Simpson, Bowles back with new deficit reduction plan

Simpson-Bowles

With the focus on the sequester, Alan Simpson and Erskine Bowles, who co-chaired the National Commission on Fiscal Responsibility and Reform, are hoping to become relevant again by pushing a new deficit-reduction plan. Last week, the two announced a plan that would reduce deficits by $2.4 trillion over the next 10 years:

A quarter of the deficit reduction – $600 billion – would come from healthcare savings, with Bowles and Simpson calling for lower provider payments, higher premiums for higher earners, savings from lower drug costs and “adjustments to account for an aging population.”

Bowles and Simpson call for an additional $1.2 trillion in other spending restraints, including mandatory spending cuts, tighter discretionary spending caps and a new formula for calculating inflation that would slow the increase in government benefits.

A reform of the tax code that loweres rates while also eliminating tax breaks would provide the other $600 billion.

Reforming entitlements, something President Barack Obama has avoided during his time in the White House, is one major aspect of both the previous Simpson-Bowles plan and this new proposal. However, not enough detail has been provided to give any idea how savings via entitlements would be achieved. But despite recent tax hikes, which have slowed retail sales and are expected to slow job growth, Simpson-Bowles would raise revenues through by removing loopholes through tax reform.

The planned outlined by the two notes that the “current tax code is complicated, confusing, costly, anti-growth, anti-competitive, unfair, and riddled with well over $1 trillion of tax expenditures – which really are just spending by another name.”

It’s true that the tax system needs to be overhauled to a more broad-based system, ridding the system of loopholes and other tax credits and deductions. But raising revenue should be focused on the economic growth that such a policy move can bring. Focusing 25% of deficit reduction on tax hikes is a bad idea. Writing at the Washington Examiner, Veronique de Rugy explained that relying so heavily on tax increases, as Simspon-Bowles does, “ignores the extensive academic literature that shows that the best way to successfully reduce debt-to-GDP ratios is to adopt fiscal adjustment packages heavily weighted towards spending cuts.”

We need to reduce deficits and we need to reform entitlements, the fiscal situation in which we find ourselves requires it at some point, but the last thing our economy needs is another tax hike.

 


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