Pete Domenici and Alice Rivlin, who co-chair an outside group on deficit reduction not to be confused with Obama’s commission, are out today with their own proposal to reduce the deficit. Like many of the proposals around, it has some good ideas, but also a lot of bad ideas.
The plan includes an element of economic stimulus in the form of a one-year payroll tax holiday. Back during the economic stimulus debate I advocated some form of this. My preferred solution would have been to make this a major component of the stimulus, and you could have structured it in a way so that the payroll tax gradually goes back to normal over a number of years as the economy theoretically improves. Remember, the payroll tax is paid both by workers and their employers, so if you cut or temporarily eliminate the tax, you’re not only leaving individuals with more money to spend, but you’re reducing the price of labor for businesses, which would help with the unemployment situation. While I think there’s a lot to be said for going after the payroll tax, I’m just not sure that a one year holiday would be the best way of going about it given that employers may be more reluctant to take on new obligations if they know that the tax is going to go right up again. Maybe a lower tax rate spread out over a longer period of time, would have a better impact.
The group makes some strong proposals to simplify the tax code by eliminating a number of deductions and credits, and moving to a flatter tax system — with just two rates of 15 percent and 27 percent. The plan would also reduce the corporate tax rate from 35 poercent to 27 percent, making the United States more competitive globally. On the negative side, the proposal calls for a 6.5 percent national sales tax.
When it comes to Social Security, the plan would raise payroll taxes on higher income individuals while cutting the benefits of wealthier beneficiaries, and changing the cost of living adjustments so that they more accurately reflect inflation and thus grow at a slower clip.
On health care, the group has a strong proposal to phase out the employer tax exclusion on health benefits, and to have medical malpractice reform. However, the plan also calls for a soda tax.
The proposal calls for a four year freeze on discressionary spending and a five year freeze on defense spending.
The problem with all of these so-called “bipartisan plans” to reduce the deficit, is that they all include elements that are completely unacceptable to each side, making it impossible to enact.