Editorial Some Fiscal Reality

November 10, 2010 Editorial Some Fiscal Reality
The draft proposal by the chairmen of President Obama’s deficit-reduction commission was a welcome antidote to the low-minded debate that dominated the midterm elections, in which politicians all vowed to reduce the deficit but offered no credible plans.

The proposal, released Wednesday, comes from Erskine Bowles, formerly the chief of staff for President Bill Clinton, and Alan Simpson, the former Republican senator from Wyoming. It frankly acknowledges what most politicians are too cowardly to admit — that deficit reduction will require shared sacrifice.

It lays out sensible principles, prominent among them that deficit reduction should start gradually, beginning in 2012, to avoid disrupting the fragile economic recovery. It also affirms the need to protect the most vulnerable Americans and to invest in education, infrastructure and research and development.

Then it does what any successful deficit reduction plan must do: It puts everything on the table, including tax reform to raise revenue and cuts in spending on health care and defense. It even dares to mention the need to find significant savings in Social Security, Medicare and other mandatory programs.

In a misguided provision, it assumes that spending and revenues should not exceed 21 percent of gross domestic product — a numeric limit that could make it impossible to meet future national needs. In all, however, the proposal is both broad and deep.

It is not clear what the commission’s final report will say. It is even doubtful that this plan would garner the 14 votes from the 18-member commission that are required to send the package to Congress for a vote in December.

At a time when good ideas are depressingly scarce in the political and economic debate, and bipartisan agreement even scarcer, this is a commendable start.

Some first impressions:

TAXES The proposal includes three options for tax reform, two of which would simplify the code by reducing income tax rates while modifying or repealing many tax deductions and other tax breaks. The third calls on Congress to undertake tax reform, while putting in place automatic tax increases if it fails to act by 2013.

The sensible aim is to raise more money — roughly $1 trillion over 10 years — than under the current system. We wish the co-chairmen had come right out and said directly that the country needs to raise taxes. Instead, the proposal says coyly that the tax changes would “reduce the deficit.”

Tax simplification is a benefit in itself. A tax code that is easier to understand is also one that is more likely to be perceived as fair, without which it would be impossible to get public support for reform.

The reforms should go farther. Raising enough revenue in a global economy driven by trade, finance, services and spending will require new sources, such as energy taxes, a financial transactions tax or a value-added tax. A value-added tax that doesn’t fall most heavily on lower-income Americans could be a significant spur to growth, because it doesn’t tax savings.

THE MILITARY The Pentagon, which accounts for half of all discretionary spending, got virtually all it wanted after 9/11. Since the recession, Defense Secretary Robert Gates has cut back several dozen unneeded weapons programs for a long-term savings of $330 billion. He has called for $100 billion in administrative cuts and efficiencies over five years. But he would plow the savings into troops and weapons modernization, maintaining modest growth in overall spending.

The new proposal would go far beyond that, anticipating $100 billion in military budget cuts in 2015 alone — and would put the savings into deficit reduction.

It calls for freezing salaries and bonuses for the Pentagon’s civilian work force and noncombat military pay, cutting weapons procurement by 15 percent and slashing military personnel at bases in Europe and Asia by one-third. All ideas well worth debating.

The most politically volatile suggestion may be to tackle military health care costs, which rose from $19 billion to an unsustainable $50 billion over the last decade. The commission blueprint would raise premiums and co-payments on military retirees who now pay no premiums and very low deductibles. Many of these retirees work in the private sector but opt for much cheaper government health insurance. Their employers would be required to reimburse the government for the employer share of the retiree’s health cost, eliminating what the chairmen say is a government subsidy for a normal business expense.

SOCIAL SECURITY To ensure the system’s solvency over 75 years, the proposal would reduce benefits to most future retirees. It would also subject higher levels of income to the payroll taxes that support the program, while building in safeguards for both low-income and long-lived beneficiaries.

The cuts to middle-class benefits are too large — a function of the fact that the proposal tilts too heavily toward cuts in benefits rather than increases in revenue.

What is important is that the proposal preserves the system’s basic character and successful design: the young support the old via payroll taxes and the rich help the poor via a benefits formula that favors the neediest.

HEALTH CARE The proposals for reducing federal health care costs include some worthy ideas that are usually ducked or weakened because of political or interest-group opposition.

In some cases, the chairmen would go beyond the new health care reform law by strengthening some of the most important cost-cutting provisions that were watered down in the struggle to pass the legislation. It would strengthen a Medicare payment advisory board and cap tax exclusions for employer-sponsored plans at a lower level than the law does.

The chairmen would spread the pain in both ideological directions. They propose caps on malpractice awards that can drive up costs, which is anathema to Democratic-leaning trial lawyers, and, if costs rise faster than targets, they back the introduction of a public plan on the new insurance exchanges, which is anathema to Republicans. All of this is described so sketchily that it is hard to predict the impact.

As we read the chairmen’s proposal, we had one very strong reaction: We hoped the Republicans would pause long enough in their gleeful planning of President Obama’s final defeat, and the Democrats would stop wringing their hands, long enough to read this important document — and then act on it.