How to Balance the Budget: The Fiscal Commission Co-Chairs' Proposal

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Hot off the presses, here is the Fiscal Commission co-chairs' proposal for balancing the budget (excluding interest payments on the debt) by 2015. I just got off the phone with someone with deep knowledge of the plan and wanted to pass along the most important details.

Here's the plan in a sentence: With $1 trillion in additional revenue and $2 trillion in spending cuts over ten years, it balances the budget -- minus interest -- by 2014 and reduces debt to 60 percent of GDP by 2024. For more incendiary details that could be tomorrow's talking points (End commercial spaceflight! Charge at the Smithsonian! Eliminate the Corporation for Public Broadcasting) TPM has a roundup.

Social Security

Social Security is made solvent for 75 years, and then some. The reforms will actually "oversave," and some of that money will go to create a new hardship benefit for early retirees.

On the revenue side, the taxable income cap gradually rises to 90 percent of income (typically, it's closer to 83 percent). This means richer Americans would pay more into the system. On the benefits side, the program is made more progressive. For the low income, the minimum benefit would be fixed above the poverty line and continue to rise through the next 75 years, protecting more and more seniors from poverty. The benefit formula si tweaked in such a way that will cut benefits slightly for median recipients, while richer retirees will see a bigger haircut. As a result, the program will be made more progressive. The retirement age is indexed to longevity for early and normal retirement, which amounts to a benefit cut for early retirees.

These reforms overachieve on solvency, and the savings go back into a "hardship benefit" for older Americans who cannot work and also are not eligible for early retirement.

Taxes

Depending on how you measure it, a quarter or a third of the plan comes from higher tax receipts. The co-chairs present lawmakers with three plans to cut income and corporate income tax rates in exchange for cutting deductions and exemptions called "tax expenditures." The overall tax philosophy was described to me as "Wyden-Gregg-plus," after the bipartisan tax reform bill from Sens. Wyden (D) and Gregg (R). [I wrote about it here.]

To force action on taxes, the commission would put a tax expenditure "sequester" in place if Congress don't touch taxes. That means, if nothing happens by 2012, taxpayers would get only, say, 85 percent of their itemized deductions. If no action by 2016, that goes down to 80 percent, and so on. It's a strategy to slowly raise taxes through diminished deductions that Congress could only cancel picking up the gauntlet of reform.

Highway spending is fully funded by a new gas tax of 15 cents that would be phased in to 2015.

The plan caps revenue at 21 percent of GDP, above the historical average.

Health care

The commission would change the Medicare reimbursement formula. This would give doctors a haircut, but balance it by reforming tort law to make doctors less exposed to law suits. It would require drug companies to offer rebates for Medicare Part D and increase cost sharing in Medicare by increasing deductibles. It also adds a catastrophic cap so that no senior pays above $5,500 dollars. Furthermore, the plan asks for $200 billion of additional health care savings, and offers $400 billion worth of ideas to get there.

Discretionary spending

The plan identifies $200 billion of potential cuts for 2015. While the plan does nothing in 2011, it holds 2012 discretionary spending to 2010 levels and enacts a one percent nominal cut each year to both defense and non-defense. This would put discretionary spending $160 billion below the president's plan by 2015.

By contrast, Obama's budget has real one percent growth in defense and a freeze in non defense. That means that compared to the president's path, the commission is taking more out of defense, the source told me.

Preference is given to three discretionary items: research and development outlays, education and infrastructure.

Read the full plans [in PDF] here:

CoChairs' Proposal

$200 Billion in Illustrative Savings


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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