The Good, the Bad, and the Unlikely

The co-chairmen of the National Commission on Fiscal Responsibility and Reform, Democrat Erskine Bowles and Republican Alan Simpson, released a draft of their proposal for deficit reduction on Wednesday afternoon. It has not won the support of the other 16 commissioners, and even Bowles and Simpson know that this proposal will not pass Congress exactly as it is written. But Congress will consider the ultimate recommendations in some form, so it's worth considering the ideas the proposal contains.

They can basically be put into five different categories:

Ideas that are good but whose politically viability is hard to predict.

– Certain cuts to military spending. One of the best things about this proposal is it demands that military spending, which accounts for 55 percent of discretionary spending, actually share equally in the burden of deficit reduction. This would be accomplished by setting up a wall between defense and everything else and not allowing money to move between the two, so that failure to cut defense could not be made up for with cuts to, say, food stamps. Some of the specific defense-spending cuts will be hard to pass politically, and some are not as good as others on the merits, but some—like reducing by one third the enormous number of troops we have stationed in Europe and Asia to intimidate the Soviet Union—are a good idea that could conceivably pass.

– "Fund program integrity efforts for Medicare, Medicaid, the IRS, and other programs with significant improper payments." Waste and fraud in Medicare and Medicaid are major concerns for conservatives and Republicans. Meanwhile, the IRS loses untold billions each year in unpaid taxes. Republicans hate the IRS, and some Tea Partiers like Senator-elect Rand Paul (R-Ky.) even want to eliminate it. So you can see why Bowles and Simpson bundled these two proposals together. They hoped the soda of chasing Medicaid cheats would make the medicine of IRS enforcement go down. This is plausible, but—with memories of what happened to Lisa Murkowski, Mike Castle, and Bob Bennett in the 2010 primaries fresh in their minds—Republicans may fear Tea Party wrath for voting for any expansion of IRS enforcement capabilities.

Ideas that have advantages but carry risks.

– Making the tax code cleaner but flatter. This is a great bargain in theory but a difficult one to effectuate: in exchange for eliminating all the expenditures in the tax code, except for the Earned Income Tax Credit and the Child Credit, you would have lower income taxes—none for individuals making less than $15,000 per year or families making less than $30,000 per year, and only three rates: 15 percent, 25 percent, and 35 percent. Capital gains would be treated like regular income. Liberals might wonder why we need to cut rates, and why we don't have an extra higher rate or two. Why should a cardiologist making $300,000 per year pay the same rate as a hedge-fund manager making $2 million per year? Historically we've had more income-tax rates at the top, and they were significantly higher than 35 percent.

Overall, though, this would be a good deal for them because tax expenditures like charitable deductions and mortgage-interest deductions favor the wealthy. Flatter rates that everyone actually pays would be more progressive than the current system. The problem is that there are strong political constituencies for the status quo. Universities and churches will see much smaller contributions if they are no longer tax-deductible, and you can be sure they won't let that happen without a fight.

And what happens if we strike this deal but then the deductions find their way back into the tax code? We end up with a revenue shortfall.

Ideas that are not so good, but will never happen.

– "Tort reform." Clearly, there are problems with our system of handling potential medical malpractice only by suing. It's a slow, unreliable way of righting an actual wrong that can sometimes punish doctors unfairly. It makes doctors reluctant to apologize lest they weaken their case in court, and it puts a lot of money in the hands of lawyers. There might be an alternative system in which anyone who suffers an injury while being treated gets a reasonable award regardless of the doctor's negligence. But that is nothing like "tort reform," the perennial Republican proposal to limit the awards to victims of malpractice that would conveniently protect Republican-leaning groups such as doctors and corporations while putting Democratic-leaning trial lawyers out of business. But tort reform is part of what the commission co-chairs propose to hold down Medicare costs. It would have, at best, mixed results for society and a very limited impact on the cost of health care. But it's probably moot because Democrats, unless they've lost their minds (always a possibility), won't sign on to a plan that would cut off a major group of Democratic donors at the knees.

Ideas that are bad and probably won’t pass.

– Cutting military pay and veterans' benefits. The U.S. military wastes a lot on hardware, on contractors, on unnecessary wars, on stationing troops in Germany. It doesn't waste money on the military itself. Freezing pay for three years for noncombat service members, as the co-chairs suggest, seems unkind, as well as likely unpopular. The real problem is too many service members working in procurement. The proposal commendably goes after inefficiencies in the military, but it should find more of those rather than hurting the rank and file.

What's really cruel, though, is the proposal to make veterans below a certain income level, who currently have no copay for medical treatment, start paying one. Damn veterans mooching off the taxpayer! How about we let people who served their country in combat get medical care for free and make investment bankers pay 36 percent instead of 35 percent taxes on their millionth dollar? Oh, right, Republicans hate tax increases. Something has to give, but it ought not to be our veterans.

Ideas that are good but are unlikely to pass.

Alas, this list is long. Here are some of the highlights:

– Reducing the mortgage-interest tax deduction. If you look at the chart on page 24 of the proposal you will see that tax rates will have to be higher if you keep the mortgage-interest tax deduction. That's because it takes money out of the tax code. It's a subsidy of homeowners by everyone else that has contributed to the economic catastrophe of the housing bubble and the environmental and social catastrophe of suburban sprawl. Eliminating it—at least eliminating the deductions above a certain amount—would be good policy but difficult politics. Being against homeownership is seen in many quarters as being against Mom and apple pie. One of those quarters is Americans for Prosperity, which wants to keep the deduction even though there's nothing particularly conservative or free-market about it.

– Raising the gasoline tax by 15 cents per gallon. The U.S. has lower gas taxes and, not coincidentally, higher carbon emissions per capita than other developed nations. It has enormous unmet needs in transportation infrastructure, which is funded by the gas tax. But asking Americans to pay more in gas taxes is so politically dangerous that even President Obama, who hails from mass-transit-rich Chicago, isn't for this.

– Cuts to farm subsidies. If someone told you that we were spending money to damage the environment, contribute to the obesity epidemic, and condemn Third World farmers to poverty, you'd probably suggest that we get rid of this program. Well, that's farm subsidies, which use your tax dollars to keep high-fructose corn syrup plentiful, chemicals flowing into the Gulf of Mexico, and West African subsistence farmers unable to compete with American conglomerates. The commission co-chairs want to trim them. That's a good idea, but try running on that platform in the Iowa caucuses. Then, once you're in the White House, try getting it past the senators from Iowa or any other farm state. Protecting parochial regional policies like this is exactly what the anti-democratic Senate was set up to do, and it does it quite well.

– Create a new minimum Social Security benefit for career minimum-wage workers and boost benefits for seniors at risk of outliving other means of support. These are both good ways to reduce the number of elderly Americans living in poverty. But it would cost money. How would we raise that money? Bowles and Simpson would raise the maximum income level subject to payroll taxes while reducing Social Security benefits for top earners, who least need them. These are good ideas in the abstract, but they face two major political challenges: many Republicans won't want to raise payroll taxes, while many Democrats will fear that reducing upper-income benefits will lead to a reduction in support for Social Security among the wealthy and middle class.

Just because these ideas are unlikely to pass does not mean that deficit hawks in both parties should not try. Ultimately, balancing the budget will require sacrifices from all politicians who say they care about deficits—some will have to agree to cuts in spending they like, others will have to agree to increases in taxes they don't want. So wish Bowles and Simpson good luck on the sales job they have ahead of them, because they will need it.