Dueling Deficit Plans Ignore That We Need Federal Spending

Last Updated Nov 17, 2010 5:15 PM EST

Another day, another economic austerity plan. Following the recent release of the Deficit Commission report, the so-called Bipartisan Policy Center today released its blueprint for getting the nation's financial house in order.

Lots to digest in the 138-page report, which was spearheaded by former New Mexico Senator Pete Domenici and ex-White House budget director Alice Rivlin. But my initial impression is that it adds up to too much austerity for working- and middle-class Americans to handle right now and too little compensatory stimulus to rouse the economy.

The BPC's overarching goal is to cut the national debt to 60 percent of GDP by 2020 while -- and here's the tricky part -- igniting growth. The fuse for the latter consists of a one-year payroll tax holiday that would reduce taxes by a total of $650 billion, giving employers and employees a 6.2 percent tax cut on wages up to $107,000. As TheAtlantic.com's Derek Thompson notes, businesses would have more money to hire employees and buy equipment, while workers would have a few more bucks to spend at the mall. The BPC estimates that would help generate between 2.5 million and 7 million jobs.

Rivlin wants to "put money in people's pockets in the short run and trim government spending in the long run." Ok. But what that fails to acknowledge is that with private investment sagging, government spending is exactly what's keeping the economy from caving in. So long as the jobless rate hovers around 10 percent and millions more people remain underemployed, immediate moves to cut spending is asking for trouble.

The BPC plan is at least somewhat less punitive than the plan Erskine Bowles and Alan Simpson, co-chairs of President Obama's National Commission on Fiscal Responsibility and Reform, introduced last week. But both proposals balance the books in part by cutting Social Security and Medicare/Medcaid benefits. Shared sacrifice is one thing, but millions of Americans simply can't afford that right now.

Worse, neither plan is particularly creative in exploring other ways to distribute the pain, such as by imposing a national tax on securities trading. As Tamara Draut, a top wonk at liberal economic think-tank Demos, said in a statement commenting on the Rivlin-Domenici scheme:

The BPC plan does not go far enough on increased revenue or progressive investments to address the urgent problem of a declining middle class. Clearly, a plan committed to the health and wealth of our middle class would tax Wall Street speculation and toxic carbon pollution before taxing families for groceries and medical care.
Not that there aren't good ideas here, especially in the BPC's approach to simplifying the tax code. It would establish only two federal income tax rates for individuals -- 15 percent and 27 percent (down from the current marginal rate of 35 percent) -- and set the the corporate rate at 27 percent (down from 35 percent). Roughly 90 million low-income households would file no returns at all. Those reductions would be financed by levying a new 6.5 percent national sales tax, with revenues used to reduce the debt.

According to the report:

[T]his plan dramatically simplifies taxes by eliminating years of tax breaks â€"- allowing major tax rate reductions, while raising additional revenues to reduce the debt. Lower corporate rates will make America more competitive, and lower individual rates with a simplified tax system will give taxpayers renewed confidence that our system is fair and understandable.
There's a third deficit-reduction plan floating around. Rep. Jan Schakowsky, D-Ill., a member of the Fiscal Commission, yesterday introduced a package of spending and tax cuts, growth measures and other proposals that she says would cut the deficit by $427 billion over five years without taking a bite out of Social Security or government health care programs. Revenue would be raised by reforming the estate tax, treating capital gains as normal income and letting the Bush tax cuts expire for the top two brackets, among other measures.

Schakowsky said in a statement:

Social Security has nothing to do with the deficit. Addressing the Social Security issue as part of the deficit question is like attacking Iraq to retaliate for the 9/11 attacks â€"- there is simply no relationship between the two and attempting to conflate them does a grave disservice to America's seniors.
While all three plans help shape the deficit debate, of course, none are likely to get very far. Ideas like boosting Medicare expenses, as the BPC proposes, or freezing defense spending, as Schakowsky favors, are political landmines. Shards of each could wind up in legislation, but my guess is that all three succumb to rising partisan conflict when Congress reconvenes in January.

Image from Flickr user Borman818
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