The Commission was formed by President Barack Obama on February 18, 2010, to find a bipartisan way to lower the annual Federal budget deficit to three percent of Gross Domestic Product (GDP). In addition, Obama specifically requested that the budget be balanced by 2015 (not counting interest payments). He also required a solution to the long-term Social Security and Medicare deficit. The idea of a bi-partisan Commission was to find a solution to the U.S. debt crisis that would be acceptable to both parties.
On November 10, 2010, co-chairmen Simpson and Bowles pre-released their proposal to much controversy. It proposed a mix of spending cuts (generally favored by Republicans) and tax increases (generally favored by Democrats) that would reduce the budget deficit to 2.2% of GDP. This would lower the national debt by $3.8 trillion over the next ten years.
The Commission's official December release was entitled "The Moment of Truth," and it was very similar. If followed, it would cut nearly $4 trillion from the deficit through 2020. It would also reduce the deficit to 2.3% of GDP by 2015, or 2.4% if Social Security wasn't reformed. This would also reduce the debt-to-GDP ratio to 60% by 2023 and 40% by 2035.
Despite its bi-partisan appeal, the plan failed to gain the support of enough of its own Commission members to make it any further. It needed 14 Commission members to approve it, and only received 11 votes. The divisiveness within the Commission itself meant that Congress wouldn't touch it with a ten-foot pole. Many Republicans had signed a "no new taxes" oath, which left them no room to compromise. (Source: Washington Post, Deficit Panel Leaders Propose Curbs, November 11, 2010)
However, in 2012 Congress realized it had no other bipartisan plan to reduce the deficit. Faced with mandated spending cuts and tax increases that threatened to throw the economy off a fiscal cliff in 2013, it began to reconsider the Simpson-Bowles plan. (Source: Bloomberg View, Simpson Bowles: It's Back, and Better Than Ever, June 14, 2012)
Simpson-Bowles SummaryIn general, the plan proposed to:
- Sharply reduce tax rates in exchange for elimination of many standard tax credits.
- Abolish the Alternative Minimum Tax.
- Cut spending to 21% of GDP.
- Increase revenue to 21% of GDP. Any additional revenue windfalls would go toward deficit reduction, not additional spending.
- Ensure lasting Social Security solvency, preventing the projected 22% cuts in benefits that would otherwise occur in 2037.
- Stabilize the U.S. debt by 2014.
Simpson-Bowles Specific RecommendationsThe final "Moment of Truth" report recommended changes in six areas.
1. Discretionary Spending Cuts: All agencies would reduce their discretionary spending to 2008 levels, adjusted for inflation, by 2013 (two years after the report was published). After that, spending increases would be capped at half the rate of inflation.
2. Tax Reform: Lower the income tax rate to 8%, 14% and 23%, and the corporate tax rate to 26%, by eliminating all other tax deductions and credits. In addition, all dividends and capital gains would be taxed as ordinary income. Any increased revenue would go to deficit reduction, not new spending.
The report recommended that Congress and the President keep in some provisions and credits, which would raise the tax rates to 12%, 22% and 28%, and the corporate tax rate to 28%. The report includes detailed suggestions for leaving in the following credits: Earned Income Tax Credit, Child Tax Credit, mortgage interest for principal residence only, employer-provided health insurance, charitable giving, and retirement savings and pensions. Taxpayers would take standard deductions instead of itemizing.
3. Health Policies: Reform Medicare payments to physicians to focus on quality of care instead of quantity. Until then, freeze physician payments through 2013, and institute a one percent cut in 2014. Increase funding to reduce Medicare fraud. The report has many specific recommendations to reduce excess Medicare payments, coordinate Medicaid and Medicare benefits, and reduce medical malpractice costs.
4. Other Mandatory Policies: No changes to SSI, food stamps or unemployment benefits. Create a federal civil and military retirement task force to reduce benefits by $70 billion (over ten years). It also recommends many detailed reductions in portions of programs including farm subsidies, school loans, and the State Abandoned Mine Fund. The Commission recommends raising incomes by such common-sense ideas as allowing the Post Office to run as a profitable business, indexing user fees to inflation, allowing the Pension Benefit Guarantee Corporation to raise premiums, and allowing the Tennessee Valley Authority to charge market rates for its electricity.
5. Social Security: Change the payout after retirement so that higher income earners receive just a little bit less. This will be gradually phased in starting in 2017. Keep increasing the retirement age to match increasing life expectancies. However, allow those who need it to draw down half their annual benefits starting at age 62. Workers must pay Social Security taxes on the first 90% of income, no matter how high it is. Workers who have paid into the system for at least 30 years will be guaranteed a minimum of 125% of the poverty level. Cover newly hired state and local workers after 2020.
6. Process Reform: Use the chain-weighted Consumer Price Index (CPI) for all government cost-of-living payments. The President's budget must show no deficit by 2015, unless there is a recession. Calibrate extended unemployment benefits to a general unemployment rate. (Source: National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010; Tax Policy Center, Bowles-Simpson Brief)
Would the Plan Work?The Simpson-Bowles plan would achieve its goal of reducing the deficit and debt with a carefully considered list of detailed recommendations. Although many critics are concerned about the tax hikes, this would not deter economic growth once GDP reaches a healthy 2-3% rate. Why? Tax cuts only spur growth when rates are above the 50% level according to the theoretical underpinning of supply-side economics, the Laffer Curve.
The plan also protects those who are most vulnerable, the very poor and elderly. This is good economics, because they are most likely to spend any income they receive. In addition, it emphasizes automatic benefit increases for the unemployed, one of the best ways to stimulate demand and increase jobs.
Simpson-Bowles recommends that all agencies reduce spending the same percent. This forces agency heads, who are best qualified, to find savings in their own departments. The plan also suggests elimination of some spending that is obviously outdated and unnecessary, like the Abandoned Mine Fund. All in all, it is a workable plan from an economics perspective. Article updated August 9, 2012