To tackle America’s growing national debt problem, President Obama put together a task force earlier this year to look at options on how to cut government spending, implement tax reform and improve the effectiveness of federal entitlement programs. The deficit reduction commission co-chairs (Erskine Bowles and Alan Simpson) put forward a $3.8 trillion deficit-cutting draft plan that calls for discretionary spending to be cut by $1.4 trillion over 10 years, while mandatory spending – including Social Security, Medicare and Medicaid – would be reduced by $733 billion. Taxes would be raised by $751 billion. More specifically:
Tax Cuts and Changes
- Consolidate the tax code into three individual rates and one corporate rate. Based on the options the bottom tax rate will be between 8% and 15%, the middle rate would be between 14% and 25%, with the top rate capped at 35%. The Corporate tax rate would be cut to 26%
- Repeal AMT
- Triple standard deduction to $30,000 ($15,000 for individuals)
- Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
- Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
- Treat capital gains and dividends as ordinary income
- 15-cent increase in the gas tax
- Gradually increase the taxable maximum to capture 90 percent of wages by 2050 (vs 82% at the end of this decade)
Social Security, Medicare and Health Care Changes
- The Social Security retirement age would rise to 68 in about 2050 and 69 in 2075, as the retirement age is indexed to increases in longevity
- Pay doctors and other providers less, improve efficiency, and reward quality by speeding up payment reforms and increasing drug rebates
- Pay lawyers less and reduce the cost of defensive medicine by adopting comprehensive tort reform
- Replace existing cost-sharing rules with universal deductible, single coinsurance rate, and catastrophic cap for Medicare Part A and Part B.
- Add a robust public option and/or all-payer system in the health care exchange system
- Add a new special minimum benefit to keep full-career minimum wage workers above the poverty threshold
- Give retirees the choice of collecting half their benefits early and the other half at a later age to support phased retirement options
Federal and Military Changes
- Use highest 5 years to calculate civil service pensions and ask federal workers to contribute half the cost (not 1/14th)
- Reform COLA payments for civilian & military early retirees
- Reform military retirement system to vest after 10 years (not 20); defer collection until age 60
- Reducing Congressional and White House budgets by 15 percent, freezing federal salaries and cutting the federal workforce by 10 percent.
- Freeze Defense Department salaries and noncombat military pay at 2011 levels for three years, cutting overseas bases by one-third and doubling proposed cuts in defense contracting.
The savings would come between 2012 and 2020. The result would be a deficit totaling about $400 billion or about 2.2 percent of the nation’s gross domestic product in 2015. That would exceed Obama’s goal for the panel of a reduction to 3 percent, from the current 9 percent of GDP. While most economists say some combination of spending cuts and tax increases is necessary, Republicans are wary of tax hikes and Democrats are reluctant to reduce U.S. government benefits. (Bloomberg)
What do you think about these proposals? For now they are just draft ideas and it will take a long while before Congress actually considers them, even though the commission’s plan calls for having them in effect by 2012 to 2013. Furthermore, given the adverse political consequences of cutting federal entitlement programs, it is unlikely any politician will be too keen to support many of these proposals without much more voter input (for example talk of cutting medicare or social security benefits is akin to political suicide). Still, one thing these proposals do show is how challenging and painful reducing our national debt will be. The question is, will we or future generations be the ones that bear the cost of the ever growing national deficit.