“The Moment Of Truth,” In Theaters Near You… Or Not

Derek Thompson at The Atlantic:

The president’s deficit commission released its final recommendation for reducing the debt and reforming the budget this morning. Dramatically named “The Moment of Truth,” the plan offers a mosaic of reforms that promise to cut $4 trillion from the debt before 2020.

The plan would also cap tax revenue at 21 percent, limit spending to 22 percent, and reduce debt as a percentage of GDP to the key figure of 60 percent by 2023.

The 18-member commission will vote Friday on the plan, which requires a 14-person majority to go to Congress. But you don’t have to wait until then to learn the basics. Here is your executive summary, with “bottom line” conclusions to give you a sense of how I see things.

Discretionary/Mandatory Spending 

The goal is clear: cut $100 billion from defense and $100 billion from non-defense spending by 2015. The road there is less clear, because the discretionary budget is a vertiginous array of programs.

So the report keeps things broad. Spending in 2012 will equal spending in 2011. Spending in 2013 will come down to pre-crisis levels, adjusted for inflation. The president will propose annual limits for war spending. Disaster funds will be set up to manage unforeseen tragedies. A new 15-cent per gallon gas tax will pay into a transportation fund so that roads and bridges rely less on general revenue. Agencies will be responsible for their own diets, but in the event that they don’t lose the weight themselves, a new, bipartisan “Cut-and-Invest Committee” will offer guidance.

On the mandatory spending side, the report recommends reforming civilian and military retirement plans, cutting agricultural subsidies, but protecting income support programs.

Bottom line: The commission doesn’t particularly care where the spending cuts come from so long as they draw equally from both security and non-security spending and don’t hurt education, infrastructure or support for low-income families.

Taxes

The name of the game here is: Broaden the base, lower the rates. That means eliminating most tax expenditures (explanation here) that don’t protect the low-income, while slashing tax rates for both individuals and companies.

For individuals, tax brackets move to a new scale of 12%/22%/28% (for comparison: under Clinton, those brackets were 15/ 28/ 31/ 36/ 39.6). Welfare provisions like the Earned Income Tax Credit and the Child Tax credit stay put. Itemized deductions are eliminated and capital gains and dividends are taxed as ordinary income, dramatically raising effective tax rates on rich folks who both itemize heavily and get more income from investments. The mortgage interest deduction [Flashcard here] becomes a tax credit to make it more progressive and the employer health care subsidy [Flashcard here] is capped and phased out slowly.

OK, so the upshot: After-tax income would decline proportionately — between one and two percent — on almost all quintiles except for the richest one percent, who would pay significantly more to Uncle Sam.

Alison Acosta Fraser at Heritage:

As a stalemate appears increasingly likely, what appears to be an updated “chairman’s mark” to guide the commission’s discussions over the next several days was released. Like its predecessor, the report, puzzlingly titled “The Moment of Truth” (as if this will somehow garner enough votes), has some strong elements, both positive and negative.

Overall, this proposal does much the same as the previous report, though it would cut spending deeper and faster, bringing discretionary spending to 2008 levels (adjusted for inflation) and balancing the budget two years earlier by 2035. Rather than wait to phase in cuts, it would reduce spending by $50 billion immediately, by starting “at home” with congressional and federal workforce pay and other common-sense ways to reduce federal spending.

Yet, as if taxes and spending are somehow equal bookkeeping maneuvers, the tax hike is bigger and faster than the earlier version. The commissioners appear to have wasted their opportunity to be truly transformational, such as in health care, by resorting to “pilot” trials of the Rivlin–Ryan Medicare premium support proposal. And notably, again, they leave Obamacare in place, save for one major improvement: the repeal or reform of the massively irresponsible long-term care benefits in the CLASS Act section of the law.

Ed Morrissey:

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.

Paul Krugman:

I think it is worth pointing out that like so many proposals from that side of the political spectrum — for this is, very much, bipartisanship as a compromise between the center-right and the hard right — this one involves a fundamental piece of strange logic. Namely, it argues that in order to head off the dire prospect of future cuts in Social Security benefits, we must … cut future Social Security benefits.

Also: in response to the point many of us have made about raising the retirement age — that only the affluent have seen life expectancy rise faster than the retirement-age rises already in the law — the plan promises special exemptions for those with physical hardships.

Let’s think about that. Right now we have a retirement system that has the great virtue of not being intrusive: Social Security doesn’t demand that you prove you need it, doesn’t ask about your personal life, doesn’t make you feel like a beggar. And now we’re going to replace that with a system in which large numbers of Americans have to plead for special dispensation, on the grounds that they’re too feeble to work for a living. Freedom!

Joan McCarter at Daily Kos:

The catfood commission has released the final report [pdf], and will vote on it Friday. It hasn’t substantially changed from the chairs’ mark preemptively released by Simpson and Bowles a couple of weeks ago. It still has the disastrous ratio 2:1 ratio of spending cuts to revenue increases, includes a payroll tax holiday (reducing further Social Security’s take), a regressive tax structure and arbitrary spending caps.

[...]

The question now is what happens next. Yesterday, Reid promised a vote, but with conditions, as David Dayen notes: “the commission must provide legislative language in hand, and they must get at least a majority vote on the commission, which would be 10 votes.” The legislative language condition is not going to be met, unless they find volunteers do translate for free. They didn’t create legislative language and officially cease to exist after today.

The other question is whether they’ll reach 10 votes–a bare majority. Kent Conrad and Judd Gregg have agreed to it, as far as the rest go, I agree with dday that it’s very much in question.

I think the House Republicans, led by Paul Ryan, are no votes. Jan Schakowsky, who came up with her own plan, is also a no. So we’re at 7-4.

What else do we know? Dick Durbin said he’s “studying” the proposal and didn’t have a commitment either way. Durbin did say that raising the retirement age was “acceptable.”

Joining Durbin on the fence is Andy Stern; Senators Max Baucus, Mike Crapo and Tom Coburn; and Democratic Reps. Xavier Becerra and John Spratt. To get 14 votes, they’d have to run the table. I’m not sure they get any of them, and could easily see 7 votes total for passage.

However, bits of this will survive as policy proposals and possibly in next year’s budget. The White House’s renewed commitment to bipartisanship seems destined to end up with Americans having to work longer for less secure retirements, and the wealthy continuing to do just fine.

Daniel Foster at The Corner:

That sounds, more or less, like the same great(ish) taste, now with more fiber. But getting the approval of 14 of the 18 panel members is still an uphill battle, and the co-chairmen have delayed a final vote on the proposal until at least Friday in the hopes of doing some last-minute arm twisting.

Josh Barro at Real Clear Markets:

…the Commission is exceeding my expectations, but perhaps that is because my expectations were always that it would serve a different mission than it purported to. In my view, the probability that 14 commission members would sign onto a consensus report was zero all along; so was the probability that we would get a comprehensive deficit reduction deal out of the 112th Congress, absent a sovereign debt crisis or other economic crisis that forces the hands of elected officials.

Instead, I view the Commission’s purpose as furthering a long-range process: driving an elite discussion about deficit reduction options so that, when the right economic time comes to actually close the budget gap, we have a clear vision of the steps we will need to take-and what compromises politicians will be willing to make. Viewed from this frame, the Commission has been a success, in part because it could not reach consensus and released several reports instead of one. These reports, and political players’ reactions to them, have helped to clarify those questions and identify a path toward budget sustainability.

Ross Douthat:

None of this makes a compromise inevitable, or even necessarily likely. (The fact that Paul Ryan didn’t join the “yes” votes represents a missed opportunity, I think, for the reasons that Allahpundit sketches here.) But if America does manage to pull back from the fiscal precipice, there’s a good chance that we’ll remember the Simpson-Bowles proposals as a significant and clarifying step toward figuring how to make that pullback work.

Felix Salmon:

I’m fascinated by the various headlines reporting the deficit commission’s 11-7 vote.

Some treat the plan as some kind of independent entity which was lobbying for votes: the WSJ runs with “Deficit Plan Fails to Win Panel Support,” while Reuters plumps for “Deficit-cut plan falls short, offers framework” and Fox News has “Deficit Commission Report Fails to Advance to Congress.” The Washington Post goes long: “Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action.”

Other headlines concentrate on the panel as the key actors, and the range of views here is very wide. Bloomberg says bluntly that “Debt Panel Rejects $3.8 Trillion Budget-Cutting Plan,” in line with the FT’s “Panel reject US budget deficit plan”. Politico is a bit softer — “Debt panel falls short on votes” — while NPR is positively upbeat: “Majority Of Deficit Commission Endorses Plan; Not Enough To Make It Automatic.” Ezra, too, looks on the bright side, plumping for “The fiscal commission succeeded — sort of.”

My feeling here is that the second group is probably better than the first: the news here should properly focus on the deficit commission and what it has failed or succeeded in doing. It was the commission which was charged with putting a bipartisan plan together, it was the commission which faced the very high hurdle of getting 14 votes (a 78% supermajority), and it was the commission which ultimately didn’t manage to get there.

Michael Crowley at Swampland at Time:

So there are two ways you can look at this outcome. One is that failing to win a supermajority is clearly a disappointment, and means that Congress won’t feel strong pressure to take action on the plan. Another is that winning a majority wasn’t an obvious outcome, and is certainly better than the embarrassment–and sense of futility–that would come with not winning a majority. Ezra Klein, for one, thinks the vote–and some encouraging words even from the plan’s opponents–good enough to give the plan credibility if Obama wants to run with it. (One option would be to build some of its elements into his 2011 budget proposal.) Look for Obama’s take when he returns from Afghanistan.

One thing the commission clearly did accomplish was to focus attention on the medium-to-long term debt threat and ways of mitigating it. That was the basis for Bowles’s claim, at a press conference earlier this week, that the panel had achieved “victory” regardless of the final tally. Of course, not everyone agrees on the importance of having that conversation right now, especially with the economy still bleeding on the emergency-room floor. Now that the panel is folding up its tent, we’ll see whether Obama and leaders in Congress agree.

About these ads

Leave a comment

Filed under Economics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s