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So, About That Deficit Commission ...


WestVirginiaRebel

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WestVirginiaRebel
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The Atlantic:

The chairmen of the deficit commission have released a proposal as to what we should do about our fiscal future. It's not the commission's final report; rather, it's a starting place for negotiations. The broad outlines:

1) Tax revenues capped at 21% of GDP.

2) Substantial renovation of the Social Security program which will make it substantially more progressive, gradually raising the percentage of payrolls that are subject to Social Security tax to about 90%, and altering the formulas for calculating and indexing benefits so that those whose lifetime earnings are above the median will see much less in the way of benefits.

3) A hundred billion or so in defense cuts, including closing 1/3 of our overseas bases, forcing military retirees to wait until age 60 to collect their pensions, and reducing procurement expenditures.

4) A like cut in domestic discretionary spending, including reducing foreign aid, a 10% reduction of the federal workforce, and the elimination of all earmarks.

5) Tax simplification and top rate reduction. This proposal is complicated, and is being oversimplified by many commentators.

6) Big cuts to health care and an alteration of the IPAB mechanism for recommending further cuts.

Needless to say, this has attracted quite a bit of ire. My inbox is crowded with missives from conservative groups screaming that the commission has proposed ONE TRILLION IN TAX INCREASES that will DEVASTATE THE ECONOMY. Meanwhile progressive groups are proclaiming that it's outrageous to cap tax revenues at 21% in order to cut the top tax rate to 23%.

My thoughts:

1) Progressives are going to have to accept that this isn't going to be all, or even mostly, done with tax increases. The comparisons to European nations being bandied about are silly. For starters, unlike, say, Sweden, America has really substantial state and local spending, which limits how much the federal government can tax and spend. According to the Census, in 2008 state and local governments spent $2.8 trillion, of which about $2 trillion were operating expenditures. That same year, the US government spent about $3 trillion. US government spending at all levels is now over 40% of GDP.

In America, I don't see how this number is going to go to 50% without some sort of fiscal cataclysm, and no, I don't care how awesome Sweden is. Twenty-one percent of GDP is well above the historical average of the last 50 years, indeed, it's well over what we're taking in now, or will take in when the Bush tax cuts expire. Meanwhile, state and local taxes are going to have to go up, because of pensions and other mandatory spending.

I see a lot of commentary this morning saying that a plan with such a low revenue cap is "not serious," but I could say the same of blithely assuming that you can raise federal taxes by, say, 40%. When I asked a senior deficit commission official why there was no mention of a VAT, he dryly noted that a resolution opposing the VAT passed the Senate in April by 83-13.

Moreover, the problem is on the spending side. There's no way, mathematically, to make up all or even most of our budget problems with tax increases. There were always going to be more spending cuts than tax increases, especially in health care.

There is especially no way given that, um, Republicans exist. You can get as angry as you want, but you cannot assume away the half of the political spectrum that does not want a massive increase in government spending and income redistribution. If you do, the voters will . . . well, do what they just did, and elect more of those people. Get angry at the voters, if you want, but it's foolish to get angry at the commissioners.

Conservatives are getting angry that there is any tax increase at all seem as foolish, at least. There was never any chance of a 100% spending cut program--even if the Democrats didn't control a thing, remember how Social Security privatization went? This is a good compromise: the tax take increases by roughly 15%, along with a broad simplification plan that should remove economic distortions and enhance growth.
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Megan McArdle goes into the nuts and bolts of the deficit commission's plan, and finds both liberal and conservative criticism somewhat overblown.
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