Deficit Reduction Proposal Has No Chance Of Getting Support From Divided Congress

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A bipartisan White House commission this week announced a sweeping proposal to slash the federal deficit by hundreds of billions of dollars a year by taking aim at virtually every sacrosanct area of U.S tax and spending policy, including Social Security and Medicare, middle-class tax breaks and defense spending.

But while the proposal has enough teeth to put a real dent in the mushrooming deficit, the  political reality is that it has virtually no chance of passing through a divided Congress without major changes.

Mathematically it apparently works…[but] politcally, it is going to have a lot of trouble getting support from more than just the two co-chairs,” Stan Collender, a former Democratic House and Senate budget analyst and managing director of Qorvis Communications in Washington told Bloomberg News.

The plan by co-chairmen Erskine Bowles and former Sen. Alan Simpson, has little chance of winning the support from 14 of the 18 commission members that is needed to force a debate in Congress.

Coming a week after voters put Republicans back in charge of the House of Representatives, the proposal would cut discretionary spending by $1.4 trillion over 10 years, while mandatory spending – including Social Security, Medicare and Medicaid – would be reduced by $733 billion.

The proposal also would raise taxes by $751 billion over 10 years, including a 15-cent increase in the gas tax that would be phased in starting in 2013.

Overall, the plan would slash roughly $3.8 trillion from the deficit by 2020, or about half of the $7.7 trillion by which the debt would have otherwise grown by that year, according to commission staff. The current national debt is about $13.7 trillion.

The plan instantly came under fire from riled up Democrats and Republicans, as well as a number of special interest groups, including the Mortgage Bankers Association and the Aerospace Industries Association.

Democratic House Speaker Nancy Pelosi called the targeting of Social Security and Medicare “simply unacceptable,” and U.S. Rep. Jeb Hensarling, R-TX, came out against any proposals to raise taxes.

However, Money Morning Contributing Editor Martin Hutchinson questions whether the proposal goes far enough.

“The plan reduces spending only to 22% of [gross domestic product] GDP, significantly higher than its historical level of around 20% while raising taxes to 21% of GDP, significantly higher than their historical level of around 18%,” Hutchinson wrote in a column that appears elsewhere in today’s issue of Money Morning. “Thus the Presidential and Congressional bad behavior of the last decade is to some extent set in stone, even if some of the excesses of the last couple of years are removed.”

Erskine and Bowles were among the first to acknowledge their plan’s shortcomings, and that it will never survive Congress intact.

“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.

Proposals in the plan regarding the sacred cows of Social Security and Medicare are sure to undergo the most intense scrutiny.

The Social Security proposal would use a “chained” index to measure inflation, which would reduce cost of living adjustments (COLA) and annual increases for beneficiaries. The plan also would raise the regular Social Security retirement age to 68 in about 2050 and to 69 in 2075.

Medicare and other healthcare costs would be reduced by cutting pay for doctors, cutting the cost of drugs by paying pharmaceutical companies less, and increasing cost-sharing with recipients.

Hutchinson called the new COLA index “a plain rip-off.”

“Far from overstating inflation, the current consumer price index drastically understates it,” he said. “Using a chained index for social security adjustments is nothing but a crude attack on senior citizens’ living standards.”

The plan also radically changes the way the government levies taxes, including eliminating the popular deduction for home-mortgage interest.  It would tax capital gains at 28% and dividends at the higher rates now levied on regular income. To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.  Corporate rates would go from 35% to as low as 26%.

Hutchinson believes parts of the new tax proposals are especially unfair.

“Since dividends are paid out of income that has already been taxed at the corporate level, their tax should be reduced to zero – or, better, dividends should be made tax-deductible from corporate income,” he wrote.  “As for capital gains tax, we have 40 years experience now that has shown pretty conclusively that the revenue-maximizing level for this is 20% and no higher.”

Other key provisions of the proposed plan include:

  • Increasing the gas tax by 15 cents a gallon to fund transportation programs.
  • A three-year freeze on the pay of most federal employees and cutting 200,000 jobs in the federal work force.
  • Eliminating all Congressional earmarks.
  • More than $100 billion in defense spending cuts.
  • Cutting farm subsidies by $3 billion per year.

Of course, even if every one of these draconian cuts were to pass intact, the United States still would face a budget dilemma.

The government is projected to run $8 trillion in deficits over the next 10 years, which would push the national debt to more than $20 trillion. If the proposal were adopted without change, the government still would have deficits of $350 billion a year.

“It puts out there how big and real the problems are,” Sen. Tom Coburn, R-OK, a member of the committee told Bloomberg.

Members of the commission will now sit down to see if they can refine the draft into something on which they can agree before President Barack Obama’s Dec. 1 deadline for the plan to be taken up by Congress.

“Is America ready for an adult conversation on the deficit?” Rep. Jim Cooper, D-TN told Bloomberg. “It’s ‘put up or shut up’ time.”

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