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Wednesday, November 10, 2010

Obama's Deficit Panel Weighs Tax Cuts & Social Security

Panel Weighs Deep Cuts In Tax Breaks & Spending

A draft proposal to be released Wednesday by the chairmen of President Obama’s bi-partisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.

But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.

The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.

Even after reducing the rates, the overhaul of the tax code would still yield additional revenue to reduce annual deficits — a projected $80 billion in 2015.

But how low the rates are set would depend on how many tax breaks are reduced or eliminated. Some of them, including the mortgage interest deduction and the exemption from taxes for employees’ health benefits, are political sacred cows.

The commission’s chairmen — Erskine Bowles, the president of the University of North Carolina system and a former White House chief of staff under President Bill Clinton, and Alan K. Simpson, a former Republican Senate leader from Wyoming — presented their draft to the nine other Democrats and seven other Republicans on the commission at a closed-door meeting on Wednesday morning.

The group, appointed last winter, had made no decisions in advance of last week’s midterm elections, to avoid politicizing the painful options for reining in projected yearly deficits that are building up the federal debt to a potentially dangerous level. Even so, the election results — by emboldening victorious anti-tax conservatives and defeating many fiscally conservative Congressional Democrats — are widely seen as having reduced the already slim chance that a supermajority of the commission could agree to a package of proposals by Dec. 1.

Under Mr. Obama’s executive order last February creating the panel of 12 members of Congress and six private citizens, 14 of the 18 commissioners must agree in order to send any package to Congress for a vote in December. The Senate majority leader, Harry Reid of Nevada, and Representative Nancy Pelosi, who will remain the House speaker until January, have promised in writing that the Senate would vote first and, if it approves a plan, the House would vote as well.

Should the package of proposals fall short of the necessary 14 votes in the deficit commission, as many people expect, proponents of deficit reduction, including some administration officials, hope that at least some of its recommendations could be the basis of efforts to pare deficits once the economy fully recovers.

In any case, the proposals will pose a test or an opportunity for Mr. Obama as he adjusts to the election drubbing that cost his party control of the House and reduced its Senate majority — depending on whether he tacks to the political center and embraces them in his own budget early next year, or shifts more to the left and leaves them on the shelf.

The chairmen’s proposals, and other deficit reports coming out soon from other groups, will present a challenge also to Congressional Republicans by challenging their contention that the budget can be balanced by spending cuts alone — a claim that even many conservative economists and budget analysts reject, given the scale of projected debt as the Baby Boom generation retires and claims federal benefits.

Next Wednesday, another bipartisan group of budget experts — led by Alice Rivlin, a former budget director both to Congress and Mr. Clinton, and Pete V. Domenici, a former Republican senator from New Mexico who for years was chairman of the Senate Budget Committee — plans to recommend a package of spending cuts and revenue increases that is similar but goes beyond what is now before the fiscal commission. They are sponsored by the Bipartisan Policy Center, a research organization formed by four former Senate majority leaders.

The Bowles-Simpson plan has a ratio of roughly $2 in spending reductions for every $1 in revenue increases, with an additional $673 billion in savings from reduced interest payments on the resulting lower federal debt.

“The Problem is Real — the Solution is Painful,” the chairmen wrote in their slide presentation to colleagues.

Mr. Obama directed the commission to propose ways to bring the budget into balance by the 2015 fiscal year, excluding interest on the federal debt accumulated so far. That interest is projected to be equal to about 3 percent of the nation’s gross domestic product that year — roughly the maximum level that many economists consider sustainable in a growing economy.

The commission chairmen’s plan aims to bring federal spending and revenue roughly in line by the fiscal year 2020. Spending would then be equivalent to 22 percent of the nation’s economic output — slightly higher than in earlier years, reflecting the growing costs of retirement and health benefits for an aging population — and revenues would be about 21 percent.

By comparison, in the fiscal year 2010, which ended Sept. 30, spending was 23.8 percent of gross domestic product while revenues were just 14.6 percent — reflecting the one-time costs of stimulus spending and the reduction in tax receipts because of high unemployment and slack business activity. That left a deficit for the year of 9.1 percent of gross domestic product and expanded the public debt to an amount equal to 62 percent of G.D.P.

Deficit Panel Leaders' Plan Curbs Social Security

The leaders of President Barack Obama's bipartisan deficit commission launched a daring assault on mushrooming federal deficits on Wednesday, proposing reducing annual cost-of-living increases for Social Security, gradually raising the retirement age to 69 and taking aim at popular tax breaks such as the mortgage interest deduction.

As part of a proposal to wrestle $1-trillion-plus deficits under control, their plan would also curb the growth of Medicare. It came a week after voters put Republicans back in charge of the House and told Washington that the government is too big.

However, the plan by Chairman Erskine Bowles and former Sen. Alan Simpson, the co-chairman, doesn't look like it can win the support from 14 commission members that is needed to force a debate in Congress. Bowles is a Democrat and was former President Bill Clinton's White House chief of staff. Simpson is a Wyoming Republican.

The two were among the first to acknowledge their plan's unpopularity — and to suggest it would be a nonstarter in Congress.

"We'll both be in a witness protection program when this is all over, so look us up," Simpson told reporters. Bowles said: "We're not asking anybody to vote for this plan. This is a starting point."

They weighed in as the Treasury Department reported that the federal government began the new budget year with a deficit in October that totaled $140.4 billion — down 20 percent from a year ago but still the third highest October shortfall on record. Even with the improvement, last month's red ink set the stage for what is expected to be a third consecutive year of $1 trillion-plus deficits.

The Social Security proposal would change the inflation measurement used to calculate cost-of-living adjustments for program benefits, reducing annual increases. It will almost certainly draw opposition from advocates for seniors, who are already upset that there will be no increase for 2011, the second straight year without a raise.

The plan would also raise the regular Social Security retirement age to 68 in about 2050 and to 69 in 2075. The full retirement age for those retiring now is 66. For those born in 1960 or after, the full retirement age is now 67.

Better-off beneficiaries would receive smaller Social Security payments than those in lower earning brackets under the proposal.

The commission is supposed to report a deficit-cutting plan on Dec. 1, but panel members are unsure at best whether they'll be able to agree on anything approaching Obama's goal of cutting the deficit to about 3 percent of the size of the gross domestic product.

Building the needed support of 14 of its 18 members will be difficult. Cuts to Social Security and Medicare are making some liberals on the panel recoil. And conservative Republicans are having difficulty with the options suggested for raising taxes. The plan also calls for cuts in farm subsidies, foreign aid and the Pentagon's budget.

"This is not a proposal I could support," said panel member Rep. Jan Schakowsky, D-Ill. "On Medicare and Social Security in particular, there are proposals that I could not support."

The plan released by Bowles is only a proposal put forth by him and Simpson. Members of the commission will resume debate on it later Wednesday and next week in a long-shot bid to reach a compromise.

The release of the proposal comes just a week after midterm elections that gave Republicans the House majority and increased their numbers in the Senate. During the campaign, neither political party talked of spending cuts of the magnitude proposed by Bowles, with Republicans simply proposing $100 million in cuts to domestic programs passed each year by Congress.

"It's a very provocative proposal," said a Republican panel member, Rep. Jeb Hensarling of Texas. "Some of it I like. Some of it disturbs me. And some of it I've got to study."

But member Sen. Judd Gregg, R-N.H., called the proposal "an aggressive and comprehensive plan for getting federal spending, deficits and the debt under control. ... This will not be the final proposal, but it is a significant step down the path of establishing fiscal responsibility."

Other proposals by Bowles and Simpson include:

—Increasing the gas tax by 15 cents a gallon to fund transportation programs.

—A three-year freeze in the pay of most federal employees and a 10 percent cut in the federal work force.

—Eliminating all congressional pet projects, known as earmarks.

Bowles and Simpson also are proposing a fundamental rewrite of the tax code, though they didn't offer a specific plan.

But the goal is to lower overall tax rates, simplify the code and broaden the taxpayer base. One option proposed is to completely eliminate so-called tax expenditures — including popular deductions like the mortgage interest tax break and a deduction taken by companies that provide health insurance to their employees.

They didn't specifically call for doing away with these popular tax breaks, instead listing that among a series of possible options.

While it may not survive, the Bowles-Simpson proposal illustrates the painful choices involved in tackling a deficit that presently requires the government to borrow 37 cents out of every dollar it spends.

Even with the dramatic proposals, the Bowles-Simpson plan would leave deficits of about $300 billion in 2015, the year by which Obama tasked the group with balancing the federal budget, except for interest payments on a national debt that now stands at $13.7 trillion. If the changes to Social Security are dropped, the deficit would be about $400 billion in 2015.

But the plan is an aggressive assault on the longer-term deficit crisis, which is fueled by spiraling costs for retirement programs.

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Sources: CNBC, MSNBC, NY Times, WRAL, Google Maps

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