6 Tips for Judging Tax and Spending Reforms

Obama deficit reduction commission issues final plan, including cuts for major senior programs.

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The final report of President Obama's deficit-reduction commission has been released, and it continues to be the document that no one really likes. It has a lot more detail than a draft report issued earlier by its co-chairs, Erskine Bowles and Alan Simpson. But the report's call for widespread cuts in federal spending remain in place, including changes that would reduce Social Security benefits and increase consumer costs for Medicare.

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If nothing else, Bowles and Simpson deserve gold stars for, in the words of the late sportscaster Howard Cosell, telling it like it is. Here's my favorite line from their report, which they titled "The Moment of Truth": "After all the talk about debt and deficits, it is long past time for America's leaders to put up or shut up."

Wading through all the news stories and policy-group responses to the report yields many conclusions, but two stand out: First, we're not yet serious in this country about tackling a fundamentally broken federal government. Second, you need to read the full 65-page document and make up your own mind.

Even its own members aren't expected to approve its tough-minded recommendations. We'll see where they stand when they line up for a vote in a couple of days. In the meantime, seniors' groups continued to argue that seniors are being asked to absorb an inordinate amount of the cost for helping to close the nation's huge budget gap. Here's a good summation of their concerns, contained in AARP's statement:

"As AARP analyzes the most recent commission proposals, the impact is troubling: they would lower the retirement incomes of average people who rely on Social Security while significantly increasing their out of pocket costs for Medicare. The combined impact of these changes would grow over time and disproportionately hurt future retirees, who already face an extremely challenging landscape and who will need Social Security just as much—if not more so—than current retirees. Half of the work force today does not have access to workplace savings programs, including 401(k)s; personal savings rates are low, particularly for retirement; and, the unemployment rates are high. Among those aged 45 to 54, 36 percent have saved less than $10,000 for retirement. In addition, proposed changes would significantly reduce Social Security benefits for many future retirees.

"The Co-Chairs' proposal would compound this loss of income by dramatic cost shifts in the Medicare program, with most beneficiaries experiencing significant increases in cost-sharing. The plan does not do enough to address the important issue of ensuring doctors remain in the Medicare program. The draft proposal would also reduce the options Americans have to save and plan for their future long-term care needs, and their desire to remain in their homes and communities, while shifting costs back on struggling state Medicaid programs. Rather than massive cost shifting in Medicare, we need to reduce costs throughout our health care system."

I wish AARP had to really worry that these proposals would be acted upon swiftly, not because I agree with all of the proposals, but because of the brutal consequences of continuing inaction. As tough as the commission's remedies are—and they are that—they would not lead to a balanced federal budget until 2035. That's 25 years of additional deficits, higher national debts, and steeper interest charges to carry those debts.

[See Raising Social Security Retirement Age Is No Simple Fix.]

"In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP)," the commission report said. "Only during World War II was federal spending a larger part of the economy. Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950 ... Since the last time our budget was balanced in 2001, the federal debt has increased dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010."

If newly elected Republicans and newly conservative Democrats become serious about tackling federal spending and tax policies, here are six ways to evaluate their proposals:

How much of the reduction is through higher revenues (more taxes, generally) and how much through reduced spending? Compromise argues for a balance but those concessions are not yet forthcoming. Liberals lean toward higher taxes; conservatives toward spending cuts. Perhaps the greatest achievement of the Obama commission is to put serious tax reform on the agenda. Our federal budget may be badly wounded, but our tax system is DOA.

The federal debt now equals about 70 percent of GDP. How would this percentage change over time? This is a solid way to measure the enduring impact of deficit reduction proposals. The higher this number, the less serious the United States is seen about reducing the deficit. This has a big impact on the value of government investments and the dollar. Continued deficit spending will become very painful if a declining dollar makes it very expensive for the U.S. government to sell its debt securities. The size of our debt relative to our economy is a widely used fiscal thermometer. The commission's report would reduce that percentage to 60 percent of GDP by 2023 and 40 percent by 2035, mostly by keeping the deficits in check while the overall economy grows. Some liberal proposals accept an 80 percent debt load as manageable.

[See Why the Retirement Age is Increasing.]

How much is defense spending cut? On paper, it is easy to reduce defense spending. In the real world? Not so much. Just spend a little time reading the latest series of Wikileaks postings of State Department documents. Global craziness and tensions are up around the world, and Uncle Sam is the only traffic cop in town. Asking other nations to take up the slack is fine, but any transition will take decades. Again, this issue often breaks down along ideological lines, with conservatives leery of any defense cuts and liberals tending to prefer trimming the Pentagon to cutting domestic social programs.

How much is Medicare and Medicaid spending cut? Everyone agrees that these programs provide benefits that are bankrupting the nation and will become even less affordable as 78 million baby boomers begin turning 65 next year. But there is little agreement about how to reduce their costs. While the health reform law promises long-term savings, it provides only fuzzy pathways to that goal.

How would Social Security be changed? The commission plan would raise retirement ages, but not for decades. Its plan calls for a more progressive program, meaning better benefits for low-income earners and reduced payments to more affluent workers. High-income earners would pay more taxes into the program. A less generous inflation measure would be used to set the program's annual cost-of-living adjustment, reducing future benefit increases. Through the nine-year period from 2012 through 2020, it estimates its plans would raise revenues by $138 billion in higher payroll taxes and cut benefits by $100 billion, nearly all through reduced COLA payments. However, Social Security's current funding shortfalls don't have an impact on benefits for decades, and that's when the commission's plan would have a more serious bite.

Any short-term stimulus? Cutting spending and raising taxes during a weak and fragile economic recovery is opposed by the commission and most other deficit-reduction plans. There is an ideological component to this issue as well. Some conservatives believe lower government spending actually can spur economic growth. By convincing companies and our trading partners that we mean business about putting our fiscal house in order, jobs and economic activity will increase. On the liberal side, the argument is that current stimulus efforts have not worked well because they were way too small in relation to the severity of the recession. More spending is their key to economic growth, higher tax revenues, and smaller deficits.

Twitter: @PhilMoeller