Special Report

Pete and Alice’s Commission

The moderates have had their say -- and the weaknesses of their plan far outweigh its few strong points.

By 11.19.10

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Putting out debt-reduction plans are all the rage these days. Following the proposal put out by the co-chairmen of President Obama's Fiscal Responsibility Commission, we've seen plans from far-left Congresswoman Jan "I hate private health insurance" Schakowsky (D-IL) and now from former Fed vice-chair Alice Rivlin and former New Mexico Republican Senator Pete Domenici.

While I give Rivlin and former Domenici credit for trying to come up with a sound deficit- and debt-reduction plan, what they've proposed has a many important problems and one fatal flaw.

Let's start with the plan's few bright spots:

• It creates a federal income tax system of just two tax brackets, 15% and 27%, and reduces the corporate tax rate to 27%.

• It makes Medicare participants pay more of the program's actual costs.

• It eliminates the deductibility of health insurance by employers.

• It eliminates some farm subsidies and reforms the crop insurance program.

• It makes it harder for federal employees to game the pension system by basing pension benefits on the "highest five years of government service."

• It caps "noneconomic and punitive damages" awarded in medical malpractice cases.

But the Rivlin-Domenici plan's weaknesses far outweigh its few modest strong points:

First, the plan's spending restraint is, to put it kindly, timid. Instead of cutting anything, the plan simply freezes a fraction of the overall discretionary budget and defense spending at today's bloated levels.

Second, the "payroll tax holiday" under which there will be no 12.4% FICA tax due for the year 2011, like most temporary attempts at stimulus, will be much less effective than they hope. Employers are rational and know that a one-year break on employment taxes just means those taxes will be back again next year. Furthermore, while I'm all for tax cuts, it doesn't make a lot of sense to increase the Social Security system's unfunded liability so that we may pay lower taxes today only to be offset by higher taxes tomorrow. Indeed, since Social Security taxes go into general revenue, a payroll tax holiday will immediately increase the federal deficit by hundreds of billions of dollars. Quite an expensive holiday.

Third, although Rivlin and Domenici do index Social Security benefits, they do not raise the retirement age, one of the key things which MUST be done to salvage the nation's most popular unconstitutional entitlement program. Instead, they simply raise the payroll tax cap, thus offsetting most of the theoretical gain of the payroll tax holiday just one year after that holiday. Furthermore, each step toward reducing benefits for upper-income beneficiaries and raising benefits for low-wage workers is another step toward proving that Social Security is a welfare program rather than how most people see it, as a retirement plan -- even if a retirement plan that no rational person would invest in.

Fourth, the Nanny State is alive and well in the Rivlin-Domenici plan with a proposed tax on "high-calorie sodas." However, even putting aside the serious question about whether such "sin taxes" are anything more than heavy-handed social engineering, a soda tax is, as Veronique de Rugy has written, unlikely to change people's behavior or diminish their caloric intake. Sure, such a tax might raise some revenue, but should government add insult to injury by not just taking too much of our money but by trying to gouge us on life's little pleasures?

Fifth, the cost containment measures for Medicare are utterly inadequate, buying into (literally and figuratively) the government run "exchanges" created by Obamacare rather than arguing for free-market solutions such as allowing interstate purchase of health insurance.

But most importantly by far is the plan's inclusion of a 6.5% national "debt-reduction sales tax." If there were ever an economic camel's nose under the tent, it's this suggestion. A national sales tax will, like any other temporary government program, last forever and increase in size until it is all but unrecognizable. It is the proposal most desired by big-government supporters of the left, by euro-style socialists-lite, including our own president, whose desire for government to be all things to all people causes them to forget that Value Added Taxes (VATs) have been a key factor in giving Western Europe persistently higher unemployment rates and lower GDP growth than the US for the last few decades.

It's not surprising that a commission made up of only the most "moderate" Republicans would come out with a plan heavy on tax increases and which smacks of the cowardly lion when it comes to controlling the cost of government. But make no mistake, any plan which includes a national sales tax (without a repeal of the 16th Amendment to the Constitution and elimination of federal income tax) should be rejected out of hand, regardless of any other aspect of the proposal, if we want to return to a path of economic prosperity. This poison pill in the Rivlin-Domenici plan should doom it to the ash heap of deficit reduction proposals without further ado.

For those who want to argue that such a tax will protect us from a devastating increase in our national debt, why don't we ask Greece, Portugal, and Ireland how it's worked out for them? (National sales tax rates of 23%, 23%, and 21% respectively, on most items.) Rather than help a nation's economy, a national sales tax simply makes politicians believe they're sitting on an endlessly-refilling pot of money and destroys incentive to make the serious reductions in government spending that our economic future and our fundamental character as a nation of liberty demand.

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About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.