Another angle on deficit reduction

Sunday, November 21, 2010; 7:46 PM

WE WROTE this month about the deficit reduction blueprint issued by the co-chairs of President Obama's fiscal responsibility commission. Now comes a second plan, released last Wednesday, that differs in key respects and also merits close study. The Bipartisan Policy Center (BPC) proposal, overseen by Democrat Alice Rivlin and Republican Pete Domenici, demonstrates that reasonable people in both political parties, if not elected officials, can agree on a deficit reduction plan: The 19-member bipartisan task force included not only Ms. Rivlin, who served as President Clinton's budget director, and Mr. Domenici, a former Republican senator from New Mexico, but also Republicans such as former Oklahoma governor Frank Keating and former commerce secretary Carlos Gutierrez and Democrats such as former Michigan governor Jim Blanchard and Clinton housing secretary Henry Cisneros.

The similarities of the two proposals bear emphasizing because they underscore the likely path should the president and Congress decide to stop bemoaning the debt and start doing something about it. Both rely on spending cuts and tax increases, although the BPC would split the two about evenly while the plan outlined by the commission co-chairs, Erskine Bowles and Alan Simpson, would rely on a three-to-one ratio of spending cuts to tax increases. Both would lower marginal tax rates by reducing or eliminating hundreds of billions in tax breaks. Both would treat the value of employer-sponsored health insurance as taxable income, helping put a brake on rising health-care costs. Both put yearly caps on defense spending and domestic programs.

One major difference is that the BPC plan attempts to stimulate the economy with a one-year payroll tax holiday for 2011, eliminating the 12.4 percent tax that employers and employees pay jointly into the Social Security trust fund. This would cost a lot but, the group says, create 2.5 million to 7 million new jobs as the cost of hiring a new employee is reduced and workers spend money from fatter paychecks. The plan would credit the lost $650 billion in revenue to the Social Security trust fund and save enough elsewhere to make up the difference.

Another key distinction is that the BPC, in addition to overhauling the tax code, would add a 6.5 percent tax on goods and services. This consumption tax, in place in every other major world economy, represents a better way to encourage savings and investment than taxing income. A broad-based consumption tax, including food and clothing, can be unfair to low- and middle-income families, but the plan offsets the effect with refundable credits to low-income families for children and earnings. Such a tax should be an element of future discussions.

The BPC plan would have government spend 23 percent of the gross domestic product rather than the 21 percent level of the Bowles-Simpson plan. Given rising health costs and an aging population, even getting to 23 percent - the current level is 26 percent - is going to require sacrifice.

No task force can supply what is missing from both proposals: political will to get the plan enacted. The coming months will show whether that will exists, from President Obama or members of Congress.

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