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  • The Fiscal Commission’s Moment of Truth

    The report of the President’s Fiscal Commission is due today. As a stalemate appears increasingly likely, what appears to be an updated “chairman’s mark” to guide the commission’s discussions over the next several days was released. Like its predecessor, the report, puzzlingly titled “The Moment of Truth” (as if this will somehow garner enough votes), has some strong elements, both positive and negative.

    Overall, this proposal does much the same as the previous report, though it would cut spending deeper and faster, bringing discretionary spending to 2008 levels (adjusted for inflation) and balancing the budget two years earlier by 2035. Rather than wait to phase in cuts, it would reduce spending by $50 billion immediately, by starting “at home” with congressional and federal workforce pay and other common-sense ways to reduce federal spending.

    Yet, as if taxes and spending are somehow equal bookkeeping maneuvers, the tax hike is bigger and faster than the earlier version. The commissioners appear to have wasted their opportunity to be truly transformational, such as in health care, by resorting to “pilot” trials of the Rivlin–Ryan Medicare premium support proposal. And notably, again, they leave Obamacare in place, save for one major improvement: the repeal or reform of the massively irresponsible long-term care benefits in the CLASS Act section of the law. Some specifics:

    Defense. Again, the commission places an overwhelming burden on defense to reduce the deficit when the defense budget disproportionately represents only about 19 percent of the entire federal budget. Moreover, defense is not the cause of deficits today or in the future. Policymakers who believe strongly in accountability can and should help identify significant savings in defense, including the areas of logistics and personnel management reform.

    However, by letting fiscal pressures alone determine what to do with the peacetime military budget is, as Secretary Gates recently said, “math, not strategy.” The reality is that what America has asked the military to do for the past 20 years and for the foreseeable future requires any savings to be temporarily reinvested in the military in order to recapitalize a force largely built 25 years ago.

    While the commission draft report is smart to exclude war funding from its security cap and note that budget rules should not determine war policy, it should have done the same for the base defense budget used to fund everything else the military does today. No commission should tie the hands of the Commander-in-Chief or Congress in determining the best way to pursue the protection of America’s vital national interests.

    Social Security. The revised draft includes several very positive changes for Social Security, but it also includes two serious policy errors. On the plus side, the two chairmen retain the increase in the full retirement age to 69 and include a gradual rise in the early retirement age to 64. They also adjust both the benefit formula for upper-income retirees to focus scarce resources on those who need them the most, include a minimum benefit that will help keep lower-income workers out of poverty, and adjust the annual cost-of-living adjustment formula to a measure that more closely mirrors a retiree’s cost of living.

    However, the chairmen also make the serious error of increasing over time the amount of income subject to the payroll tax from $106,800 to about $190,000. This rise would especially hit small business owners and reduce future growth in hiring by the companies that they own.

    The chairmen also retain a mistaken provision that brings all newly hired state and local government employees into Social Security—a move that brings in revenue in the short run but increases costs over time.

    Dropping these last two policy mistakes would greatly improve Social Security’s financial future without reducing job creation. Two additional positives are the call for a new disability benefit for those unable to work until the increased retirement ages and a call for bipartisan action to increase non–Social Security retirement savings.

    Obamacare. While the proposal calls for the repeal of the CLASS Act (the horrible federal long-term insurance entitlement created under the unpopular Patient Protection and Affordable Care Act of 2010), the rest of the horrendous health law is left in place, thus locking in expanded federal spending.

    Medicare. The recommendations fall short of the major structural reforms needed—the transformation of the program from a defined benefit to a premium support system. Nonetheless, the commission proposes a number of positive changes: the repeal of the Sustainable Growth Rate formula for updating Medicare physician payment in a fashion that is deficit neutral; changes to Medicare cost sharing rules, such as establishing a single deductible for hospital and physicians services and adding catastrophic protection; eliminating first-dollar coverage in Medicare supplemental insurance, thus solving a major cost problem in the program; and reducing excess payments to hospitals for medical education.

    Medicaid. Once again, the recommendations fall far short of structural reform of the Medicaid program. The commission instead recommends improvements within the current Medicaid structure such as preventing state gaming to secure higher federal payments, putting Medicare/Medicaid dual-eligibles in managed care, a more flexible waiver process for so-called well-qualified states, and reducing Medicaid’s administrative costs. The recommendations to promote Medicaid pilot programs and fast track successful models could encourage much needed experimentation at the state level, but this approach does not ensure structural reform.

    Transformational Reform. A particularly attractive proposal is changing the defined contribution payment formula for the Federal Employees Health Benefits Program into a straight premium support system, with the annual government contribution indexed to the growth of the Gross Domestic Product (GDP) plus 1 percent. This is proposed as a forerunner for Medicare reform.

    The commission also recommends the application of the GDP-plus-1-percent formula as the global budget target for all federal health care spending. This would restrain federal spending, but such a cap should be accompanied by safety valves to ensure patient access, such as the right of doctors and patients to contract privately for medical services outside of Medicare and the elimination of balanced billing restrictions in Medicare and elsewhere.

    Taxes. Just as in the co-chairs’ original proposal, the commission’s report represents a massive tax hike on American families and businesses. The tax code historically raises 18 percent of GDP in revenue. The commission’s proposal surpasses President Obama’s tax hike of 19.8 percent and would take taxes to 21 percent of GDP, shattering the all-time record high tax level.

    The proposal obscures the massive tax hike by cloaking it in the form of fundamental tax reform. On the positive side, the proposal lowers the top marginal income tax rate and the top corporate income tax rate and moves the corporate tax to a territorial system. It also eliminates a host of deductions and credits that complicate the tax code and slow economic growth and eliminates the dreaded Alternative Minimum Tax.

    On the negative side, the corporate tax rate offered is still too high because it remains above the average of other industrialized nations. Taxes on capital are also too high. In fact the proposal raises the rates on capital gains and dividends above their current levels. To rectify this, the commission should build upon the proposal by lowering tax rates even further to enhance incentives to generate income, form capital, and increase global competitiveness.

    Most disturbingly, the proposal also includes a tax hike trigger that would automatically raise taxes if Congress does not enact tax reform. Such a device would inject too much uncertainty into the economy, just like the uncertainty about tax rates next year is affecting markets now. Moreover tax reform—e.g., the tax hike—is supposed to come first out of the pipeline in 2013. Spending, not revenues, is the problem, and we’ve been down this road before: immediate tax hikes accompanied by promises of spending cuts in the future. This is unacceptable.

    Will the commission fail, as many have said from the start? We’ll know soon. Even if it does, its good policies should continue to be discussed by the nation and advanced by the new Congress. And the bad ones? Toss them.

    Co-authored by Curtis Dubay, Mackenzie Eaglen, David John, and Bob Moffit.

    Posted in Economics [slideshow_deploy]

    14 Responses to The Fiscal Commission’s Moment of Truth

    1. MiHi, Omaha says:

      When the Heritage Foundation regards a new disability benefit plan for the disabled a "positive", it can only mean a brutal, deadly negative for the disabled.

      It's perverse and obscene how the most helpless and impoverished in our country are going to be framed and punished for the crimes of the most wealthy & criminal.

    2. Bobbie says:

      Moment of truth, if the American president had the decency to hold responsibilities to those responsible, we wouldn't be in the mess he continues to worsen. That's a moment of truth!

    3. Scott Boise ID says:

      For those of us who have had to balance budgets and operate in the real world, this is a sick joke. Balance the budget with phased spending reductions by 2035? That is simply code for, "let not really do this". Get real- it will never get done. This "proposal" is gutless, and continues to make Government the #1 priority of the nation – first in line above all takers. It should be at the end of the line. The kind of fiscal change we really need can only be done by taking a chainsaw to Washington – substantive cuts; massive entitlement reform; closure or partial closure of any number of Federal bureaus that are not necessary, and not Constitutionally mandated. This commission was a waste of time. But I could have told you that months ago.

    4. Kenneth Morris, Ring says:

      I was under the impression that they were advocating an increase in the federal gasoline tax. If that is so just like all of the other percentage and flat taxes on products it hurts the lower income Americans most of all. And it as usual the left who wants these increases and always say they are for the little people!!!!!

    5. Rick, Sierra Vista A says:

      Everyone in the country has a different idea of the best way to reduce the deficit. The reality is that the politicians have painted this country into a fiscal corner. The time for a thoughtful and structured approach will be completely gone in the next few years when China and other countries say they will no longer buy up our debt. What happens then will be much much worse than anyone wants to imagine.

      This Deficit Commission report is well named as "The Moment Of Truth". If we can't show Americans and the rest of the world that we are doing something about the fiscal insanity that has controlled this country for years, we are headed collapse and chaos. The key to making this work is to agree that EVERYONE will need to give up something to make the necessary reductions.

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    9. Stephen C. Eldridge says:

      Heritage notes, with apparent approval, that SS benefits will be means-tested.

      I am greatly disappointed that Heritage apparently believes that it is acceptable to retroactively punish those who have previously paid for SS benefits (and would receive a very poor return on their money) on a very Progressive (i.e., Socialist, Unconstitutional wealth redistribution) basis, but now eliminating their benefits just because the saved other funds (i.e., they preserve the welfare state).

    10. Floyd, Sacramento says:

      With the Health Care legislation still on the table, you are correct that a large portion of government spending will not be curtailed. But considering who is on this so-called "Moment of Truth" committee, this is no surprise. It is stacked heavily against conservatism. Only Paul Ryan, Judd Gregg, and Jeb Henarling stand out in any respect as conservatives. But who are they among so many moderate (liberal) representatives, especially the likes of Max Baucus, Xavier Becerra, and the staunch socialist himself, Andy Stern. This is like mixing oil and water. It ain't gonna fly.

    11. Roger Conklin says:

      The report recommends: "A territorial tax system should be adopted to help put the U.S. system in line with other countries, leveling the playing field." In the context of the prior sentences this recommendation would appear to refer only to corporate taxes; but it does not specifically state this. This is a very sound recommendation, not only for corporate but, most importantly, also for personal taxes since currently the US is the only industrialized nation that taxes the income of its citizens who do not live within its territory and who are bona-fide residents of a foreign country to which they are already subject and have been taxed on that same worldwide income by that country. This current double taxation makes US citizens non-competitive for jobs outside of the US. For 95 out of the 100 years prior to 1976 the US recorded trade surpluses but the Tax reform in 1976 subjected US citizens abroad to such a horrendous tax increase that many could not survive. Hundreds of thousands lost thieir overseas jobs and came home because their employers could not afford the massive compensation increases so they could survive. This destroyed the US export sales force abroad. Starting in 1976 the US has never since recorded a single trade surplus and our cumulative trade deficit since 1976 is $7.7 trillion. Many industrialized trade competitors are setting new trade surplus records and have the lowest pre-crisis unemployment rates in several years. Exports must be sold and that requries feet on the ground which, because of this double taxation, the US does not have but our competitors do. US trade deficits destroy American jobs. Trade surpluses create jobs.

    12. Thelma Wright Dallas says:

      The one thing I like best of all is the requirement for tax reform. I say pass the FAIRTAX bills HR25 & S296. These bills will repeal the 16th Amendment of the Constitution which required the income tax in 1913. The FairTax will eliminate all federal income taxes including the SS & Medicare tax; FairTax eliminates all corporate taxes. No corporate taxes would be passed down to the consumer. There will be no deduction/credits because there will be No filing to declare how much money you have made for the year. No one needs to know how much money you or a corporation make. I believe corporations will bring a lot of their money back to the USA, therefore more jobs.

    13. Thelma, Dallas, GA 3 says:

      Social Security, Medicare, Medicaid all need to be reduce, but before that happens the government needs to start “at home” with congressional and federal workforce pay and benefits. The number of federal employees need to be reduced back to 2006 level and all pay back to 2008 levels. All departments and agencies need to be cut back or cut out completely. HHS, FDA, EPA, FCC, IRS and the Education Dept (to name a few) are encroaching on states right and are being unnecessarily intrusive in our personal lives. Many people are being hired as we speak to cover the new rules and regulations. Reduce all benefits for these departments and the reduction for the main 3 entitlements will go down a lot better.

    14. Thelma, Dallas, GA 3 says:

      REPEAL Obamacare!! This is the most intrusive entitlement ever, will cost more than anyone ever plans, and will add many more employees to maintain which adds much more than $700Billion to the cost.

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