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Opinion

Opinion

Opinion: Simpson-Bowles could be reform model

March 23, 2013

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— The proposition that entitlement curbs are the key to maintaining national solvency is widely accepted, though not by many congressional Democrats. President Obama, however, has endorsed it on various occasions. And he could make it happen.

If he wants. I remain skeptical that he does. But national solvency is important enough to test this proposition at least once more. The obstacle is Obama’s current position that entitlement cuts must be “balanced” with new revenue from closing loopholes.

Republicans are adamantly opposed. No more revenues, Mr. President. You got your tax hike on Jan. 1.

Is there a solution? Yes: tax reform with a twist.

The problem begins with definitions. By tax reform, Obama means eliminating deductions, exclusions, credits of various kinds with all the money going to the Treasury.

That’s radically new. The historic 1986 Reagan-O’Neill tax reform closed loopholes with no extra money going to the Treasury. The new revenue went directly back to the citizenry in the form of lower tax rates.

This is called revenue neutrality. The idea is that tax reform is a way not to fatten the Treasury but to clean the tax code. It means eliminating special-interest favors and behavior-altering deductions that create waste and inefficiency by inducing tax-preferred rather than market-oriented economic activity. And it introduces fairness by removing breaks and payoffs for which only the rich can afford to lobby.

As a final bonus, tax reform’s lower rates spur economic growth. A unique win-win-win: efficiency, fairness, growth.

Obama’s own Simpson-Bowles deficit-reduction commission offered a variant. First, it identified an astonishing $1.1 trillion per year of these “tax expenditures.” That’s more than $11 trillion in a decade. In one scenario, it knocked them all out and lowered marginal tax rates to just three brackets of 8 percent, 14 percent and 23 percent.

But here’s the twist. Using the full $1.1 trillion annually of newly redeemed “loophole” revenue, Simpson-Bowles could have dropped the rates a bit below 23 percent. But instead it left some of that money in the Treasury, an average of almost $100 billion a year, or about $1 trillion over a decade. It was a reasonable compromise, so reasonable that even the Senate’s most fierce spending hawk, commission member Tom Coburn, signed on.

Now, Simpson-Bowles is not on the table but it could be a model. Obama’s “tax reform” would send 100 percent of the revenue to the Treasury. Reagan-O’Neill sent zero percent. Simpson-Bowles fell somewhere in between. So should any grand compromise.

Before deciding exactly where to locate that compromise, however, we have to decide which deductions to cut, yielding how much revenue. The bad news is that, given all the lobbying and haggling this would occasion, it could take years to work out. The good news is the formula proposed by Harvard economist Martin Feldstein. Before even picking and choosing which deductions should remain permissible, it simply allows no one to reduce his tax bill by more than 2 percent by using any or all of the deductions and loopholes in the current tax code (except charitable contributions).

There should, of course, be separate negotiations over which of the hundreds, thousands, of loopholes/deductions should be tossed out as corrupt or counterproductive rent-seeking. But the 2 percent ceiling means that we don’t have to wait until full tax reform — because the Feldstein formula significantly and immediately reduces the impact of all the loopholes.

Feldstein calculates that his tax reform would yield $2.1 trillion in new revenue over a decade. Now we can cut the pie. Obama wants the government to keep it all. The GOP wants to give it all back to reduce tax rates. Let’s be Solomonic. Divide the revenue in half — 50 percent to the Treasury for reducing debt, 50 percent to the citizenry for reducing rates.

That’s roughly $1 trillion each. Everybody gets something. Republicans unexpectedly get a rate cut, minor but symbolic after having had to swallow the fiscal-cliff rate hike. The country gets the first significant tax reform in a quarter century. Obama gets $1 trillion worth of “balance,” his price for real entitlement reform. And if he turns out to be serious about that, we get the Holy Grail — tax and entitlement reform all at once.

Which means a deal that manages to simultaneously promote efficiency, fairness, growth, debt reduction and a return to national solvency. In other words, the best deal since the Louisiana Purchase.

— Charles Krauthammer is a columnist for Washington Post Writers Group.

Comments

Orwell 1 year ago

Shorter Krauthammer:

We MUST cut benefits to those who need them most, and who would create demand/jobs by spending the money. Our objective is to give more money to those who need it the least, who will play Wall Street Roulette with the money.

In the real world: nonpartisan CBO research established that cutting taxes does NOT create jobs, but the Republicans forced suppression of the report.

Deficits matter, but only among other concerns. And HOW the deficit is reduced is more important than WHETHER or HOW FAST it's reduced. As usual, Krauthammer and his ilk insist on benefiting themselves firstest and mostest.

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just_another_bozo_on_this_bus 1 year ago

The simple fact remains that while deficits do matter, they don't matter anywhere near as much as the hysteria over them indicates. They most certainly don't matter as much as un/underemployment rates well into the double digits. They don't matter as much as crumbling infrastructure, underfunded schools, police and fire departments or the most expensive, and least effective, healthcare system among wealthy countries, which is also a main driver of future deficits. And above all, they are completely irrelevant relative to the biggest real debt that we are passing on to future generations-- global warming and climate change that, at current pace, will almost certainly lead to economic and environmental catastrophe across the planet.

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Chris Golledge 1 year ago

I find Krauthammer's depiction of what Reagan did to be a revision of history, but I agree that Simpson-Bowles, or something very much like it is probably close to what is needed. Not an expert on it by a long stretch, but the percentage of cuts under that plan is very close to what we have with the sequestration. The difference is that the cuts are more gradual and more targeted, and I suspect that will achieve similar results in terms of balancing the budget without being as disruptive to the economy.

The short answer is that you can not continuously spend more than you bring in without coming to a crisis eventually. On social spending, we, as a society, are better off with some safety net to assist with unfortunate circumstances, but making it so that individuals are just as well off receiving charity in the form of welfare or unemployment benefits as they are getting a job, any job, is a recipe for disaster. On military spending, we spend 3 times what the next highest nation spends, and as much as the next 17 nations combined; you can't tell me that we will suddenly be vulnerable if we spend 2.7 times what our nearest competitor spends, and only as much as say, 15, other nations combined spend.

S-B is the answer no one likes, and that is a characteristic of a compromise.

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ChuckFInster 1 year ago

John Boehner " Mr. President. You got your tax hike on Jan. 1"

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Armstrong 1 year ago

Interesting concept. The biggest issue would be getting Barry to buy in.

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jafs 1 year ago

This is actually an interesting compromise.

I'm surprised CK offered it.

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just_another_bozo_on_this_bus 1 year ago

Austerity does NOT spur economic growth-- and neither does kicking the poor and the elderly to the curb.

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