Fiscal SWAT Team to the Rescue with New Debt Plan
Policy + Politics

Fiscal SWAT Team to the Rescue with New Debt Plan

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Even though the GOP leadership has offered a far-reaching plan Monday to reduce the deficit and raise new tax revenue, negotiations between the White House and the Republicans over a deal to avoid the fiscal cliff are at a depressing standstill. To the rescue --  the authors of one of the more prominent “Grand Bargain” schemes who also unveiled today a retooled version of their package of tax and entitlement reforms and spending savings  in hopes of  moving the talks forward.

Former Republican Senate Budget Committee Chairman Pete V. Domenici and former Clinton administration  Budget Director Alice Rivlin, co-chairs of a Bipartisan Policy Center debt reduction task force, issued a 2.0 version of their plan that attempts to thread the needle between what they say is the short-term need for more economic stimulus and concern for slowing the growth of the $16.2 trillion national debt.

The Domenici-Rivlin budget and tax recommendations carry a lot of heft in Washington and may be second only to those of the highly celebrated Bowles-Simpson presidential commission. Some of their new proposals – including doing more now to help a flagging economy -- are in line with the Obama administration’s own approach. “We are worried about going too fast and too quick on the spending cut side because of the fragile economy,” Domenici told reporters today.

At the same time, they are strongly advocating reform and savings in Medicare and other entitlement programs, the main drivers of long term deficit spending, and chastising both parties for not  being  willing to show their hands on how they would achieve these  cost savers.  “We currently face immense budgetary pressures from the combination of rising per-capita health care spending and an aging cohort of baby boomers,” Domenici and Rivlin said in a summary document. “To reduce the growing pressure on all budgets – federal, state/local, business, and household – we must control the growth of health care spending.”

At the same time, they are pressing for bold changes to the federal tax code to simplify and lower rates, do away with most costly deductions and write offs, and improve the efficiency of overall tax collection. Both parties favor major tax reform, although Obama insists that the wealthiest Americans  pay higher rates while Republicans say they can raise all the fresh  revenue needed without a rate hike.

Unless the administration and Congress can strike a deal in the coming weeks, the economy will be jolted by $600 billion of automatic tax increases and spending cuts that are set to automatically take effect beginning Jan. 2 – the so called fiscal cliff that could send the economy back into recession.

Here are the  highlights of the revised Bipartisan Policy Center plan:

  • Speed up the economic recovery by replacing an expiring Social Security payroll tax cut with a one-time income tax rebate for 2013.  The rebate, similar to a 2008 measure and designed to appeal to both parties, would cost the Treasury  between $90 billion and $100 billion for the year – or roughly the cost of the current payroll tax cut.
  • Reform the corporate and individual tax codes by eliminating or curbing nearly all tax expenditures, reducing marginal rates and raising significant new revenues for deficit reduction.  The proposal, for example,  would replace a multi-bracketed tax code with only two rates of 15 percent and 28 percent while doing away with standard deductions and personal exemptions. It would also eliminate  the Alternative Minimum Tax.
  • Like the individual rate, the corporate rate would also be a flat 28 percent instead of the current 35 percent top rate, while capital gains and dividends would be taxed as ordinary income, with a top rate of 28 percent, excluding the first $1,000 of realized net capital gains or losses. It would also tax “carried interest” or hedge fund management fees as ordinary income rather than capital gains – a move that alone would raise about $20 billion of additional revenue over the decade
  • Instead of the current system of itemized deductions, which disproportionately subsidizes the housing and charitable giving of the wealthy, the plan would provide a flat 15-percent refundable tax credit for charitable giving and for up to $25,000 a year of mortgage interest on a primary residence. It would also provide a flat 15-percent refundable tax credit or a deduction to retirement savings accounts up to 20 percent of earnings or a maximum of $20,000.
  • Major reforms of Medicare, Medicaid and other entitlement programs  to bend the  cost curve and  move away from fee-for-service reimbursements which dominate the health care delivery and reward volume of service as much as quality and effectiveness. The Medicare proposal is similar to a plan devised by Rep. Paul Ryan, R-Wis., and Sen. Ron Wyden, D-Ore., that would give seniors a choice between private insurance with government subsidies and traditional Medicare. The approach would seek to increase competition and reduce government overpayments, using Medicare Advantage as the main vehicle for those savings.

While virtually nothing will be settled until President Obama and House Speaker John Boehner find a way past their impasse on whether to raise tax rates on the wealthiest two percent of Americans –as the president favors and the speaker adamantly opposes – Domenici and Rivlin stressed the need for a larger framework of economic initiatives, spending savings and true tax reforms that can put the government on a path to at least $4 trillion of long term deficit reduction.

With time running out on the lame duck Congress, Domenici and Rivlin said  that  lawmakers and the president should agree on  a “down payment” of  modest spending savings and revenue increases, with the heavy lifting put off until a new Congress takes office in January.  That would necessitate  the president and Congress agreeing now to a series of spending and revenue targets and instructing the committees with jurisdiction to adopt legislation to meet those targets next year.

As a backstop or enforcement mechanism, the agreement by Obama and Congress would instruct the Office of Management and Budget to eliminate any shortfall in the required amount of deficit reduction . Those shortfalls would be made up by imposing reductions to all mandatory and entitlement programs, except Social Security, and federal tax expenditures. 

Whether  mandatory cuts in entitlements and tax breaks to enforce long term deficit reduction  would be any more politically  palatable than the automatic spending cuts in discretionary spending on defense and domestic programs that are set to take effect early next year and that are contributing to the threat of a fiscal cliff  is questionable. Budget enforcement mechanisms have a long and checkered history.

Domenici and Rivlin urged the administration and Boehner to abandon their public posturing and campaigning over the fiscal cliff, as was apparent from the dueling statements by Treasury Secretary Timothy Geithner and Boehner on the Sunday talks shows and Obama’s campaign-style appearance in Pennsylvania last Friday – and get down to serious work.

“The public argument on the part of the president and Congress . . . will make it more difficult,” Domenici, a veteran of many budget battles dating back to the Reagan administration,  told reporters today. “They ought to cool it and talk in the back room about real ideas..

Rivlin, a prominent budget expert and one time director of the Congressional Budget Office, voiced  concern that Boehner  was no longer exaggerating when he said over the weekends that that talks have gone “nowhere” since the Nov. 6 election.  “I hope serious negotiations are going on behind the scenes that get us to a solution,” she said wistfully. “We perceive the current negotiations are not going well, at least the part that’s visible.”