President Obama's deficit reduction panel is set to issue its final report this week, triggering proposals from other groups as well. Our Fiscal Security, a partnership of Demos, the Economic Policy Institute, and the Century Foundation, issued its progressive Budget Blueprint Monday. It highlights the sharp differences between liberal and conservative approaches to closing the nation's enormous budget gap, and differs sharply from the draft proposals issued nearly three weeks ago by the co-chairs of the Obama commission, Erskine Bowles and Alan Simpson.
While acknowledging that the deficit is serious, particularly regarding long-term healthcare costs, the blueprint says that what's needed now is increased stimulus spending to put Americans back to work and generate stronger economic growth. Its proposals would defer deficit reductions until the national unemployment rate was at or below 6 percent for at least six months. The rate is now 9.6 percent.
"In order to reduce our long-term national debt we must refuel the engine of our economy: the middle class," its proposal said. "We strongly oppose the idea that America's fiscal challenges should be solved by cutting longstanding social insurance programs that have brought security and prosperity to millions of Americans."
Social Security benefits would be cut under the co-chairs' proposals. The Budget Blueprint would not cut these benefits and would eliminate projected Social Security deficits largely by raising the earnings ceiling (now at $106,800) that caps Social Security taxes.
By waiting until as late as 2014 for the economy to recover, the blueprint proposals would add to short-run deficits in the interest of longer-term economic growth. Its proposals would result in long-term deficits higher than many economists support.
"By 2020, overall revenue would reach 21.7 percent of the economy, while all federal spending would reach just over 25 percent, leaving deficits at a manageable level," it said. "Under the proposed path, debt levels would reach 83 percent of GDP [gross domestic product] in 2020 and then be stabilized at about 90 percent of GDP in 2025 and thereafter." Other proposals target a much smaller gap between federal spending and revenues, and favor a debt level closer to 60 percent of GDP.
Perhaps the biggest difference between liberal and conservative budget proposals is who should pay the higher revenues that would be needed to help close the deficit. The Fiscal Security proposal would raise most new revenues from taxes on the wealthy and on corporations. It would eliminate Bush-era tax cuts for wealthier taxpayers and also restore the estate tax, with escalating tax rates for larger estates. Further, it would raise more than $50 billion through a new tax surcharge on millionaires. It also would tax capital gains and dividends as ordinary income, raising another $88 billion.
"Our Fiscal Security's blueprint calls for modernizing the tax code by addressing its $1 trillion worth of deductions, credits, and preferences," the group's report said. "The value of these tax expenditures, as a whole, tends to benefit those with higher incomes. We identify savings by eliminating several of these benefits for corporations and individuals and by limiting the value of deductions for those with higher incomes."