Deficit panel releases final proposal

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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