Deficit Commission: Too Much Tax, Too Little Reform

Article excerpt


The National Commission on Fiscal Responsibility and Reform the Simpson-Bowles Commission ) deserves credit for spotlighting the nation's unsustainable spending and deficit trends. This is, simply put, the greatest economic challenge of our era.

Although the report failed to win the necessary 14 of 18 member votes to send its recommendations to Congress, it still should be taken seriously. While the report contained some positive proposals, it ultimately depended too much on tax increases and not enough on spending reforms.

Before judging a solution, one must define the problem. The nation's long-term deficits are driven exclusively by rising spending, not declining tax revenues. Even if all tax cuts are made permanent, revenues will soon slightly exceed their historical average of 18 percent of the economy. Federal spending - rising from its historical average of 20 percent of the economy to a projected 26 percent by the end of the decade - is the moving variable.

Nearly all of this new spending will come from Social Security, Medicare, Medicaid and net interest on the debt. After costing $1.6 trillion in 2010, these four expenditures are set to cost a staggering $3.6 trillion by 2020. Over the long term, the Congressional Budget Office (CBO) projects, nearly all new debt will result from these four spending categories.

Although spending drives the deficits, the report relied heavily on tax hikes. Measured against a current-policy base line (which assumes today's tax rates and spending policies continue), the report proposed $3.3 trillion in tax increases, $3.5 trillion in spending reductions and $1.3 trillion in net interest savings through 2020. This would leave the highest federal tax burden in American history (21 percent of the economy), and still not balance the budget until 2035.

Despite some positive elements, the report's entitlement reforms were insufficient. They would merely reduce the annual growth rate of Social Security and health care spending from 6.5 percent to 6.2 percent over the first decade. Those programs still would cost $20 trillion combined over the decade.

On Social Security, the report would wisely raise the eligibility age to 69, adjust benefits downward for the wealthiest seniors and use a more accurate inflation measure. Unfortunately, it also recommended steeply raising the income cap for Social Security taxes. This large tax increase could devastate small businesses.

Health care is the largest driver of long-term spending and deficits. Yet here the report was disappointingly timid. It proposed retaining nearly all of Obamacare (while wisely proposing a repeal of the unsustainable CLASS long-term care program), and merely tweaking the financially unsustainable, government-heavy Medicare and Medicaid programs.

Commissioners should have proposed repealing Obamacare and opted for fundamental Medicare reform, such as the bipartisan approach championed by Rep. Paul D. Ryan, Wisconsin Republican, and Alice Rivlin, a former director of the Office of Management and Budget and of CBO. …