Draft from President’s Deficit Commission Stirs the Fiscal Pot in Washington

November 10, 2010

The two chairmen of the President’s deficit commission, Erskine Bowles and Alan Simpson, certainly can’t be criticized for timidity. The proposals in their draft released today (PDF) are dramatic, as befits our alarming public debt crisis.

No one should be surprised that the commission is calling on the federal government to tax more and spend less. On the spending side, hawks will wince at the defense cuts while defenders of entitlement spending will dislike the higher retirement age and lower cost-of-living adjustments. One line item calls for all earmarks to be eliminated. Federal employee unions will not like the idea of a 3-year federal pay freeze and a reduction in non-defense employment by 10 percent through attrition.

On the tax side, there are certainly tax hikes for tax-haters to hate: gas taxes, dividend and capital gains taxes, and payroll taxes on high earners. Also, the revenue cap that the chairmen suggest, 21% of GDP, is higher than revenue has been in two generations. Caps do tend to become targets in Washington.

On the other hand, advocates for fundamental tax reform will be gladdened by the commission’s so-called Zero Plan. (The name will launch a thousand jokes). On personal income taxes, the plan suggests three brackets, with the highest tax rate at 28%, matching the top rate that prevailed from 1988-1990 after the last major tax reform.

The plan is presented as a tax reform “menu,” which makes it useful as the basis for discussion. For example, under the Zero Plan, the three rates — 13%, 21% and 28% — can be reduced to 8%, 14% and 23% if all exemptions, deductions and credits are repealed. Such low statutory rates on personal income would greatly reduce “excess burden,” the phrase economists use to describe the hidden burden on the economy imposed by high tax rates. This burden is never “scored” in revenue terms, but if the rates could really be this low, the gains from lower excess burdens would probably exceed the $80 billion that the chairmen want to set aside for deficit reduction.

One major alternative to the Zero Plan is loosely based on the plan promoted for the past several months by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), and Senator Wyden has made a cautiously approving statement about the commissioners’ “Wyden-Gregg Style Reform.” A third option called “Tax Reform Trigger” throws the job of writing tax reform to the Congress where it has to be done anyway, but suggests that a series of automatic tax increases — in the form of curtailed deductions, exemptions and credits — start phasing in during 2013 if Congress has not enacted reform.

Overall, the draft released has enough pain to attract numerous denunciations, although hopefully it can be seen as a catalyst. The key tax-writers on Capitol Hill, Senate Finance Committee Chairman Max Baucus (D-MT) and future Ways and Means Committee Chairman Dave Camp (R-MI) both received it in that positive spirit.

“Many pundits and lobbyists were expecting the deficit commission to suggest a value-added tax,” said Tax Foundation President Scott Hodge, “which would have triggered many denunciations. The absence of a VAT makes everyone take a hard look.”


About the Author


Related Research