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The Debt Commission's Free Ride for Boomers


It sure doesn't seem fair. The co-chairs of the National Commission on Fiscal Responsibility and Reform have largely given Baby Boomers—the generation that created the current fiscal mess—a pass on fixing the problem.

One major recommendation from Erskine Bowles and Alan Simpson is to scrap the tax deduction for mortgage interest. That's fine for older Boomers, since many have paid off that debt or have little interest left to deduct. No child credit? Hey, they're (hopefully) out of the house. Boosting the retirement age for Social Security to age 69 by 2075? The Boomers will be dead then. Gradually hiking the federal gas tax by 15¢ per gallon from its current 18.4¢ starting in 2013? Aging Boomers won't be driving much in their dotage. End the employee-sponsored health-benefit exclusion from income taxes? Boomers will be on Medicare.

"The more you protect the Baby Boomers, the more the relative hit has to fall on younger generations," says Maya MacGuineas, director of the fiscal policy program at the centrist New America Foundation in Washington.

When all is said and done, Boomers may end up shouldering more of the burden to pass a sustainable government to future generations. Bowles and Simpson, long-time political operators, have much of official Washington in a frenzy. They've made it clear that bringing the budget into balance and the debt under control mean abandoning cherished positions. "Fairness" toward aging boomers could be a casualty. It's as if they consulted The Prince, the classic exegesis of power politics by Niccolò Machiavelli, before issuing their preliminary recommendations.

"From this arises the question whether it is better to be loved rather than feared, or feared rather than loved," mused the Renaissance scholar in Chapter 8. "It might perhaps be answered that we should wish to be both: but since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved."

"Thank You," Bowles and Simpson

Bowles and Simpson have attracted their share of fear and loathing. For instance, Americans for Tax Reform, the antitax advocacy organization headed by Grover Norquist, blasted the Bowles-Simpson plan. The government would be still "spending too much" and the panel ignored how to balance the budget "without raising taxes," it said. The group pointedly reminded more than 235 congressmen and 41 senators that supporting the plan would violate a no-tax-increase pledge that they made to their constituents. Richard Trumka, president of the AFL-CIO, said the co-chairs' scheme for fiscal balance "tells working Americans to 'Drop Dead.'"

The anxious rush to defend familiar positions is why the nation owes Bowles and Simpson a big "thank you." The report has made it clear just how daunting a fiscal challenge the U.S. faces. Anger doesn't cut it, let alone business as usual. "There is no way to get on top of the debt and the deficit with policy changes that are easy or fun," MacGuineas says. "This is about the hard stuff." Adds Leonard Burman, professor of public affairs at the Maxwell School, Syracuse University: "They did a real service. What they came out with is unpalatable to everyone, and now people can get serious negotiating."

The scale of the national debt and budget deficit is well known. In 2009 and 2010 the federal government's red ink ran in the neighborhood of 10 percent of gross domestic product. The $3 trillion in net borrowing over the same period will leave the federal government with debt of roughly 60 percent of GDP for the first time since the end of World War II. The longer-term projections are most ominous. In one of its scenarios, the Congressional Budget Office assumes that the Bush tax cuts are permanent, the alternative minimum tax patch is lasting, and health-care costs rise at close to their historic levels. The national debt explodes to 100 percent of GDP by 2023 and 200 percent of GDP by 2038—a mere 13 and 28 years, respectively, from now.

That the scope of the problem may be understood hardly makes reform easier to swallow. There is much to dislike among the Bowles-Simpson suggestions. For instance, their plan leans heavily on slashing spending, compared to raising tax revenue, with some $3 in cuts for every additional revenue dollar. Instead of weighing the costs and benefits of different government programs, it advocates limiting government's take to 21 percent of GDP.

Most Would Pay More Taxes

That said, Bowles and Simpson emphasize critical areas for review. They would significantly reduce military expenditures, as well as discretionary spending. They slightly increase the progressivity of Social Security and they highlight the need to bring health-care spending—the core of the long-term structural budget deficit—under control. Perhaps most significantly, they push for major tax reform. The co-chairs propose eliminating many of the deductions and credits that clutter up the tax code in return for lowering overall tax rates.

They offer three basic tax reform options. The most intriguing would eliminate the mortgage interest deduction, the preference for employer health-care insurance, favorable rates on dividends and capital gains, child tax credit, and similar tax expenditures in exchange for a sharp drop in brackets—to 8 percent, 14 percent, and 23 percent. "Most people will end up paying more in taxes, but they should be doing it in a system they can understand and [that] will be perceived as fair," says Burman, the Syracuse professor.

Odds are that the Bowles-Simpson preliminary plans will go the way of most blue-chip panel studies: Directly into the dustbin of history. Washington is gridlocked, especially since the Nov. 2 midterm elections. The nation's political class is mired in a giant game of chicken. Everyone knows a deal has to be struck eventually. But the players don't want to cede anything too soon. "You're a fool and weak if you're the first to give in on the things you care about," says Daniel Shaviro, professor of taxation at New York University. "But on the other hand, if you don't give, nothing gets done."

The way out is for President Barack Obama to change the rules of the game of chicken. He can use the power of the bully pulpit to appeal directly to the electorate. President Franklin D. Roosevelt used the power of radio with his fireside chats to bypass the traditional media to push his New Deal initiatives. President Ronald W. Reagan turned his back on official Washington and Gucci Gulch lobbyists when he resuscitated major tax reform in 1986. (It's also forgotten that Reagan responded to the debt and deficit concerns of the centrist voter by raising taxes three times between 1982 and 1984.) It's a leadership playbook Obama should heed. After all, in Chapter 26 of The Prince, Machiavelli wrote: "Where the willingness is great, the difficulties cannot be great."

Chris_farrell
Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace.

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