- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

What's Wrong with the Gang of Six Plan?

Posted By Alison Acosta Fraser On July 21, 2011 @ 11:35 am In Economics | Comments Disabled

Desperate for a “balanced” approach [1] to resolving the debt ceiling impasse, President Obama glommed on to the Gang of Six’s plan before the ink was dry.

The plan has lots of tough-talking language intended to make both sides of the aisle tingle.  But that’s where the balance ends. In reality, it’s a mostly empty bipartisan shell—heavy on tax hikes and promises of spending cuts, but devoid of details on how to make the sweeping transformative changes needed to solve our debt and spending crises.

A core problem, of course, is that plan’s false assumption that we need “balance”—i.e., both tax hikes and spending cuts—to solve a spending crisis.  Naturally, the only “balance” needed to solve a spending crisis is spending cuts.  Tax hikes only “enable” more bad spending behavior.  But set that aside for a moment.  Just what are the problems with the Gang of Six’s  “Promises, Promises” proposal? [2]

First, the heavy reliance on tax hikes….. er, revenues.  Yes, they claim their proposed “tax reform” delivers $1.5 trillion in real tax relief.  But the “reform” also generates an additional $1 trillion in revenues for the federal coffers to meet the deficit target (plus another $133 billion for the Highway Trust Fund [3]). But wait, there’s more! Masked in cloudy language about CBO baselines is the fact that they would let the Bush tax cuts expire—hiking taxes another $3.8 trillion. At the end of the day, the Gang’s plan would raise taxes by as much as $4.9 trillion and give $1.5 trillion back.  What they trumpet as a tax cut is really a $3.4 trillion tax hike.

And not to worry, the Gang assures us, not a penny of the new tax revenue will go to new spending.  It will all be used to pay down the debt.  Riiight!  By definition, every extra dollar of tax revenue permits an extra dollar of spending.

Yes, the plan suggests some good tax ideas, like rate reductions and corporate tax reform.  But the price tag for the bad ideas is way too high and the details for the good are far too sketchy.

And what about the crux of their plan: a $3.7 trillion deficit reduction target. Will it arrive there by spending cuts? Taxes?  Some combination of both? It’s anybody’s guess.  The plan presents absolutely no overall spending target, either in dollars or percent of GDP.  So how does it stack up to the House-passed budget, or the House-passed “Cut, Cap and Balance” bill?  Nobody knows.

All they tell us is their plan would work in three phases. Phase one is what they call an “immediate aggressive deficit reduction down payment” of $500 billion.  Is that spending cuts or “immediate aggressive” tax hikes?   Unclear.   And even if the “down payment” is all cuts, how soon is “immediate”?  Will any cuts take effect this year? In 2012?  Or will they all be made in the immediate, post-2012 future?

Phase Two of the plan would put various congressional committees to work getting spending reductions, budget process reforms and the tax hike details fleshed out.  Again, everything happens in the future. Results could be delivered in six months, but there is no requirement or mechanism to make sure it happens.  All in all, there are no guarantees of action, no requirements that any cuts actually take place.

As for the few specifics of what they might deliver, the Gang seeds their plan with ideas for both sides of the aisle:

  • Repealing the CLASS Act—the new entitlement to long-term care for the elderly—is a great idea.  But repeal is likely to happen with or without the Gang’s plan.  Everyone agrees the entitlement’s Ponzi Scheme financing is doomed to fail, making elimination the only viable option.
  • Setting a savings target for Medicare and Medicaid is a small step in the right direction, and fully paying to fix the automatically scheduled cuts to doctors and other health care providers is laudable as well. But the Gang is silent on how it will achieve those savings and solve the Doc Fix.  They leave that to the committee process, which has been perennially unable to do this.
  • Switching the inflation index used for federal spending to “Chained CPI,” a more realistic measure of the cost of living, is sound.  But details like where and when matter. If the new inflation index applies to the tax code, then it’s a tax hike on everyone.
  • Reforming federal pay and launching a small program of asset sales, are good ideas, but the Gang’s goals here are underwhelming.
  • Continuing their war on the successful, the Gang would make our already highly progressive [4] tax code even more progressive.
  • Rooting out fraud, waste and abuse in entitlement spending…well, who could object to that?  Though one has to wonder why Congress is waiting to be told to do it.

Lastly, there is no certainty whatsoever that national security spending would not be eviscerated in this process.  According to an assessment by House Armed Services Committee Chair Buck McKeon, R-Calif., the Gang’s plan could slash defense spending by nearly $900 billion, despite warnings that our military is showing signs of “hollowing out” and already experiencing major shortfalls in readiness.

Phase Three is the Gang’s vague goal to make Social Security solvent over 75 years – but only after Phase One passes the Senate.  How you do this really matters.  It’s entirely possible to develop a plan that fixes Social Security over 75 years while materially worsening deficits now. That’s not gonna fly.

And here’s where the fine print is insidious. The Gang inserted a poison pill for their entire plan: if the Social Security phase does not pass with 60 votes, then somehow the previous deficit-reduction bill is null and void. If this is the case – why offer the bill at all? [5]

The nation faces two debt issues: the current debt ceiling and the fact that, under current policies, the national debt is set to soar much, much higher.  Credit-rating agencies have announced the obvious – if the United States doesn’t get its debt under control, its credit rating is at risk.  Given the scant details and the vagueness of even the goals themselves, the Gang’s plan will not meet the Moody’s test [6] for ensuring a AAA credit rating any more than would the fundamentally flawed McConnell-Reid plan [7]. And melding the Gang’s plan into McConnell-Reid as some suggest wouldn’t make matters any better.

At the end of the day, this empty skeleton of a plan delivers nothing but risk.  Risk that spending won’t be cut now.  Risk that spending won’t be cut in the future. Risk – make that a probability – that taxes will go up.  Risk that our debt will go up without the transformational changes needed to put the nation on a sound economic and fiscal path.

Like its Senatorial cousin, the McConnell-Reid “cut, run, and hide” plan, the proposal offered by the Gang of Six is long on promises and short on concrete action.  Washington should get to work making real cuts spending cuts.  Now.

Alison Acosta Fraser is director of The Heritage Foundation’s Roe Institute for Economic Policy Studies.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/07/21/whats-wrong-with-the-gang-of-six-plan/

URLs in this post:

[1] balanced” approach: http://washingtonexaminer.com/politics/2011/07/obama-tries-build-momentum-gang-six-plan

[2] Gang of Six’s  “Promises, Promises” proposal?: http://blog.heritage.org/2011/07/19/gang-of-six-promises-promises/

[3] Highway Trust Fund: http://www.heritage.org/Research/Reports/2011/04/Federal-Highway-Program-Shortchanges-More-Than-Half-the-States

[4] highly progressive: http://www.heritage.org/budgetchartbook/top10-percent-income-earners

[5] why offer the bill at all?: http://www.nationalreview.com/corner/272304/gang-six-plan-promise-multiplied-promise-j-d-foster

[6] Moody’s test: http://blog.heritage.org/2011/07/15/what-moodys-really-told-boehner-and-obama-about-the-debt-ceiling/

[7] McConnell-Reid plan: http://blog.heritage.org/2011/07/19/mcconnell-reid-just-borrow-more-plan-fails-to-cut-spending-and-degrades-americas-creditworthiness/

Copyright © 2011 The Heritage Foundation. All rights reserved.