Deficit Commission: Tinkering Around the Edges

Whether it was intentionally jumping the gun to give us a flavor of what we can expect or inadvertently leaked, a draft copy of the report from the National Commission on Fiscal Responsibility and Reform found its way to the New York Times and other media outlets this week. This came as a bit of a surprise since the report itself isn't due until December, and while the draft is marked “Do Not Quote, Cite, or Release,” it appears the pundits have already disregarded the advisory.

So in doing a quick layman's analysis of the report, the claim made is that it balances the budget by 2037 -- in part by making $4 trillion in deficit reduction over the next decade -- and fixes Social Security for the next 75 years by making needed reforms and slowly advancing the retirement age to 69 before the end of the century. They also aim to offset the cost of the “doc fix” for Medicare by making a series of cuts through savings and lowering reimbursement rates.

In the report, they show “illustrative” spending cuts which can be made over the next five years to both defense and domestic spending. Overall, the report creates a sketch of what could be done to address the deficit if Congress had the spine to follow through on the recommendations, with the hardest sell likely to be the changes to Medicare -- especially in the wake of the fight over ObamaCare.

More fascinating to this observer, though, are the proposed changes to the tax code, best described as making a series of tradeoffs. The architects of the plan have three different options, including a simple option of a “haircut” on deductions if suitable reforms aren't enacted by 2012.

The other two options follow fairly similar lines. One plan reduces the number of tax brackets to three, with differing percentages -- they could run as low as 8% for the poorest Americans to as high as 28% for our wealthiest taxpayers and for corporate earnings, depending on which items remain as deductions. The more deductions eliminated, the lower the rate goes. It's probably as close as we can get to a flat tax.

Another option is similar, but somewhat more complex. In return for simplifying the brackets to three (15%, 25%, and 35%) and lowering the corporate tax rate to around 26 percent, a number of cherished deductions such as cafeteria plans and deductions for state and local taxes go away. We would no longer face the alternative minimum tax but would lose the interest deduction on home equity loans, second homes, and large mortgages. The idea for all of the options is to limit the collections to a point where they no longer exceed 21% of GDP.

Perhaps the worst revenue option presented is a call to increase the gasoline tax in stages totaling 15 cents a gallon, presumably to fund transportation projects.

Yet in reading through the report, a number of questions and observations jumped out at me.