Reading the Deficit Commission Report

by Bob Stein

Here’s what I like:

— Trying to reduce spending as a share of GDP to 21 percent — very commendable for a centrist group.

— Civil-service retirement-benefit reductions; requiring greater contributions for the government’s defined-benefit plan; making the benefit formula less biased in favor of older workers.

— Repeal of the state and local tax deduction.

— Limiting the mortgage interest deduction.

— Trying to wring savings from Medicare/Medicaid.

— Indexing the retirement age in Social Security to longevity — very good. Bravo.

— Lowering the top marginal tax rate on corporate income and regular labor income.

— Shifting to a territorial system for taxing corporate profits.

— Eliminating the AMT.

Here’s what I don’t like:

— Although the plan says it would try to cap revenue as a share of GDP at 21 percent, there is nothing in the plan that would do so. Gradually, productivity will push a larger share of income into the higher marginal tax brackets, resulting in higher revenue relative to GDP.

— Social Security solvency is achieved over 75 years only, rather than over the infinite horizon. This means that in ten years, when the 75-year window includes, at the back end, a ten-year window where solvency does not exist, we will again be back in 75-year insolvency.

— The plan calls for increasing the tax base for Social Security. This is a large tax hike for many workers.

— If the commission were really serious about reducing government health-care spending, it would have pushed for high-deductible health insurance plans inside the president’s program enacted in March.

— The commission failed to include a higher retirement age for Medicare, which is indispensible for bringing down long-term Medicare costs.

— The tax plan raises the cap-gains and dividends tax rates to 28 percent.

— The tax plan shrinks the marginal tax reduction received by the typical working family that has an additional child. In effect, the commission adopts the view that fiscal policy does not influence fertility. We have a long-term old-age entitlement problem in large respect because these programs “crowd-out” the traditional incentive to raise kids. So instead of tax benefits for parents being part of our fiscal problem, they are really part of the solution.

 — Bob Stein is senior economist with First Trust Advisers.

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