Another Deficit Plan Targets Taxes By DAMIAN PALETTA

Another Deficit Plan Targets Taxes By DAMIAN PALETTA

A panel of Democrats, Republicans, economists and other experts said Wednesday that a complete overhaul of the U.S. tax code is the best way to address the nation's fiscal problems—a new and likely controversial idea aimed at tackling the growing deficit.

John Bussey discusses a new plan to reduce the deficit from a group led by Democrat Alice Rivlin and Republican Pete Domenici. The group envisions a complete overhaul of the U.S. tax code.
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The report, co-authored by Democratic budget veteran Alice Rivlin and former Sen. Pete Domenici (R., N.M.), follows a separate proposal last week by the two chairmen of President Barack Obama's deficit commission. The many similarities between the two offer a window into the types of proposals that might win backing as Washington launches into what is likely to be a protracted debate on deficit cutting.

The most recent report, put together by a group called the Bipartisan Policy Center, calls for a one-year payroll-tax holiday in 2011 that it says will create between 2.5 million and 7 million jobs.

The plan would lower income and corporate tax rates and offset them with a 6.5% national sales, or "consumption," tax as well as an excise tax on sugar drinks like soda.

The Bipartisan Policy Center was created in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell with the aim of finding solutions to major national issues.

Last week's proposal, from Democrat Erskine Bowles and Republican former Sen. Alan Simpson, also called for an overhaul of tax and spending programs. Other similarities include:

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Alice Rivlin and Pete Domenici in January speaking about the U.S. debt.
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• Changing the formula for social-security taxes so that they are levied against 90% of all wages, compared with the current system, which caps the tax at a certain income level.

• Major cuts in discretionary spending. Both singled out a government policy that allows military retirees to collect full benefits after 20 years.

• Cuts to farm subsidies and either eliminating or limiting certain politically popular tax breaks, such as the mortgage-interest tax deduction.

Democrats and Republicans are largely in agreement that the U.S. debt is on an unsustainable path, and ideas are pouring in from both sides. Rep. Jan Schakowsky (D., Ill.), a member of Mr. Obama's commission, offered her own proposal Tuesday, calling for $110.7 billion in defense spending cuts in 2015 and raising $132.2 billion in revenue by closing certain tax loopholes for companies that she said ship jobs overseas.
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Mr. Domenici, in an interview, said, "In some ways, [the debt] is a silent killer, eating away at our future,"

Because the proposals touch so many key parts of the economy, from taxes to spending, they have triggered opposition. The latest came Tuesday, when Defense Secretary Robert Gates said the proposal by Messrs. Bowles and Simpson to cut $100 billion from defense spending would have a "catastrophic" impact on national security.

Those cuts are "math, not strategy," he said at The Wall Street Journal's CEO Council in Washington.

Mr. Domenici, who spent 36 years in the Senate, called for a four-year freeze on defense spending as part of his report and said Pentagon officials should be less resistant. "Everybody must sacrifice, and our military leaders...must bear their share to get [the debt] under control," he said.

The Rivlin/Domenici proposal is likely to attract the most attention for its proposed 6.5% Debt Reduction Sales Tax, which some will liken to a value-added tax that exists in some parts of Europe.

Rep. Eric Cantor (R., Va.), who is likely to become House majority leader in January, said Tuesday that many lawmakers wouldn't support VAT-type tax because its ties to Europe might make it politically poisonous in Washington.

"I don't think any of us want us to go the direction of the social welfare states around the world," Mr. Cantor said at the CEO Council.
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“ Changing the tax structure without controlling federal spending first is a waste of time. ”

—Edward Neis

Ms. Rivlin said the national sales tax was necessary to bring in revenue lost by cutting income and corporate tax rates and putting in the one-year payroll-tax holiday. A "consumption tax was a good way to go rather than try to put more burden on an income tax," she said.

Another change in the proposal would affect health-care costs. The proposal would, starting in 2018, encourage people to purchase private insurance plans by charging higher premiums for Medicare if costs rise faster than certain limits.

Treasury Secretary Timothy Geithner said at the CEO Council Tuesday that the administration was waiting to see what the specific proposals looked like before it weighs in on specifics. He said the ideal situation would combine short-term fiscal policies that help sustain growth with medium and long-term policies that cut the debt.

Write to Damian Paletta at damian.paletta@wsj.com