U.S. debt panel’s good sense upsets left and right
Uncle Sam would tax somewhat more and spend a whole lot less if the co-chairs of President Barack Obama’s deficit commission get their way. Critics on both ends of the political spectrum will carp — but they would struggle to devise a better way to tackle America’s long-term fiscal problems.
Still, a preliminary report released on Wednesday quickly came under heavy fire from both right and the left in Washington. Conservatives slammed panel heads Erskine Bowles and Alan Simpson — respectively a Democrat and a Republican — for concocting a plan that would boost tax revenue to 21 percent of GDP against a traditional average of 18 percent. That would be the highest level in American history. Liberals, on the other hand, accused the duo of cutting the economic safety net for the U.S. middle class by proposing deep reductions in future senior healthcare and Social Security benefits.
The predictable kvetching shouldn’t obscure the many merits of the bold, even radical plan put forward by the commission co-chairs. Taxes probably need to be raised to get Democrats in Congress to approve other deficit-reducing measures that involve cutting spending. The Bowles-Simpson plan would do this mostly by eliminating inefficient tax breaks and loopholes — perhaps even the sacred mortgage interest deduction. In return, marginal tax rates would be lowered for individuals and companies. The top corporate rate, for instance, might drop as low as 26 percent against 35 percent currently, pleasing Republicans.
But spending cuts in the panel’s early plan do outweigh tax increases by around three to one. Overall, the projected ratio of U.S. debt to GDP would fall to 60 percent by 2024 and 40 percent by 2037. By contrast, the Congressional Budget Office forecasts that without dramatic action the ratio would hit 185 percent by 2035. The plan would raise the Social Security retirement age and tweak the government pension system’s benefit formula. As for health spending, it would give Obama’s reforms a chance to prove their deficit-cutting mettle but ax them if spending doesn’t move sharply lower.
Bowles and Simpson still need to sell their plan to 12 of the other 16 panel members. Even if they’re successful at that tough task, members of Congress could still blow off the whole thing. But if it comes to that, election-conscious politicians shouldn’t forget that investors in U.S. assets can vote, too — with their feet.