Higher taxes, more spending, deep defense cuts — how is Bowles-Simpson a compromise?

J.D. Foster Contributor
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President Obama created the Bowles-Simpson deficit reduction panel to devise a plan to deal with America’s disastrous fiscal situation. This is a difficult, largely thankless, and absolutely necessary task.  We face two options: Either we effect a major course correction before a fiscal crisis besets the nation or we endure such a crisis. Obviously, before is better.

The two co-chairs, former Clinton Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, did a creditable job. Yes, the ultimate product is fatally flawed. The evisceration of the military implied by the plan is completely unacceptable, grossly irresponsible, and dangerous. But it suggests many worthwhile elements as well. The reforms to Social Security, for example, are especially welcome.

The co-chairs’ exercise in fundamental course correction is complex both substantively and politically. When reforms to tax policy and spending policy are phased in over many years, it can be difficult to grasp the extent of the changes. One way to get a handle on this is to imagine how the economy would look if the entire package were already in law going into 2011.

Such a what-if exercise is admittedly speculative. For example, the co-chairs propose to eliminate the home mortgage deduction. Even in a healthy housing sector, the resultant downward pressure on housing values would be profound. But one can only speculate as to their size.

Other aspects are certain. For example, taxes rise dramatically under the plan. The exact means by which this comes about are not immediately obvious because the co-chairs play some of the usual games with the revenue baseline. But, in the end, the details matter less than the bottom line. And the bottom line is that the co-chairs propose to increase federal revenues to 21 percent of GDP, a near 17 percent increase about the historical average level of 18 percent of GDP.

What exactly does that mean? Federal spending is ultimately constrained by federal revenues. More revenues mean more spending. So this plan cements in place the left’s long-cherished massive expansion of government.

It also means a huge tax hike. The U.S. economy is projected next year to be over $15 trillion.  So a three percentage point hike in share of GDP, if in effect in 2011, would pour an addition $450 billion into the federal kitty in 2011 alone. That’s more than twice the size of the Bush tax cuts.  Based on the administration’s economic forecast, if these tax hikes were already in place they would take an extra $6.6 trillion from taxpayer wallets over the next decade.

The panel’s co-chairs worked hard to develop a compromise solution to address the nation’s fiscal dilemma. The presumption going in was this would require painful concessions from conservatives and liberals to reach an agreement. The Bowles-Simpson play represents a compromise, alright — a compromise between the left and the far left. Rather than let federal spending explode in the coming years, it lets it grow rapidly, despite deep cuts in defense spending. And what keeps fattening the ravenous beast is continuous, massive injections of money raised from tax hikes.

J.D. Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation.