Budget deficit commission will wrestle with hard choices

McClatchy NewspapersApril 22, 2010 

WASHINGTON — Unable or unwilling to do it himself, President Barack Obama next week launches a bipartisan commission that's charged with finding a way to slash the government's skyrocketing budget deficits.

The easy part? Everyone agrees that something has to be done. The hard part? Agreeing on what to do.

Tax the rich? That appeals to liberals, but Obama's already pushed through or proposed more than $1.1 trillion in tax increases over the next decade, many on those who make more than $200,000 a year. Getting more will be difficult.

Reduce spending? Sounds good at tea party rallies, but Congress couldn't agree on $9 billion to cut in order to pay for extending jobless benefits, and experts say it would take much deeper reductions in popular programs such as Medicare and Social Security to make a significant dent. That's equally daunting.

Thus, the bipartisan National Commission on Fiscal Responsibility and Reform faces no easy task when it holds its first meeting on Tuesday, searching for a bipartisan consensus on ways to reduce the deficit to within 3 percent of the U.S. gross domestic product by 2015.

Under Obama's proposed budget, this year's deficit is projected to reach $1.5 trillion, or 10.3 percent of the GDP, according to the nonpartisan Congressional Budget Office. It's expected to decrease slightly to $1.3 trillion next year, or 8.9 percent of the GDP, and to 4 percent of the GDP by 2014. The CBO says it will resume rising again after that, however.

Obama is asking the commission to recommend by Dec. 1 ways to cut deficits further, trying to ensure that any plan is bipartisan by requiring that 14 of the 18 members agree on any recommendation.

"It's unlikely they're going to come up with a plan that will get 14 out of 18 votes," said Robert Bixby, the executive director of the Concord Coalition, an anti-deficit group. "It's quite an uphill climb, but worth taking a shot."

Bixby said Obama faced two major obstacles: asking for quick fixes when many problems, such as deep deficits in entitlements such as Social Security and Medicare, were long-term challenges, and hoping that Republicans would help him come up with politically risky remedies that he wouldn't dare propose himself.

"It implies the president has set a goal he's unwilling to meet on his own," Bixby said.

Still, he and many other advocates of a balanced budget fear that the country is courting a fiscal crisis, and they hope that the commission at least will make clear some crucial choices.

Among the options:

TAXES

Taxes would have to rise by nearly 40 percent in order to reduce the deficit to the target level, according to the nonpartisan Tax Policy Center. If applied uniformly across the board, the lowest marginal tax rate would jump from 10 percent to 14 percent and the top rate from 35 to 48 percent.

If applied only to individuals who make more than $200,000 a year and couples who earn more than $250,000, the top rate would have to jump to nearly 77 percent.

The center concluded: "Such dramatic tax increases are politically untenable and still wouldn't come close to eliminating the deficit."

VALUE ADDED TAX

Some economists propose a national version of a sales tax, or value added tax, akin to those levied in Europe.

White House aides say that Obama isn't even thinking about a value added tax, but the president himself hasn't ruled it out. "That is something that has worked for some countries. It's something that would be novel for the United States," he said this week on CNBC. "Before, you know, I start saying, 'This makes sense or that makes sense,' I want to get a better picture of what our options are."

CUT SPENDING

Obama already has proposed freezing "non-security" discretionary spending for three years. That covers all federal programs except defense, homeland security, veterans and entitlements.

The commission could propose extending that freeze or even reducing spending on those programs. Sen. Kent Conrad, D-N.D., the chairman of the Senate Budget Committee, this week proposed cuts including the Pell Grant program, which Obama likes.

Reducing spending is politically hard, however. When Sen. Tom Coburn, R-Okla, demanded an offset to pay for just $9.2 billion in unemployment benefits, Democrats and the media slammed him, and he lost.

Another option is to freeze or cut the rest of the discretionary budget, including defense and homeland security.

Obama has had some success at that, notably managing to kill the F-22 fighter jet, which the Pentagon no longer wanted. New reductions could be harder.

One big potential source of cash could come from the withdrawal of U.S. troops from Iraq, if the rising costs of sending more troops to Afghanistan don't consume those savings .

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SOCIAL SECURITY

The panel could propose raising taxes on Social Security. A Reagan-era commission pushed through an increase in the payroll tax paid by employees and employers, which is now at 6.2 percent of income. It could be increased again.

Also, the tax now stops on income above $106,800, a ceiling that rises each year. The government could raise the cap higher to get more taxes or lift it altogether.

Or the government could raise the retirement age, to delay when people would collect full benefits.

The 1983 changes scheduled a gradual increase in the retirement age each year, rising from 65 to 67 by 2027. The qualifying age could be raised higher.

MEDICARE

Another possibility is increasing the Medicare tax.

However, the newly enacted health care law already raises Medicare taxes for individuals who earn more than $200,000 and couples who make more than $250,000. That tax increase, part of the $438 billion in health care tax increases over 10 years, is to finance new health benefits for the uninsured, not to reduce the deficit.

Also, money saved by cutting Medicare Advantage will be used for new benefits, not for trimming deficits.

"The most troubling aspect of the new health care bill is that they took a lot of things that should have been used to cut the deficit or shore up Medicare," Bixby said. "Unfortunately, the new health care law took most of them to pay for new benefits."

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PUMP UP THE ECONOMY

One option is for the economy to grow so fast that it produces a flood of tax revenue.

However, "Recent fiscal history offers little basis for that view," concluded a report from the National Academy of Public Administration and the National Research Council.

The big problem: The labor force isn't growing as much as it used to, and adding more workers is key to economic growth. The labor force grew an average of 2.1 percent a year in the 1970s and 1980s, but it dropped to about half that rate, 1.1 percent, from 1990 to 2008. It's expected to drop even more, to 0.7 percent a year through 2018, then to 0.5 percent a year until 2050, according to the Social Security Administration.

LET IN MORE IMMIGRANTS

Some suggest letting in more immigrants to help pay for the growing burden of such programs as Social Security.

It wouldn't help much, however.

"The effect is so modest that even if immigration doubled or tripled from the current rate, it would make only a small long-term contribution to incomes and therefore to federal revenues," said the National Academy of Public Administration and the National Research Council.

SPUR INFLATION

Could the United States engineer inflation to shrink the relative size of the debt?

Inflation after World War II helped cut the cost of the war debt, which reached an astronomical 109 percent of the GDP. Other factors helped too, though, including a jump in the labor force thanks to returning GIs, and a booming economy.

However, rising inflation wouldn't solve the problem.

Much of the federal government's debt is short term, meaning it must be paid off before inflation could devalue it, or it's indexed to rise with inflation.

Also, the three biggest entitlement programs — Social Security, Medicare and Medicaid — are indexed to inflation, meaning that their costs would go up with inflation.

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