The deficit commission’s plan

By Felix Salmon
November 10, 2010
here, list of illustrative cuts here) is hilariously depressing on both the big-picture and the little-picture level.

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The pair of deficit commission reports (draft here, list of illustrative cuts here) is depressing on both the big-picture and the little-picture level.

The big picture is in this chart — the proposal gets most of its juice after 2020. Which just happens to be the point at which growth in health-care costs automagically is brought down to GDP + 1% “by establishing a process to regularly evaluate cost growth, and take additional steps as needed if projected savings do not materialize”. But healthcare inflation is a gruesomely difficult nut to crack, and if the CBO simply assumed that it could be solved so easily in 2020, its projections would look much rosier too.

debtcommission.jpg

Beyond that, the biggest savings proposed by the commission are in various parts of the federal payroll. Nothing else remotely moves the needle: the next biggest saving, beyond the punt of the “cut-and-invest committee”, comes from a reduction in the rate of growth of foreign aid. (You’d think that one could find pretty substantial non-personnel costs in the defense budget, but evidently not: a few cuts like the V-22 Osprey don’t even begin to generate savings until 2015.)

Meanwhile, some of the small savings have to be seen to be believed. The deficit commission, charged with coming up with a bold plan to bring the nation’s finances into order, really does propose:

  • Increasing the amount of time spent on instant messenger, to reduce travel costs;
  • “Reduce copying use by putting the default option on copiers to double-sided”;
  • Merging the Commerce Department with the Small Business Administration;
  • Charging a fee to Smithsonian visitors.
  • Etc.

There are some good ideas in this report, and it’s definitely good that people are talking openly in public about raising the retirement age (very slowly: it only hits 69 in 2075) and phasing out mortgage interest tax relief.

On the other hand, bold ideas in terms of new taxes — carbon taxes, wealth taxes, Tobin taxes, consumption taxes, you name it — are nowhere to be seen: as Jonathan Chait says, this is “a plan that’s tilted, overwhelmingly, toward Republican priorities”. Which means a large dash of wishful thinking, a bunch of tax cuts (!), and even a cap on the amount of tax revenues that the government can bring in. How that’s meant to help reduce the deficit I have no idea.

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Comments
14 comments so far

Why would anyone want to reduce the deficit? How else would our economy expand?

The CBO forecast is absurd. How can healthcare grow so much without increasing GDP???

Felix, I’m still waiting for you to justify deficit/debt reduction…

Posted by petertemplar | Report as abusive

There are some good ideas in this report, and it’s definitely good that people are talking openly in public about raising the retirement age (very slowly: it only hits 69 in 2075) and phasing out mortgage interest tax relief.

I’m with you on the mortgage interest tax deduction, but I have some serious qualms about raising the retirement age. It’s all very good for us white-collar workers, for whom the greatest physical demand on a typical day is the stroll in from the parking lot (or subway, or what have you). But do we really want to make people work in coal mines or construction sites until they’re nearly 70? I’m thinking no.

Posted by NewSouthZach | Report as abusive

On the tax side, there are actually some major things. Many deductions are recommended to be axed.

For example, the mortgage interest deduction is recommended to be taken away. That would be a huge effective tax increase for most homeowners.

Grover Norquist of Americans for Tax Reform calls this a massive tax increase.
http://atr.org/obama-debt-commission-cal ls-forbr-trillion-a5647#

Nancy Pelosi, representing the hard left, is of course apopleptic as well. She ‘strongly condemns’ it:
http://www.dailykos.com/storyonly/2010/1 1/10/919488/-Nancy-Pelosi-strongly-conde mns-deficit-commission-report

Something drawing condemnation from the extremes on both sides is probably somewhere in the middle.

Posted by DanHess | Report as abusive

On the tax side:

1. The proposal is regressive. It dramatically reduces tax rates for high income earners, and the reduction of deductions and the gas tax will disproportionately hit the middle and lower classes.

2. The proposal does nothing to eliminate the disparity in the taxation of economic income as between investors (who are never taxed on unrealized gain) and wage earners (who are taxed currently on every penny).

3. Unclear what the proposal does with the $1 trillion of untaxed income of US corporations sitting overseas. A territorial tax would exempt all of this income from tax. A territorial tax also allows wealthy individuals to keep their investments in the Cayman Islands and avoid tax. A territorial tax has a nice ring to it but one wonders why it’s necessary with a 26% or even 28% corporate tax rate.

4. But base broadening and rate reduction is overall a brave and winning concept, and the AMT has to be repealed. However, it will take two years for these proposals to be properly developed and implemented. Anything faster is loophole heaven.

Posted by comment1 | Report as abusive

The mortgage interest deduction is of far greater value to the wealthy than to the median household, ESPECIALLY since it is a “Schedule A” deduction that goes up against the standard deduction. A lower-middle-class household only sees small benefit above the standard deduction, while an upper-middle-class household gets essentially the full benefit (and at a higher tax rate). Limiting or eliminating the mortgage interest deduction is truly a no-brainer.

Why repeal the AMT? It is a simpler and fairer taxation system than the STANDARD income tax. Why not keep the AMT and eliminate the income tax? Remember, it isn’t an additional tax — it is an ALTERNATE tax system. One that has much to recommend it. Before the AMT was passed, wealthy individuals had plenty of opportunity to eliminate their entire tax liability. That is an improvement?

Posted by TFF | Report as abusive

All parties, from insurers to the government to individuals, have a role to play in helping to control health care costs. Check out Whatstherealcost.org for what you can do and what the health care system should be doing.

Posted by ChristineRegenc | Report as abusive

@comment1

“1. The proposal is regressive. It dramatically reduces tax rates for high income earners, and the reduction of deductions and the gas tax will disproportionately hit the middle and lower classes.”

Reductions in deductions do not hurt lower income families. They generally pay no income tax at all (ex payroll) even without deductions, and haven’t in many years. Middle income families will pay more, but there is no other way.

Cutting tax rates for high earners? Where??

Capital gains are taxed as ordinary income. This would be a major tax increase for the wealthy, for sure.

Posted by DanHess | Report as abusive

I read in my paper, the Seattle Times, this morning that the panel also recommended eliminating taxes on foreign profits by US Corporations (I use the phrase euphemistically). My sense is that this panel’s recommendations are about protecting our wealthiest citizens and corporate interests at the expense of the middle/working classes and senior citizens. I have often wondered if a senior has medical coverage under medicare if they cannot afford to the copays. Seems like they are essentially uninsured.

It is time for average americans to become seriously involved in politics – I mean 24 hours a day, seven days a week. We need to establish a middle class PAC or our own corporation dedicated restoring the middle class in Amercia. Just think: $1 dollar a week x 52 weeks x 25,000,000 working class citizens would yield $1,300,000,000 per year. Even someone on unemployment could manage a $1 per week. I could easily support an organization like this to the tune of $30.00 per month. It would have to be independent and not support any candidate that took corporate money. We could raise a fortune and really fight back.

Posted by MiddleClassGal | Report as abusive

Looks like the commission completely missed what would do far more than anything else to both reduce the deficit and restore the economy: impose tariffs on imports.

Beyond that, the report only needs one other recommendation: pass an amendment to the constitution requiring a balanced budget, with an exception for periods of declared war.

Posted by Pete_Murphy | Report as abusive

I came here hoping to hear that we finally had a bipartisan group that had a balance approach to tacking a tough issue that we should all get behind. Is it really such a problem for the people born in 2000 to retire at 69 instead of 67? Is it really such a problem for everybody to pay 15 cents / gallon more? Is it really such a problem to eliminate some of the deductions for high income earners. These guys balance economic reality with fiscal sanity and you guys are crucifying them. Instead I hear a lot of silly ideas that won’t work in the real world ranging from let’s tax everything and everyone making money (this is another way of saying. communism) to let’s tax everything we buy from overseas (which is another way of saying protectionism). Has anybody on this site taken a fundamental economics or history class.

Posted by libertarian723 | Report as abusive

libertarian, I must admit that I like almost all the proposals. They are fiscally conservative and socially responsible at the same time, stepping away from our current path to ruin.

I am, however, puzzled by this one: “eliminating taxes on foreign profits by US Corporations”. Can anybody shed some light on this?

Posted by TFF | Report as abusive

On eliminating taxes on foreign profits by US corporations:

Currently when an “American” company like Coke produces markets and sells a beverage entirely overseas… say in Brazil and they earn a profit on that transaction they owe US taxes on it if they “repatriate” those profits to world headquarters in Atlanta.

The United States has no claim on that profit whatsoever… nothing took place in the US. Because the US currently does tax that profit, (but only if Coke brings the money home) Coke will do anything in it’s power to reinvest the profit overseas rather than move it back to the us.

By eliminating the tax on foreign profits many billions of dollars that the US goverment has no rightful claim to will return to the United States some of that money will be reinvested in capital equipment in the US. Some of that money will go to nine figure CEO bonuses… but who cares every dime that is spent in the US for any reason still boosts our economy rather than some other nations economy.

For any protectionists out there please consider the alternitive… several high profile US companies have changed their articles of incorporation to outside of the US. This allows them to pay US taxes only on their US profits.

Contrary to popular belif most profits of the 50 largest “U.S.” companies are produced outside of the US.

Over all great list of proposed cuts… I support them all except the V-22… verticle takeoff and 1000 miler range is a huge force multiplier allowing fewer troops to engage a larger area. Cut something else in the DOD but not the Osprey.

Posted by y2kurtus | Report as abusive

Thanks, y2kurtus, I thought it might be something like that. You gave the clearest explanation that I’ve seen yet.

And yes, bringing that capital back to the US matters more than reaping taxes on it.

I’m well aware of the foreign profits of the major companies, and in fact am reluctant to invest my money with any company that DOESN’T get the majority of its revenues from overseas. (Too risky…) The big companies range from 50% to 75% of their revenues from overseas.

Posted by TFF | Report as abusive

Preserving Social Security and Burying the Obama Deficit Commission Proposals on Social Security
By Emeritus Professor of Mathematics, CSULB
President Obama’s National Commission on Fiscal Responsibility and Reform, co-chaired by Alan Simpson and Erskine Bowlers, has issued a doomsday report on “fixing” the Social Security retirement system (OASDI) as a part of its proposals to reduce the Federal deficit. This flies in the face of the fact that, not only has Social Security not contributed a dime to the deficit, it has a $2.52 trillion surplus! Amongst other things, the co-chairs would drastically cut retirement benefits and increase the retirement age to 69. Not a single member of this commission, or of the vast TV/audio/print media, has mentioned nor studied other solutions to the alleged Social Security “crisis”.
There is no crisis and there is most definitely no need to advance the retirement age to 69 nor to cut the retirement benefits. .
Based on the data in the totality of individual income tax returns for the 16 year period of 1993 through 2008, there are easy structural changes that can be made to the Social Security (OASDI) taxation system that will easily provide for sufficient annual contributions and assets growth to take care of the retirement needs of the increasingly aging population for the indefinite future, as well as the replacement of the existing 73-year old REGRESSIVE OASDI taxation system by a PROGRESSIVE one, and without reducing retirement benefits nor increasing the retirement age. Regrettably, the ever-present plethora of “privatization” and “fix-it” advocates are clueless about this analysis.
To illustrate the regressive nature of the OASDI taxation system, the data from the calendar year 2008 shows the following. Tax returns listing an Adjusted Gross Income (AGI) of over $200 K (= only 3% of all tax returns) held 30% of all AGI, yet less than 3% of the listed AGI was paid to OASDI; returns listing over $1 Million (= only 0.23% of all tax returns) held 13% of all AGI, yet less than 0.6% of the listed AGI was paid to OASDI; finally, the $10 million and over AGI class had an average GROSS income (AGI plus all exclusionary gross income) of $37 million, yet paid an average of less than 0.006% to OASDI
By using a progressive tax rate system (applied to ALL INCOME, not merely to salary/wage income) for OASDI, the rate for OASDI payments for 85% of all tax returns (= below $100,000 annually) will be LOWER than the current rate of 6.2%. This is because the total income of this class is in the form of salaries/wages, and everything below the salary/wage cap of $100,000 is taxed at 6.2% for OASDI contributions.
Here are the details for a typical progressive OASDI tax rate system: 4% rate on all income below $30,000 (40.3% of all tax returns in 2008); 5% rate for the range $30,00 to $75,000 (24.6% of all tax returns in 2008); 6% rate for the range $75,000 to $200,000 (22.1% of all tax returns in 2008; currently, those from $100,000 to $200,000 pay as little as 3% to OASDI); 7% for the range $200,000 and up (13.0% of all tax returns in 2008; this group pays from below 3% to as little as 0.006% to OASDI).
In addition to providing more than the annual retirement/disability needs produced under the existing regressive taxation system, the annual OASDI Trust Fund assets at the end of 2009, for each of five progressive tax systems that were analyzed for the 16 year period, would have INCREASED from the current $2.52 trillion (2008) to:
$3.47 trillion for tax-rate system 1; $4.17 trillion for tax-rate system 2; $4.27 trillion for tax-rate system 3; $4.41 trillion for tax-rate system 4; $4.83 trillion for tax-rate system 5.
Clearly, this revised progressive OASDI tax rate system would preserve Social Security, the most successful US government program in history, for the indefinite future, and would silence the plethora of “privatizers” and “fix-it” advocates.

Posted by johnbachar | Report as abusive
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