The Corner

The Rivlin-Domenici Alternative to the Deficit Commission Report

A week after the deficit commission released its preliminary report, economist Alice Rivlin and former New Mexico senator Pete Domenici have released their own shadow report and have taken to the pages of the Washington Post to make their case for it.

The Rivlin-Domenici plan wouldn’t cut spending; it freezes some small portion of the budget at 2011 levels but that’s pretty much it.

We would freeze domestic discretionary spending for four years and defense spending for five, both at 2011 levels, and then limit their future growth to the rate of growth in the economy.”

Because there is not much in the way of spending cuts here, the “fiscal responsibility” in this shadow report comes from increases in tax revenue — for instance, a 6.5 percent sales tax for “debt-reduction.” That’s a first step toward a VAT. As many people, including me, have argued before, this is a terrible idea (read more on the VAT here). Their payroll-tax holiday of $800 billion would have to be offset with more borrowing now in order to pay current Social Security benefits. Controlling our debt explosion with more debt seems like a terrible idea.

Another jam in the proposal is the the tax on high-calorie sodas. The point here is to jack up the price of sugary drinks to control health-care costs. I have written about how bad an idea this is, since doesn’t raise much revenue and certainly doesn’t control obesity:

Richard Williams and Katelyn Christ, two economists at the Mercatus Center (where I work), argue that soda drinkers would [not work]. In a 2009 study, they wrote: “The assumption is that this sin tax would reduce caloric intake because consumers would stop drinking high-calorie drinks and/or switch to lower-calorie drinks. However…if consumers respond to the proposed sin tax on sodas and sports drinks by switching to some of the potential substitute drinks [see table], their caloric intake would either remain the same or actually increase.”

In a 2008 working paper, Emory University economists Jason Fletcher, David Frisvold, and Nathan Tefft examined the impact that changes in states’ taxation rates from 1990 to 2006 had on body mass index and obesity. They concluded that soft drink taxes have a vanishingly small impact on weight because, even when untaxed, soft drinks represent only 7 percent of the average soda drinker’s total calorie intake.

If the government wants to have a role in the fight against obesity and they think sugar is part of the problem, then why not get rid of farm subsidies, especially those that go to the sugar barons who control Florida Crystals and Domino Sugar? It’s hypocritical to fight sugar on one hand while favoring it on the other. As you know, the federal government guarantees a minimum price for sugar in the domestic market by maintaining a system of preferential loan agreements, domestic marketing quotas, and import barriers. In fact, according to USDA data, U.S. sugar prices have been more than twice world market prices.

To be sure, Rivlin and Domenici call for compromises on both sides of the aisle. But their proposal only demands compromises on the part of those who believe that the government is too big and out of control, and those who believe that spending could be significantly cut without “eviscerating the American middle class.” It is much more in line with what I had expected the deficit commission report to look like. Live and learn.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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