The Quintessential Liberal Plan to Reduce the Deficit

Another day, another big idea to fix the budget. Here's the new deficit-busting proposal from Our Fiscal Security, a group composed of progressive think tanks Demos, the Economic Policy Institute, and The Century Foundation.

This one's really worth your attention, because the debate on fixing the budget has, until now, been fought mostly on conservatives' and moderates' turf. The opening salvo from the chairmen of the president's deficit commission was a center-right proposal that leaned on spending cuts over tax increases by a two-to-one margin. A more liberal counter-proposal from the Bipartisan Policy Center evened that ratio at one-to-one. Today's proposal puts nearly the entire burden on defense cuts and tax hikes for the wealthy.

In a nutshell, this plan delays any overall spending cuts until unemployment dramatically drops. It increases government spending on children and infrastructure. It pays for these changes in the medium term by raising taxes, especially on the rich, and cutting defense spending aggressively. In the long term, it tries to strengthen the Affordable Care Act (health care reform) by loading the quiver with more arrows to fire at the monstrous growth in health care.

Spending Increases
The plan increases spending in three key areas -- children education and care, infrastructure, and research and development -- by about $200 billion in 2011. But the spending package doesn't disappear; rather, it grows to reach nearly $300 billion in 2020. Think of this as permanent stimulus, intended not only to help families in the short term but to create the conditions for economic growth in the medium and long-term as well.

Spending Cuts
The plan identifies nearly $1 trillion in defense cuts over the next decade, drawing on recommendations from the Sustainable Defense Task Force and the Obama administration. Notably, the plan rejects any "overall spending reduction" until unemployment has fallen to 6 percent and remained there for at least six months. This is a big deal. Some economists project that we might not hit that floor until the end of the decade; however, this proposal still aims to balance spending and taxes by 2018. In other words, it has a lot of room to make up on the tax side.

Higher Taxes for the Rich
Most of the proposed tax increases would fall on the rich. The plan would tax investment income like regular income; limit deductions to keep the rich from whittling away their tax bill; repeal the Bush tax cuts for top earners; make the estate tax progressive to hit larger estates harder; and enact a "financial speculation tax," which amounts to a very small tax on a very large number of transactions (From the authors: "In 2004, the Congressional Research Service estimated that a 0.5% tax on stock transactions would raise roughly $65.6 billion a year.") On top of that, it would add a new marginal tax rate (or "surcharge") for taxpayers with income over $1 million.

Lower Taxes for Most Americans
The plan permanently extends the tax cut from the Recovery Act, called Making Work Pay, to the tune of about $300 billion over 10 years. It also expands the child tax credit and the Earned Income Tax Credit.

Other Tax Moves
The plan deals with tax expenditures -- which are holes carved out in the tax code to leave families and corporations more money -- much like the liberal plan from Rep. Jan Schakowsky. That is, it preserves, and sometimes expands, tax subsidies for the low-income and middle-class, while closing loopholes on corporations and high-earners to raise their effective tax rate.

Finally, it uses the tax code to promote green energy. First, it creates a new carbon tax (or cap and trade regime) that would funnel half the revenue back to consumers. Second, it raises the motor fuel excise tax to encourage more public transit.

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Finally, it eliminates the subsidy for fossil fuels.

Social Security
There are no specific benefit cuts in this proposal. Instead, the plan makes employers pay Social Security taxes on every dollar of wages (currently the taxable ceiling is around $107,000). As the authors note, this would have the owners of the Miami Heat pay an additional $900,000 on LeBron James' salary. Employees would have to pay their own half of the Social Security tax on more income as well. Since this change only fills the projected Social Security deficit by 75%, the authors also consider dedicating general revenue to the program.

Health Care
The health care proposals mostly build on ideas in the Affordable Care Act, such as bundling payments to move away from a fee-for-service system, expanding comparative effectiveness research to reduce wasteful care, and strengthening the Medicare advisory board to promote new viable strategies nationwide.

The bottom line is that this is a very liberal deficit reduction plan. It would cut taxes for the middle-class and below, expand domestic government spending, and double down on the health care overhaul. The only way a program like that can pay for itself is if tax rates rise dramatically on the rich. And rise they would. Wealthy families would pay more into both Social Security and the general federal coffers, while companies in and around the financial industry would find it more expensive to do business.

If you're a conservative, you'll probably hate this. If you're a liberal, you'll probably love it. I lean left, and I like the focus on infrastructure, but I don't see how we can continue to cut effective tax rates for the middle class ad infinitum while expecting ten two percent of the country to shoulder the entire burden of the budget. The pain doesn't have to be shared equally by all families at all income levels, but if we shared it more, the result would be less pain.