Budget

The Simpson-Bowles Mystique


The Simpson-Bowles Mystique

Photograph by Michael Ochs Archives/Getty Images

Simpson-Bowles is the James Dean of deficit-reduction plans: more popular in death than life. Republican Senator John McCain of Arizona calls it “an excellent blueprint.” Democratic Representative Chris Van Hollen of Maryland, the ranking minority member on the House Budget Committee, holds it up as a “framework.” General Electric (GE) Chief Executive Officer Jeffrey Immelt describes it as “a great starting point,” and hundreds of executives involved in the Campaign to Fix the Debt are touting it as a model for fiscal cliff talks. But most people have only a vague idea of what’s in the 65-page plan, available at fiscalcommission.gov, or what points divide the parties.
 
What is Simpson-Bowles anyway?
President Obama appointed North Carolina Democrat Erskine Bowles, a former chief of staff to President Clinton, and former Senator Alan Simpson, a Wyoming Republican, to head a bipartisan panel on deficit reduction in 2010. The agreement was that if at least 14 of the 18 members signed on to a plan, it would go to Congress for approval. But what was billed in 2010 as a $4 trillion deficit-reduction plan got only 11 votes.
 
Was it actually bipartisan?
It’s closer to the Democrats’ position than the Republicans’ in one big way: tax hikes. The plan assumes the expiration of all the Bush tax cuts for couples earning $250,000 a year or more as its starting point. If you include revenue from those increases and update it through 2022, it would raise $2.6 trillion over 10 years, according to an analysis by Richard Kogan, a senior fellow at the Center on Budget and Policy Priorities. That’s more than the $1.4 trillion the Obama administration is seeking.
 
So all the Simpson-Bowles tax hikes would come from raising rates?
The plan doesn’t specify the blend of higher rates and lower tax breaks it would use to raise money. If enough breaks were cut, rates could be brought back down significantly.
 
You can see why the $2.6 trillion might not go over big with Republicans.
That’s not all they object to. The plan would raise the federal gasoline tax by 15¢ a gallon. And according to Kogan’s analysis, it would cut planned defense spending by well over $1 trillion over 10 years—a sore point for the GOP’s defense hawks.
 
There must be parts Democrats hate.
Sure. Simpson-Bowles would phase out, by 2038, the tax break for employer-sponsored health insurance—a concern for unionized workers such as fire fighters and cops, who get generous health-care coverage. And the plan’s overall spending cuts are more than the Democrats want to swallow: At $2.9 trillion, by Kogan’s calculation, they’re about as big as the forthcoming 10-year spending caps plus the automatic cuts the Dems have been fighting in fiscal cliff talks. Some ideas aren’t popular with either party, such as replacing the deductions for mortgage interest and charity with small tax credits.
 
Does Simpson-Bowles say what to cut?
It has several suggestions outside of defense and entitlements, some big and some small, ranging from reducing the federal workforce through attrition down to trimming the “at least 20 programs at 12 agencies dedicated to the study of invasive species.”
 
Isn’t health care the black hole of government spending?
Yes, and the plan’s solutions to that problem aren’t popular with Democrats. Health-care cuts would come to $480 billion over 10 years, says Kogan. On Medicare, the biggest savings would come from requiring recipients to pick up more of the cost through measures such as higher deductibles. On Social Security, Simpson-Bowles would reduce benefits a bit, raise the portion of income that’s subject to payroll taxes, and use a less generous inflation measure. It would also index the Social Security retirement age to life expectancy, which would be tough on manual laborers.
 
So can Simpson-Bowles really be the basis for a deal?
According to Kogan’s analysis, it cuts the deficit by $6.6 trillion when measured over the same time period and using the same budgetary base line as the $4 trillion plan President Obama has been pitching. So Congress could take out some unpopular parts and still save enough to keep the debt under control. “This is a very ambitious plan,” says Kogan. “There is some give.”

The bottom line: Simpson-Bowles, the failed budget plan that’s now being championed at least in name, calls for bigger tax hikes than Obama is proposing.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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