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Economy & Business

Commentary: Simpson-Bowles report has solid suggestions

This article first appeared in the St. Louis Beacon, Oct. 26, 2011 - In the aftermath of the debt ceiling debacle last August, a bipartisan Super Committee of congressional leaders is now empaneled and hearing testimony about what to do with the budget deficit as well as fiscal policy.

Astonishingly, the superb work of the Simpson-Bowles Deficit Reduction Commission has received very little substantive attention. After ignoring the Simpson-Bowles Report for most of 2011, President Obama finally took pieces of it into account as he tried to fashion a "grand bargain" with House Speaker John Boehner. At the same time, so-called Tea Party Republicans pounced on the idea of eliminating tax loopholes as being the equivalent of tax increases and thus unacceptable.

The House Republicans in this camp utterly ignored one of the core tenets of the Simpson-Bowles report, which called for lower individual income tax rates of 8 percent, 14 percent and 23 percent, while at the same time reducing the corporate income tax rate to approximately 25 percent. Unfortunately, after a brief flurry last summer around the "grand bargain," Congress punted the core issues and created the Super Committee. This week, the New York Times/CBS poll found public approval of Congress had dropped to a record low, 9 percent.

At least some political leaders and commentators are finally taking note of the Bowles-Simpson Report. Reacting to an editorial in the Wall Street Journal in July, House Majority Leader Eric Cantor indicated that he was open to eliminating back-door spending through tax loopholes but failed to tie those to corporate tax reductions. None other than Bill Clinton recently acknowledged that the corporate tax rate is far too high and places the United States in an untenable competitive position globally.

It is not too late for the president and Congress to put aside ego and strident partisanship and wake up to the Bowles-Simpson Report. Now is the time to enact historic tax and budget reforms. America can no longer afford to punt these issues down the road. This effort should include many elements of the bipartisan report, which leaves no sacred cows untouched. It is not too late to return to this discussion and make it the foundation of the Super Committee deliberations.

Ominous Background

Against the ominous background of unemployment of more than 9 percent and a stagnant economy, the Simpson-Bowles Report sets forth a blueprint for action that would not only stem the deficit explosion but also stimulate growth through fiscal policy reforms, particularly in the area of the current grotesquely constructed tax code.

The commission's report, issued late last year, points to six major areas of focus in solving the problem:

  •          Discretionary spending cuts
  •          Tax reform
  •          Healthcare cost reduction
  •          Mandatory spending cuts
  •          Social Security reform
  •          Budget process reform

According to the plan, $4 trillion can be removed from the deficit by the year 2020. The goal should be for the deficit to be no more than 2.3 percent of GDP by 2015. The federal tax code should sharply reduce marginal tax rates at the corporate and the personal income tax level while at the same time eliminating "backdoor spending" through the tax code; it also should abolish the alternative minimum tax.
Further, the federal government should cap revenue received from taxes at 21 percent of GDP within 5-7 years and federal spending should be reduced to 21 percent of GDP over a 5-10 year period. Congress must place Social Security on a solvent foundation; the report recommends using revised retirement dates to reflect the longer life spans of Americans as well as "means testing" payouts. The plan also calls for the stabilization of debt by the year 2014 and a reduction of the debt to 60 percent of GDP by 2023 and 40 percent by 2035.

Each section of the six-part plan includes key highlights. 

Discretionary Spending

The report calls for the cap of discretionary spending in 2012 to the level of the pre-2008 crisis. In the future, the deficit spending can only grow at one-half of the inflation rate through 2020.

A firewall should exist between traditional defense spending for the security of the country and non-security spending. It is noteworthy that two-thirds of the discretionary budget is spent on defense and security -- protecting America -- and one-third on education, housing, law enforcement, R&D and the like.

The report calls for firm caps on both security and non-security discretionary spending with certain percentage reductions so that they fall to a proper level by the year 2015. Caps would be enforced through a 60-vote supermajority requirement to spend anything above the caps; if at the end of the budget cycle there is an overrun, an abatement process would occur across the board to bring the deficit into line with the cap.

The report proposes a new examination of war spending in contrast to normal defense spending. It also proposes establishment of a disaster fund in order to budget honestly for catastrophes as they occur. It calls for the full funding of a Transportation Trust Fund through the dedication of a 15 cent per gallon gas tax dedicated to transportation funding and infrastructure and at the same time eliminate earmarks. 

It also proposes establishment of a "Cut and Invest Committee" designed to exact savings from the federal budget and invest them in high priority research and development. For example, if 2 percent of the discretionary budget is cut, 1 percent of that could be invested in R&D. It estimates  that over $200 billion in cost savings should occur resulting in $100 billion to invest. 

Tax Reform

The Report points out that the tax code is a backdoor way of spending money. Currently, $1.1 trillion is spent per year through "loopholes," leading to very high marginal tax rates for both corporations and individuals. The commission calls for the elimination of a large number of the 75+ loopholes in return for lower tax rates, a reduction of the deficit, a simplified tax code, a reduction in the tax gap and a return to fostering innovation and new jobs.

The proposed new personal income tax rates are 8 percent, 14 percent and 23 percent. The corporate tax rate should decline to 20-25 percent. The cost savings from this item would be $80 billion by 2015 and $180 billion by 2020. While most loopholes should be abolished, certain deductions could remain, including support for low income workers and families through the child credit, the earned income tax credit and perhaps some sort of unemployment; the mortgage deduction for principal residences only; deduction for employer-provided health care; donations to charitable organizations; and deductions for 401(k) and pension plans.

It should be emphasized that everything else should go; if not, tax rates would have to rise over time. All of this should occur over a transition period of 3-5 years.

Other changes

The report makes a number of detailed suggestions concerning how to contain the cost of healthcare reform including, in particular, malpractice and tort reform.

Other mandatory savings and policies include a reduction in the federal farm subsidies in a variety of other areas.

For Social Security, the major changes proposed relate to the age of retirement, which has not changed since the program began even though the life expectancy of an American has increased by 14 years. It also recommends and means testing for payouts.

Finally, to reform the budgetary process, the report makes several suggestions on how to attack the budget each year in a rational manner and to ensure compliance with the reforms embodied elsewhere in the report.

The American public must become educated about both the merits of a comprehensive approach and the high stakes involved. The debt limit has brought Democrats to the table, and if Republicans adhere to the approach set forth in the Bowles-Simpson Report, real reform could occur. In the absence of major reform now, politics as usual will trump the merits of comprehensive reform and place America in a continuing state of runaway spending and nonsensical tax policy.

J. Joseph Schlafly is senior vice president of Stifel, Nicolaus & Co. Inc. and a member of the board of the St. Louis Beacon. The opinions are his own.

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