The Deficit Reduction Commission, chaired by former White House Chief of Staff Erskine Bowles and former Senator Alan Simpson, has come out with a draft proposal. In some circles, this is what has been called the “cat food commission.”
Like most other presidential commission reports, this one will probably just end up collecting dust. For the commissions recommendations to be sent to Congress for an up or down vote, 14 of the 18 members of the commission will have to sign off on it. I doubt that will happen. In this case, that would be a very good thing. The broad outline of the proposal can be found in this report from the New York Times.
The panel is proposing about three dollars of spending cuts for every dollar of revenue increases (despite the fact that federal revenue is near a record low as a % of GDP). Both domestic and military spending would be on the table.
The commission is recommending a broad overhaul of the income tax system that would do away with most tax deductions and then also cut tax rates. In the process, it looks like it is designed to shift even more of the overall tax burden onto the middle class and further reduce the tax burden on the wealthiest in the country.
While all tax brackets would fall, the lowest rate would drop to 8% from 10%, while the top tax bracket would tumble to 23% from 35%. This is class warfare at its purist, only it is the upper class that is on the offensive, not the middle class.
The article did not mention if the attachment rates would be changed or not. That is a significant omission. It matters a great deal if the 10% or prospectively 8% rate kicks in at $20,000 or at $40,000, and not just for those earning less than $40,000 a year.
While in principle the idea of simplifying the tax code and lowering rates is a good one, consider the consequences of moving from here to there. The two biggest tax deductions are the mortgage interest deduction and the deductibility of health insurance premiums by corporations. Nothing else even comes close.
The housing market is already struggling, to put it mildly. Everyone who took out a mortgage did so on the assumption that the mortgage interest they pay would be deductable. Removing that deductibility would substantially increase the cost of owning a home. For most people, the mortgage is the biggest single monthly bill. The net effect would be to increase the after-tax cost of your mortgage by your marginal tax rate. The higher after-tax cost would end up being reflected in the prices of homes.
Home prices would plunge dramatically. It is bad enough that 23% of all homes with mortgages are underwater. This proposal, if imposed, across the board would dramatically increase that number. The end result would be more people walking way from their homes and more foreclosures. A slow phase-in of ending mortgage deductibility would make a lot more sense, say, by capping the total interest expense per year that can be deducted, and then reducing that amount each year, say, over the course of a decade.
For example, if the cap were set at $24,000 a year worth of mortgage interest ($2000 per month), someone with a $25,000 a year mortgage could still deduct $24,000 of it the first year, but in the next year, he could only deduct $21,000 per year. However if that were done, rather than doing away with the deduction all at once, the revenue would increase much more slowly, so the marginal rates would also have to fall more slowly. The whole point of this exercise is, after all, to reduce the budget deficit over the long term.
Even with the Health Care reform, most people still get their health insurance through their employers. The reason for that is that the employer can deduct the cost of health insurance, rather than pay for that benefit with after-tax dollars. Rising health insurance premiums are already a huge problem, and this would make it much worse for businesses. The likely result is that fewer employers would offer health insurance.
We already have 50 million people in this country (about 1 in 6) with no health insurance. While “Obamacare” is expected to reduce that number by 32 million when (if?) it is finally implemented in 2014, this proposal could easily swamp that effect. If the GOP gets their way with either repealing or defunding Obamacare, and this proposal were to go through, the number of uninsured would rise dramatically. Perhaps it would even double. Businesses would get a lower tax rate regardless if they provided health insurance or not.
Even with the big reductions in marginal rates, the commission expects that the elimination of the deductions would raise a net of $80 billion in revenues. Count me as a skeptic.
The proposal would also raise the Social Security retirement age and increase the amount of earnings subject to the tax. I have been calling for the latter for some time now. However, the raising of the retirement age is effectively an across-the-board benefit cut. Since it is a simple fact that on average poor people have a lower life expectancy in this country than rich people, it is a benefit cut that will fall more heavily on the poor than the rich.
Also, while it is one thing for a lawyer or a portfolio manager to continue to sit at their desk until age 70 or even 75, it is a totally different story if you are a coal miner or working on an assembly line. Also, right now some of the people who are having the hardest time finding a job are those who are between 55 and 65. What the heck are they supposed to do if the retirement age moves up to 70? Furthermore, these changes to Social Security would not even count as part of the deficit reduction.
From what I can tell from the early reports on this draft, the best use of the cat food commission report would to be to use if for kitty litter.
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