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November 9, 2010

4 Good, and 4 Bad, Debt Panel Ideas

By

Say this much for Erskine Bowles and Alan Simpson: They understand that Washington's fiscal policy is putting us on a path to economic disaster. The co-chairmen of the president's National Commission on Fiscal Responsibility and Reform know that, unless we want to follow the likes of Greece or France, we need to get to work.

So Bowles and Simpson primed the pump for the commission on Wednesday by releasing their own report -- a mixed-bag plan to reduce spending, cut some taxes and raise others. No doubt this is meant to spur tough decisions by the commission, whose report is due in early December. Breaking the business-as-usual, full-steam-ahead and damn-the-consequences mentality of Washington is stunningly difficult. Bowles' and Simpson's proposals should be welcomed as a serious attempt to do just that.

By 2040, federal spending is projected to reach nearly one-third of the economy -- an unsustainable and unaffordable level. Entitlements -- Medicare, Medicaid and Social Security -- are the core of this problem. There is no way to fix spending without reforming these programs. And if they don't fix the problem? That would place unconscionable levels of debt on our younger generations. As Bowles and Simpson note, Americans have always been willing to sacrifice to make our nation stronger for future generations.

The report tackles all elements of the budget -- cutting discretionary spending, cutting entitlement and other mandatory spending, and tax policy. The results would bring spending down to 20.5 percent of GDP by 2040. This is good. However, taxes would increase to 21 percent of GDP. This massive tax increase is one of the key flaws of their plan. The notion that you must raise taxes to solve a spending problem is simply wrong.

Like many such reports, there are sound policy recommendations that should be seriously considered and others that are flawed.

Spending cuts

Good:
They would cut nondefense discretionary spending by $100 billion and take on some sacred cows like earmarks, federal pay, Congress' own budget, foreign aid, NASA or the Army Corps of Engineers. But they should go much further, given the depths of our challenges.

Bad: They propose cutting defense, leaving America vulnerable and sending a clear message to countries such as North Korea and Iran -- and our allies -- that we are no longer capable and willing to defend our interests.

Social Security reform


Good:
They propose to fix Social Security in its own right by strengthening the minimum benefit for the truly needy, raising the eligibility age to account for increases in longevity; and proposing a sound method for moving to a more progressive benefit.

Bad:
They include a new Social Security hardship exemption for those unable to work past age 62 over and above the disability insurance program. Worse, they propose to increase the amount of wages subject to tax.

Medicare reform


Good: They would repeal Medicare's "doc fix," an automatic and dramatic reduction in doctors' payments that Congress routinely thwarts, call for comprehensive medical malpractice reform (vital for reducing health care costs), and set a global target for total federal health care spending after 2020. Unfortunately, they avoid the tough enforcement mechanisms needed to ensure true reductions occur.

Bad:
They rely on price controls in Medicare that distort the allocation of resources and lead to access problems. And they fail to move Medicare and Medicaid away from a government-centric command-and-control system and toward consumer-directed programs.

Taxes


Good: They propose eliminating the insidious Alternative Minimum Tax and dramatically reduce tax rates -- including the corporate income tax rate, a reduction vital if we're to remain internationally competitive.

Bad: They call for hiking tax rates on capital gains and dividends and eliminating accelerated depreciation, thus raising taxes on capital investment. This would be exceedingly harmful to the economy. They also eliminate all "tax expenditures" across the board -- another huge tax hike. Some of these credits and deductions should be eliminated or reformed, but others should not. Instead, proposals such as these should be considered as part of a systemwide revenue-neutral tax reform -- one that will grow the economy and thus produce stronger tax revenues.

Bowles and Simpson deserve credit for jump-starting the serious discussion of some of the choices the nation must confront -- a larger and longer public discussion about the fundamental changes needed in the size and scope of government.

Alison Acosta Fraser is the director of the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

First appeared in AOL News

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