The Plan to Balance the Budget: The Fiscal Commission's Final Report

The president's deficit commission released its final recommendation for reducing the debt and reforming the budget this morning. Dramatically named "The Moment of Truth," the plan offers a mosaic of reforms that promise to cut $4 trillion from the debt before 2020.

The plan would also cap tax revenue at 21 percent, limit spending to 22 percent, and reduce debt as a percentage of GDP to the key figure of 60 percent by 2023.

The 18-member commission will vote Friday on the plan, which requires a 14-person majority to go to Congress. But you don't have to wait until then to learn the basics. Here is your executive summary, with "bottom line" conclusions to give you a sense of how I see things.

Discretionary/Mandatory Spending

The goal is clear: cut $100 billion from defense and $100 billion from non-defense spending by 2015. The road there is less clear, because the discretionary budget is a vertiginous array of programs.

So the report keeps things broad. Spending in 2012 will equal spending in 2011. Spending in 2013 will come down to pre-crisis levels, adjusted for inflation. The president will propose annual limits for war spending. Disaster funds will be set up to manage unforeseen tragedies. A new 15-cent per gallon gas tax will pay into a transportation fund so that roads


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and bridges rely less on general revenue. Agencies will be responsible for their own diets, but in the event that they don't lose the weight themselves, a new, bipartisan "Cut-and-Invest Committee" will offer guidance.

On the mandatory spending side, the report recommends reforming civilian and military retirement plans, cutting agricultural subsidies, but protecting income support programs.

Bottom line: The commission doesn't particularly care where the spending cuts come from so long as they draw equally from both security and non-security spending and don't hurt education, infrastructure or support for low-income families.

Taxes

The name of the game here is: Broaden the base, lower the rates. That means eliminating most tax expenditures (explanation here) that don't protect the low-income, while slashing tax rates for both individuals and companies.

For individuals, tax brackets move to a new scale of 12%/22%/28% (for comparison: under Clinton, those brackets were 15/ 28/ 31/ 36/ 39.6). Welfare provisions like the Earned Income Tax Credit and the Child Tax credit stay put. Itemized deductions are eliminated and capital gains and dividends are taxed as ordinary income, dramatically raising effective tax rates on rich folks who both itemize heavily and get more income from investments. The mortgage interest deduction [Flashcard here] becomes a tax credit to make it more progressive and the employer health care subsidy [Flashcard here] is capped and phased out slowly.

OK, so the upshot: After-tax income would decline proportionately -- between one and two percent -- on almost all quintiles except for the richest one percent, who would pay significantly more to Uncle Sam.

Here's the key graph summing up the effect on after-tax income for each class.
deftax3.png
Wondering about corporate tax reform? Here's the summary in a chart. The gist is familiar. The plan gives corporations a lower tax rate in return for taking away almost all of the tax deductions that companies use to shrink their liabilities.

deficittaxes2.png
Bottom line: I don't agree with the commission's insistence on capping tax revenue at 21 percent of GDP. But the broad plan to increase tax revenue by cutting both tax rates and tax expenditures is fair, pro-growth, and right on.

Social Security

Like the chairmen's report, the final plan closes the projected shortfall in Social Security with what amounts to three big benefit reforms and one smaller revenue reform. On the benefits side, it shrinks Social Security checks to the middle class and up by changing the benefits formula. This single reform accounts for about half of all Social Security savings. The plan also slowly raises the retirement age to 69 by 2075 and refines the cost-of-living measure used to increase Social Security checks every year.

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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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