Deficit panel releases final proposal

posted at 11:35 am on December 1, 2010 by Ed Morrissey

Erskine Bowles and Alan Simpson took their case directly to the public today by releasing the final version of the proposal to reduce the spiraling national debt and deficit spending.  The strategy looks less like a plan to pressure Congress than to pressure the other members of their commission, however, since none of the 12 current members of Congress on the panel have committed to supporting the proposal.  The New York Times reports on the fruits of true bipartisanship (via The Corner):

Among the lawmakers, the Republicans generally oppose the chairmen’s draft plan because of its tax increases for upper-income Americans. The elected Republicans on the panel are SenatorsJudd Gregg of New Hampshire, Tom Coburn of Oklahoma and Michael D. Crapo of Idaho, and Representatives Dave Camp of Michigan, Paul D. Ryan of Wisconsin and Jeb Hensarling of Texas.

The elected Democrats on the commission are resisting the scale of proposed reductions from future health care and Social Security programs, according to people familiar with the discussions. Those Democrats are Senators Richard J. Durbin of Illinois, Max Baucus of Montana and Kent Conrad of North Dakota, and Representatives Jan Schakowsky of Illinois, Xavier Becerra of California, and John M. Spratt Jr. of South Carolina.

While the three House Republicans are said by people involved in the deliberations to be unbending in their opposition to the blueprint developed by the chairmen, the three Senate Republicans are not. Similarly, except for Ms. Schakowsky, the Democratic House and Senate members are said to be still negotiating with one another and the chairmen toward some compromise.

So what exactly is in the plan?  Readers can download their copy from C-SPAN, but the Washington Post gives the highlights in general terms:

It called for sharp cuts in military and domestic spending, and the elimination of more than $1 trillion a year in popular tax breaks, such as the deduction for home mortgage interest and the tax-free treatment of employer-paid health insurance. The final report calls for the elimination or reduction of such loopholes.

The report released Wednesday preserved parts of the original blueprint that took aim at programs for the elderly – the biggest and fastest-growing category of federal spending – advocating higher Medicare premiums and smaller Social Security checks, particularly for the richest 50 percent of retirees.

The plan also calls for raising the retirement age to 69 for today’s toddlers–a proposal that prompted an outcry from liberal lawmakers, organized labor and advocates for the elderly when it was included in the pre-Thanksgiving report.

I’m hoping to get through the entire proposal later tonight, perhaps as an insomnia cure, but none of this sounds either outrageous or surprising.  Raising the retirement age for Medicare and Social Security eligibility should have been done years ago.  The original retirement age for both programs were set at or past the average life expectancy for a good reason — because to do otherwise invites financial ruin.  People live longer and healthier lives and do not need taxpayer support at age 65 any longer, and the systems should recognize that.

The elimination of the two major tax breaks will almost certainly doom this proposal, even though each makes sense in certain contexts.  The ObamaCare debate should have demonstrated by now the market-distorting effect of tax-free employer-provided health insurance, which has kept American workers dependent on employers and less mobile in the marketplace for decades.  However, the elimination of the tax break without real reform in the entire third-party payer system in the US will put those workers at even more risk for financial ruin.  That tax break should only be eliminated if Congress at the same time removes the barriers to interstate sales of health insurance, ends coverage mandates, and strengthens the HSA system — and ObamaCare took the opposite approach, which will make the system even worse as a result.

Similarly, the mortgage tax exemption is another government intervention in the housing and lending markets.  Unfortunately, millions of Americans built that deduction into their current purchases, which means that revoking it should only be done in a revenue-neutral manner.  That would happen if the US adopted a rational flat-tax system, or even a Fair Tax system where people could limit their tax liability by controlling consumption.   The mortgage tax exemption should literally be the last to go in tax reform.  If Congress thought the Tea Party was a serious issue in this last midterm election, just wait until millions of homeowners have thousands more dollars in tax liabilities thanks to this idea of reform.  It simply won’t happen unless Congress eliminates every other deduction and loophole in the tax system.

Under the circumstances, it’s small wonder that no elected official wants to affix his signature to the proposal, no matter how reasonable it might be.   It’s also telling that Bowles and Simpson didn’t write this in legislative language, which means that it will take months before all or even a portion of this makes it to the floor of the House.  There may be some good starting points for debate and action in this plan, but as a coherent proposal, it requires more reform than it demands.


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I have a feeling that there will be thousands of ‘waivers’ with this proposal!
L

letget on December 1, 2010 at 11:43 AM

This is their final answer?

Skandia Recluse on December 1, 2010 at 11:45 AM

I would accept this proposal as written, with these caveats:
1. Repeal socialized medicine, for constitutional reasons, plus additinal savings
2. Cut the spending in year 1 and raise the taxes in year 2, just to prove that the cuts will take place.
3. A sunset provision for every federal department, so that each has to justify their existence under the constitution.

Vashta.Nerada on December 1, 2010 at 11:48 AM

I actually like the proposal.

ninjapirate on December 1, 2010 at 11:49 AM

So basically it’s the standard “Gut the military and raise taxes” thing.

As expected, these elitist political class statists completely missed the point of the last election.

Massive cuts in the size of government are what is wanted.
Try closing these agencies for starters.

EPA
DOE (Energy)
Education
HUD
Labor
Agriculture
Lay off all workers of these agencies and have the GSA close out any contracts.

Sell off or return to state control all lands presently held by the federal government. (I may allow some parks to be maintained by the USG)

Holy Downsizing Edman! We just balanced the budget!

evilned on December 1, 2010 at 11:51 AM

That would happen if the US adopted a rational flat-tax system, or even a Fair Tax system where people could limit their tax liability

Why this hasn’t been done a long time ago is a mystery to me. The tax code has got to be the biggest waste of time and energy of any government program ever devised.

fourdeucer on December 1, 2010 at 11:57 AM

I bet more spending could be cut in lieu of raising taxes to get these numbers.

Not passing the GOP earmark ban does not install a lot of confidence that our leaders on the Hill are serious about cutting spending.

Baxter Greene on December 1, 2010 at 11:58 AM

The Money Shot:

The elimination of the two major tax breaks will almost certainly doom this proposal

abobo on December 1, 2010 at 11:58 AM

Ed,

I did take a look at it. It doesn’t seem to “eliminate” the Property Tax Reducation. It limits it to homes under 500K and eliminates deductions of interest on 2nd home equity loan interest. They also say, you can include it in the final plan but the three new Tax rates would have to be increased. Could be wrong.

I kind of like three tax rates and a lower biz rate.

AYNBLAND on December 1, 2010 at 11:58 AM

I bet more spending could be cut in lieu of raising taxes to get these numbers.

Baxter Greene on December 1, 2010 at 11:58 AM

Spending will have to be cut more – the proposal as written still does not put us into surplus so we can begin paying down debt.

Vashta.Nerada on December 1, 2010 at 12:03 PM

The Deficit Panel: The Party of “No” vs the Party of “I Don’t Know”…predicted winner…Nobody.

PatriotRider on December 1, 2010 at 12:04 PM

Let us start by taxing political parties for the businesses that they are. Then make the unions pay their fair share. The government agencies like EPA, Energy, Labor, Just US, need some serious restraints. Make all bailout recipients pay back everything with interest in a timely manner. Failure to do so means a public auction. Keep Air Force One on the ground more. Make Congress work 5 days a week. The “churches” that buy sports arenas for millions of dollars and such, have lost sight of their mission and need to be treated as the businesses they have become. Start selling public land instead of hoarding it. Look at Texas. Over 90% of the land is privately owned and the land owners are better stewards of the land than the government. Just some random thoughts.

DAT60A3 on December 1, 2010 at 12:05 PM

The Texas legislature meets every two years and for only 120 days that year. Maybe Congress should do the same. Limit the time they have to bugger us.

Limerick on December 1, 2010 at 12:07 PM

Mr. Bowles said . . .The era of deficit denial in Washington is over

slicing more than $1.6 trillion from Obama’s proposed budgets by 2020 and reducing overall government spending to just under 22 percent of the nation’s gross domestic product.

And the report recommends a legislative trigger that would raise taxes automatically unless a comprehensive overhaul is approved by 2013

The final package would balance the budget more quickly than the original, wiping out annual deficits by 2035.

Yes, I can see how this could work. (you have to ask what I mean by ‘work’, i.e. ‘work’, as in lull the stupid, hypnotize the weak, deceive the credulous, and fool the naive into thinking the democrats intend to do anything other than maintain their fanatical grip on power.)

Bill Clinton said in 1994 (?) “The era of big government is over.”

Problem solved, lets go Christmas shopping.

Skandia Recluse on December 1, 2010 at 12:09 PM

Look at Texas. Over 90% of the land is privately owned and the land owners are better stewards of the land than the government. Just some random thoughts.

DAT60A3 on December 1, 2010 at 12:05 PM

Just for the record, Texas was an independent nation before becoming a state, and as part of admittance, were allowed to keep their land. All other states west of the Mississippi were required to give their vacant land to the feds as a condition of admittance. You are right, though, about the condition of privately owned land vs government owned land.

Vashta.Nerada on December 1, 2010 at 12:12 PM

Spending cuts proposed?!?!

What a bunch of racist tea-baggers!

cntrlfrk on December 1, 2010 at 12:14 PM

It’s also telling that Bowles and Simpson didn’t write this in legislative language, which means that it will take months before all or even a portion of this makes it to the floor of the House.

Hey, let’s direct Nancy Pelosi and her “staff” to write the legislation. That way it will be thousands of pages, and “we can pass this thing, so we’ll know what’s in it”.

Rovin on December 1, 2010 at 12:15 PM

Texas was always cash poor, land rich. They paid for things such as the state capitol (bigger than the US capitol building), paying veterans of the war for (Texas)independence, and other public debts with land sales. That is why they didn’t let the greedy bastards from the Federal government have their source of wealth and revenue.

DAT60A3 on December 1, 2010 at 12:17 PM

For too long the tax code has been a government tool for social engineering i.e. the home mortgage deduction and a whole butt-load of other things. Eliminating deductions with one low marginal rate for everybody is the “fairest” way to do it. I would not favor a “consumption” tax without the repeal of the 16th amendment.

It’s not about having enough money, it’s really about spending. Entitlements are an opiate that has damaged the social fabric of our country. They are used to bribe the electorate for political power. When something comes along that needs massive funding, the money should be found in less important departments; slash their budget, close ‘em down until the latest Fear of the Year is paid for. The military is a constitutional mandate. There is a lot of waste there, especially in procurement and there’s fat to cut without harming defense. I do believe, however, that at least most of any savings should go back to military pay increases.

cartooner on December 1, 2010 at 12:22 PM

Waivers on the mortgage/health care exemptions will be based on how the individual voted in the previous election. Democrat voters get the waivers while Republicans get ‘punished’.

jerseyman on December 1, 2010 at 12:22 PM

evilned on December 1, 2010 at 11:51 AM

100+, but I think you may want to add HHS and DHS to that list.

belad on December 1, 2010 at 12:30 PM

I do like this proposal. More spending cuts are needed, but this is the a great starting point.

bopbottle on December 1, 2010 at 12:42 PM

You remember what Democrats used to proudly stand up and strut when Reagan submitted such things? Yep — Dead on arrival.

tarpon on December 1, 2010 at 12:42 PM

Couple of questions for anyone willing to respond:

Regarding the retirement age specifically, does anyone think that job classification should be considered in this calculation? This is something that I don’t believe is done in any form for any government program currently and what I mean by that is classifying jobs by the toll it takes on the body over the years.

For example- I know a gentleman who works in the construction trade, and has done so for his entire adult life. He’s nearly 70 now and quite obviously his body has taken quite a beating during that time. He moves slowly, painfully, and can’t compete with younger workers so he’s forced to try to find odd jobs that aren’t time-sensitive, and works on his own. Compare this to a bank executive who’s job requires that he rarely lift anything heavier than an ink pen. My friend, and many like him, may not physically be able to work until age 69; his body may give out at say, 66. Is it fair that he is unable to collect the funds that he paid into the system for more than 3 years simply because his skillset and possibly education rendered him better suited for a physical career rather than an intellectual career? And remember, it’s not always about taking care of yourself; workplace accidents are far more common on a construction site than in a boardroom, and usually more serious and lasting.

Ed made a blanket statement:

People live longer and healthier lives and do not need taxpayer support at age 65 any longer, and the systems should recognize that.

which may be true to some extent, but certainly not in all cases. Should this be considered?

BKeyser on December 1, 2010 at 1:14 PM

Regarding the retirement age specifically, does anyone think that job classification should be considered in this calculation?
BKeyser on December 1, 2010 at 1:14 PM

I thoughtfully considered your point, and came to the conclusion that this level of tinkering is over the top. In fact, the idea that the feds would possibly be deciding when a person retires has convinced me that we need to abolish social security. Seriously.

Vashta.Nerada on December 1, 2010 at 1:31 PM

Vashta.Nerada on December 1, 2010 at 1:31 PM

Thanks for your input, and I don’t disagree. I’m not a big proponent of “fairness” anything; you make choices in life and make you own way, and some of those choices make it harder for some over others. That’s life and no one ever guaranteed it would be fair.

A job classification precursor could surely open the door to a whole mess of problems- anything from eligibility to fraud. I think you’re right that any plan for fiscal responsibility should include the phasing out of Social Security asap, and a tax-free personal safety net be encouraged in its place.

It’s just a shame that some people aren’t able to see equal reward for equal contribution.

BKeyser on December 1, 2010 at 1:41 PM

BKeyser on December 1, 2010 at 1:41 PM

The American dream used to be that your children had a better life than you. Now, it seems to be big-screen televisions, and government checks. My own family went from shipbuilding common laborers, to night-school graduates, to college graduates, to master’s degrees in four generations, so I know where you are coming from, but also know that the solution comes from the individual.

Vashta.Nerada on December 1, 2010 at 2:10 PM

The Repubs need to LOUDLY support this. The Dems will loudly oppose. Let the American people see clearly where the two parties stand.

humdinger on December 1, 2010 at 2:42 PM

Despite multiple layers of fact checking, the Post got it wrong. The Commission’s proposal specifically preserves the mortgage interest deduction, it just tinkers around the edges a bit including lowering the cap from $1,000,000 to $500,000 and making use of a 12% non-refundable tax credit. (See page 27.)

In fact, the treatment of so-called “tax expenditures” (gotta love that terminology) isn’t all that radical. It reduces them to be sure, but preserves a handful to benefit all the important voter demographics including mortgage interest, health expenditures, savings, and charitable deductions. (Page 25.)

Planet Moron on December 1, 2010 at 3:06 PM

Despite multiple layers of fact checking, the Post got it wrong. The Commission’s proposal specifically preserves the mortgage interest deduction, it just tinkers around the edges a bit including lowering the cap from $1,000,000 to $500,000 and making use of a 12% non-refundable tax credit. (See page 27.)

In fact, the treatment of so-called “tax expenditures” (gotta love that terminology) isn’t all that radical. It reduces them to be sure, but preserves a handful to benefit all the important voter demographics including mortgage interest, health expenditures, savings, and charitable deductions. (Page 25.)

Planet Moron on December 1, 2010 at 3:06 PM

The proposal has three different sets of individual rates and the mortgage interest deduction would be eliminated if the lowest set of rates was implemented.

Regarding the retirement age specifically, does anyone think that job classification should be considered in this calculation? This is something that I don’t believe is done in any form for any government program currently and what I mean by that is classifying jobs by the toll it takes on the body over the years.

For example- I know a gentleman who works in the construction trade, and has done so for his entire adult life. He’s nearly 70 now and quite obviously his body has taken quite a beating during that time. He moves slowly, painfully, and can’t compete with younger workers so he’s forced to try to find odd jobs that aren’t time-sensitive, and works on his own. Compare this to a bank executive who’s job requires that he rarely lift anything heavier than an ink pen. My friend, and many like him, may not physically be able to work until age 69; his body may give out at say, 66. Is it fair that he is unable to collect the funds that he paid into the system for more than 3 years simply because his skillset and possibly education rendered him better suited for a physical career rather than an intellectual career? And remember, it’s not always about taking care of yourself; workplace accidents are far more common on a construction site than in a boardroom, and usually more serious and lasting.

Ed made a blanket statement:

People live longer and healthier lives and do not need taxpayer support at age 65 any longer, and the systems should recognize that.
which may be true to some extent, but certainly not in all cases. Should this be considered?

BKeyser on December 1, 2010 at 1:14 PM

From the report: Also, direct the Social Security Administration to design a
hardship exemption for those who cannot work past 62 but who do not qualify for disability benefits.

Jimbo3 on December 1, 2010 at 3:36 PM

The proposal has three different sets of individual rates and the mortgage interest deduction would be eliminated if the lowest set of rates was implemented.
Jimbo3 on December 1, 2010 at 3:36 PM

Fair enough, but the authors very specifically state on page 26:

The new tax code must include provisions (in some cases permanent, in others temporary) for the following:
• Support for low-income workers and families (e.g., the child credit and EITC);
• Mortgage interest only for principal residences;
• Employer-provided health insurance;
• Charitable giving;
• Retirement savings and pensions.

Which is why they go to great lengths to describe the plan that preserves the mortgage interest deduction on page 27 as their “Illustrative Individual Tax Reform Plan.”

No one on that commission thinks anyone is going to eliminate the mortgage interest deduction even if they know they should. It’s good for a headline, but they clearly aren’t serious about it, or at least expect anyone else to be.

Planet Moron on December 1, 2010 at 4:13 PM

Another reason for 65 as the retirement age is to get those individuals out of the labor market to allow younger workers to get jobs.

Although the Social Security full benefits age should be raised, there are many private and government plans linked to 65. There are also many plans with mandatory retirement ages.

slp on December 1, 2010 at 4:21 PM

Now is not exactly the best time to eliminate or cap the mortgage interest deduction, when the housing market is in the dumps. They should trigger a gradual phase-out with the recovery of the housing market. For instance, just to throw an idea out, what about a trigger of 2 successive years of increasing housing prices, and a phase out over 10 years where you lose 10% of the interest deduction each year — first year you only get to deduct 90%, 2nd year 80%, and so on?

There is no reason we should subsidize home ownership over home investing, renting, other investments, or whatever else could be done with the money instead of purchasing a house. But the deduction could be eliminated at a better time in a gradual way.

As far as the tax deduction for employer-sponsored health insurance, I am fine with it being eliminated. People are grossly over-insured. In the 60′s, 60% of health care dollars were paid out of pocket. Now in 2010, it is almost down to only 10% paid out of pocket. Both the full cost of the insurance and the full cost of health care are largely hidden by the current 3rd-party payer system. If you eliminated the deduction, you would eliminate the huge incentive that keeps us locked in this horrible 3rd-party system. Employers would likely be prompted to move to high deductible plans in large numbers, and we might actually end up with a functioning health care market again.

Of course there are plenty of other good policy ideas on how to facilitate and complement the elimination of this deduction. I won’t go into them here since I’m sure people have already hit the snooze button on me.

By the way, here’s another very interesting proposal on what could replace the current employer-sponsored tax deduction: Universal Catastrophic Insurance
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/07/AR2009100703048.html

willamettevalley on December 1, 2010 at 4:45 PM

Another reason for 65 as the retirement age is to get those individuals out of the labor market to allow younger workers to get jobs.
slp on December 1, 2010 at 4:21 PM

Removing a productive member of society from the work force does not “allow younger workers to get jobs,” it just removes a productive member of society from the work force. We should be nurturing an environment in which people and businesses want to create new jobs, not one in which we seek to retire people early to free up old ones.

Planet Moron on December 1, 2010 at 4:47 PM

Jimbo3 on December 1, 2010 at 3:36 PM

Thanks for pointing that out. I guess I’m not the only one thinking along those lines- misguided as it may actually be…

BKeyser on December 1, 2010 at 6:08 PM

Commensurate with eliminating the mortgage interest deduction is a reduction of the tax rate which should result in not much of a hit to middle income home owners. A good trade off considering that it will eliminate the market distortions you noted, thus reducing the price of homes.

MJBrutus on December 1, 2010 at 6:46 PM

Here’s a possible sweetener on the SS mess: allow people to take much-reduced early withdrawls, even if still working, to be invested in an IRA or IRA equivalent. Full SS at 70. Also, for those who DO take early withdrawls but live past (say) 90, restore the full benefit. And index the ages to life expectancy. You’d like people to have a good chance of living long enough to collect something but not living 1/3 of their lives collecting full SS.

njcommuter on December 1, 2010 at 9:00 PM