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Simpson-Bowles?

Confess: you don’t remember what, exactly, the Simpson-Bowles “Fiscal Responsibility and Reform” Commission proposed. I didn’t remember, either, but with many conservatives, including Steve Hayward, suggesting that the House pass Simpson-Bowles as its proposal to avert the fiscal cliff, I thought it would be good to refresh both my memory, and yours.

You can read the Commission’s report here; it isn’t particularly long. The Commission’s proposals are good on taxes and discretionary spending, so let’s start with those.

RECOMMENDATION 1.1: CAP DISCRETIONARY SPENDING THROUGH 2020. Hold spending in 2012 equal to or lower than spending in 2011, and return spending to pre-crisis 2008 levels in real terms in 2013. Limit future spending growth to half the projected inflation rate through 2020.

The Commission issued its report in December 2010, so two more fiscal years have gone by. Still, it wouldn’t be hard to update the Commission’s numbers to address next year’s spending. This chart shows how substantially Simpson-Bowles would cut federal spending, compared to President Obama’s budget or the CBO baseline. In the first four years it would fund more than $600 billion less spending than is requested in Obama’s budget:

The Simpson-Bowles proposal includes multiple enforcement mechanisms:

RECOMMENDATION 1.3: ENFORCE CAPS THROUGH TWO MECHANISMS — POINT OF ORDER AND ABATEMENT. Require a separate non-amendable vote in House and 60- vote point of order in Senate to spend above the caps. If caps are exceeded, impose across-the-board abatement by the amount appropriations exceed the caps.

Among other proposed spending reductions, Simpson-Bowles includes elimination of all earmarks.

With respect to taxes, Simpson-Bowles is also good:

RECOMMENDATION 2.1: ENACT FUNDAMENTAL TAX REFORM BY 2012 TO LOWER RATES, REDUCE DEFICITS, AND SIMPLIFY THE CODE. Eliminate all income tax expenditures [deductions and other tax preferences], dedicate a portion of the additional revenue to deficit reduction, and use the remaining revenue to lower rates and add back necessary expenditures and credits.

A “zero plan” could reduce income tax rates to as low as 8%, 14%, and 23%. Even after adding back a number of larger tax expenditures, rates would still remain significantly lower than under current law.

The Commission presented a menu of options here. To the extent that some deductions (e.g., home mortgage interest) are preserved, marginal rates are somewhat higher, but still considerably lower than at present. The Commission also called for a significant reduction in the corporate income tax rate, along with rationalization of taxation of foreign income. This chart compares current rates (along with post-January 2013 rates, under current law) with rates that would be possible under various deduction scenarios:

The Simpson-Bowles plan would eliminate all corporate welfare. No more “green jobs” programs!

2.2.2  Eliminate all tax expenditures for businesses. Corporate tax reform should eliminate special subsidies for different industries. By eliminating business tax expenditures – currently more than 75 – the corporate tax rate can be significantly reduced while contributing to deficit reduction. A lower overall tax rate will improve American business competitiveness. Abolishing special subsidies will also create an even playing field for all businesses instead of artificially picking winners and losers.

That should warm every conservative’s heart.

So if Simpson-Bowles is good on discretionary spending and taxes, what’s not to like? The knock on the Commission’s report was that, while it included proposals for Social Security reform, it did little about the biggest causes of the nation’s long-term debt problem, Medicare and Medicaid. It assumed the continuation of Obamacare and only nibbled around the edges of the existing Medicare and Medicaid programs. This was the principal reason why Commission member Paul Ryan declined to support the group’s final product, even though he applauded the effort and approved of many of the Commission’s proposals:

The primary driver of our fiscal problems is government health care spending and the fundamental weakness in the Co-Chairs’ proposal is its failure to structurally reform health care.

That was an appropriate criticism when the Simpson-Bowles Commission was operating in a vacuum. But we are now addressing a specific moment in time. Given the current alignment in Washington, it is obvious that any compromise that emerges in the coming weeks will not repeal Obamacare, and will not fundamentally reform Medicare and Medicaid. Those battles must be left to a future date. Given that reality, the chief objection to Simpson-Bowles is largely moot. What remains, the spending and tax guidelines, is good. So I would have no problem with the Republicans adopting Simpson-Bowles as their plan to get past the current fiscal crisis.

I have argued that there is a case to be made for higher, not lower, taxes, as long as those higher taxes are imposed on taxpayers generally, not just high income earners. Simpson-Bowles is flawed in that, like all marginal rate reductions of recent decades, its effect would be to make the income tax system even more progressive than it already is. We badly need to make more voters into taxpayers so that they have a concrete interest in restraining federal spending. That battle, too, is one that will be left for another day if Simpson-Bowles becomes the Republican plan.

So my conclusion is this: 1) Republicans’ first choice should be to agree to a brief (say, 120 day) continuation of the status quo to permit budget legislation to work its way through Congress. The solution to our present fiscal crisis should be decided through the legally-mandated process of introducing budget bills in the House and Senate, debating amendments, taking votes, reconciling differences in a conference committee, and so on. Voters should be able to see in the light of day what each party, and each individual member of Congress, favors. Midnight back-room deals are no way to decide our children’s financial future.

2) If we assume that John Boehner doesn’t listen to me, Jeff Sessions and others, and instead continues negotiating behind closed doors, then Republicans should be willing to agree to a return to all Clinton-era individual income tax rates, as long as they can obtain very substantial spending cuts in return. If such a deal cannot be negotiated, no back-room agreement should be made.

3) Instead, the House should pass Simpson-Bowles. Note that the Simpson-Bowles report is not as specific as a budget plan would be, and leaves open a number of options at various points, especially with regard to taxes. Republicans should make certain that their legislation can accurately be characterized as an implementation of the Simpson-Bowles blueprint.

Enacting Simpson-Bowles in the House is, of course, a political move. But that doesn’t mean it is bad policy. If the House’s adoption of Simpson-Bowles doesn’t lead to a compromise that is workable, then so be it: under existing law–which was, after all, adopted by the Democratic Senate and signed by President Obama–on January 1, tax rates (all of them, not just the top two tiers) will rise and federal spending will be cut. And the battle over the federal budget will continue.

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