifle compared to what Rivlin/Domenici proposes on Medicare.

The conservative plan advocates an increase in premiums for Part B, which pays for outpatient care, from 25 to 35 percent. But more controversially, it recommends a move away from a government run program to a system where there is private sector competition. Rivlin/Domenici call this a “Premium Support” program, starting in 2018, which would give enrollees access to privately administered plans.

It is part of an ideological assault against the framework for President Obama’s health care overhaul that passed earlier this year. In addition to a move toward a privatized entitlement system, Rivlin/Domenici proposes doing away with the current tax inequity that penalizes those who buy insurance on their own but gives a tax break to those who receive it through their employer.

Schakowsky, for her part, advocates that a deficit plan include a “robust public option,” which would take health care toward total government control and administration.

Bowles/Simpson made one suggestion on Medicare that has drawn notice, proposing to raise patient cost sharing but cap total out of pocket risk. Otherwise their plan said that if the program grows at more than 1 percent of GDP by 2020, the president should be required to submit a plan to reduce that. They threw out a list of changes to Medicare that came from the left and the right.

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Tags : alan simpson bill clinton budget deficit erskine bowles federal government franklin delano roosevelt george w bush government spending harry truman heritage foundation income tax in the united states jan schakowsky jimmy carter jon ward medicare national debt recession tax united states federal budget
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