Bowles, Simpson to the Rescue! Deficit Hawks Take on the Fiscal Cliff (again)

February 19, 2013 — 1 Comment

There is no perfect solution to our fiscal problems. However, we believe strongly and sincerely that an agreement on a comprehensive plan to bring our debt under control is possible if both sides are able to put their sacred cows on the table in the spirit of principled compromise. — Erskine Bowles and Alan Simpson in “A Bipartisan Path Forward to Securing America’s Future” — Feb. 2013

Erskine Bowles and Alan Simpson threw a new sequestration alternative into the mix today.  The leaders of Obama’s 2010 fiscal commission released a framework outlining $2.4 trillion in deficit reduction; greater than the White House goal of $1.5 trillion, but not enough to satisfy the GOP’s lust for getting a balanced budget in 10 years (necessitating more than $4 trillion/10 years).

obama-simpson-bowles

obama-simpson-bowles (Photo credit: Cal Almonds)

The bi-partisan plan (Bowles is a Democrat and former White House chief of staff; Simpson is a Republican and former senator from Wyoming) strikes a middle ground in policy proposals; it reduces the deficit by just enough to stabilize the debt as a share of the economy (70% over 10 years), and unlike the sequester it’s targeted directly at the spending areas that are bankrupting the country in the long-run (Social Security and Medicare/Medicad).  It’s also probably going to fall flat on its face.  So thank you Mr. Bowles and Mr. Simpson for trying to fix the economy (again), but as you know better than most, congress is a place where good ideas go to die.

To clarify, the sequester goes into effect on March 1.  It is an automatic series of across-the-board spending cuts worth $1.2 trilion spanning from 2013 – 2021.  $85 billion would be slashed from the 2013 budget alone. The sequester was set-in place by the 2011 Budget Control Act, intended to be so intimidating and damaging that congress would be forced to develop an alternative plan to reduce the deficit.  Instead, the cuts got pushed back by two months after congress missed the fiscal cliff deadline on Jan. 1 2013. Then, legislators were only able (and barely so) to pass the American Taxpayer Relief Act (ATRA), raising taxes on high income earners and extending tax-cuts for most Americans.  Now, some congress members are calling to let the sequester take place, even though Republican House Speaker John Boehner called it “bad policy,” and nearly everyone agrees that it’s economically unsound. What are the consequences of the sequester?  GDP would decline by roughly half a percent, as many as 1 million jobs would be lost, uncertainty would grow rampant and hiring and investment would stall.  Oh, and its targets for spending slashes aren’t supported by either party AND it doesn’t do enough to fix the debt problem.  So yeah, it’s pretty bad policy.

Although the sequester delayed until Mar. 1, there has already been some progress in the realm of deficit reduction.  $2.5 – 2.7 billion dollars has already been arranged, stemming from the BCA, ATRA, lower government funding and interest savings.  Another $1.5 trillion, as the White House is calling for, would meet the initial goal of $4 trillion by 2021 and bring the debt to 73% of GDP, as it was in 2012.  The new Simpson / Bowles Proposal would cut that ratio to a more sustainable level – 70%, by adding another trillion dollars to the White House’s target (Committee for a Responsible Federal Budget).  Under the sequester alone, the Congressional Budget Office reported earlier this month that debt as a share of GDP would topple 77%, a historically high amount which, among other things, would lead to higher interest payments for the US government.

The Simpson / Bowles plan relies on the following proposals for deficit reduction.  For the full outline, click here.

  • $600 billion.  Tax Reform: Close loopholes and scale back reductions and exemptions.  Use some of the savings to fund comprehensive tax reform (lower rates and simplify) and the rest to reduce the deficit.  Challenges: The GOP says taxes are off the table, and simplifying the 70,000 + page internal revenue code in a bitter, divided congress won’t be easy.
  • $600 Billion.  Cut Medicare and Medicaid.  Improve provider and beneficiary incentives, reduce provider payments, reform cost-sharing, increase premiums for high-income earners, adjust benefits to account for an aging population and reduce drug costs.  Challenges: The White House says $400 billion is its upper limit on Medicare/Medicad cuts, and healthcare reform might be the most sensitive and difficult political issue given the never-ending debate on Obamacare.    
  • $1.2 trillion from:
    • Using chained-weighted CPI to adjust cost of living payments from programs like Social Security (SS).  Chained CPI, which some say is a more exact measure of inflation, would also adjust income tax brackets and raise revenue.  This new form of indexing could contribute ~ $100 billion to any deficit-reduction strategy.  Challenges: Republicans might consider this a tax increase.  Democrats don’t want to cut SS payments.
    • Strengthen limits on discretionary spending.  Challenges: How much?  Which programs?  The only assurance is that these cuts will be less than the $2 trillion plus the original Simpson / Bowles plan called for.
    • Reduce Mandatory Spending Programs: Cut farm subsides, modernize civilian and military retirement programs, reform higher education spending, increase user fees to government services/facilities such as visiting national parks, the library of congress, etc.  Challenges: Specific cuts are vague and the amounts are not finalized, doing so would require political leaders to strike a compromise by fiddling over small budget items – imagine that.  

So there it is: $2.4 trillion in additional deficit reduction in just three pages.  Simpson and Bowles want to wait a couple of weeks before finalizing details to receive feedback, says Marc Goldwein, policy director at the Committee for a Responsible Federal Budget.  Unfortunately, by that point the sequester will already be in effect.

The proposal is a different approach from the pair’s original deficit reduction strategy they produced as co-chairs of the “super committee,” highlighting the partisan divide in congress:

This plan sacrifices the most useful element of the original Simpson-Bowles effort, which was that it created a model — not the only model, of course — for how you might go about reducing the deficit if you weren’t bound by the various promises, interest groups and political constraints of the two parties. This plan, by contrast, is an effort to split the difference between the two parties while amping up the total deficit reduction. –Ezra Klein, Washington Post

The plan does rely more on spending cuts and less on tax increases, which could make it more palatable to the House GOP.

The news is making headlines and investors are responding as stock prices rose this morning in anticipation of the announcement.  If you saw how the debt-ceiling and fiscal cliff part 1 debates panned out though, the new Simpson / Bowles plan doesn’t give much reason to be more cheerful: Thus is the Joy of Tax Law and Litigation.

Even if Simpson and Bowles’ plan was somehow fully embraced by congress, the pair also called for an additional “Step 4″ which would require “making Social Security sustainably solvent, bringing the Highway Trust Fund into balance, and limiting the long-term growth of federal health care obligations.”  Step 4? – Now that’s asking a lot.

What do you think about the Simpson / Bowles framework and the sequester?

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JDKatz: Attorney's At LawJDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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  1. Close which loopholes? (hint: not the corporate jet one) « The Joy of Tax Law & Litigation - February 26, 2013

    […] $1.2 trillion sequester, AKA the “austerity crisis,” and “fiscal cliff Part 2” takes effect at the end of this week (March 1).  WIth no alternative legislation, $85 […]

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