Just as President Obama and the Republican leadership are trading offers, three think tanks--the Heritage Foundation, the Center for American Progress, and the Bipartisan Policy Center-- each offered ideas that could be used in the negotiations.
The Heritage Foundation's J.D. Foster and Alison Acosta Fraser outline six entitlement reforms that can help with our long-term fiscal challenges, focusing primarily on Medicare and Social Security. These reforms are less sweeping than the kinds of structural reforms they would prefer, but they believe that these policies would have a better chance of being passed by Congress. The options they propose include:
- Increasing the Social Security retirement age to 69 by 2034 and indexing it for longevity thereafter
- Correcting the cost-of-living adjustment (COLA) in Social Security by switching to the chained CPI
- Raising the Medicare retirement age to align with Social Security's, which is currently higher
- Increasing Medicare premiums for high earners, reducing the premium subsidy they get from Medicare
- Phasing out Social Security benefits for upper-income retirees
- Consolidating Medicare's parts into one and financing 35 percent of costs with premiums.
The Bipartisan Policy Center, following on the heels of their proposal for a two-part process for deficit reduction, propose an illustrative down-payment that could be put together to produce up-front savings. In total, the package contains about $375 billion of deficit reduction over ten years including $195 billion of spending cuts, $140 billion of tax increases, and $40 billion of interest savings. The policies they use are:
- Increasing Medicare Part B premiums to cover 27.5 percent of program costs, up from 25 percent ($60 billion)
- Switching to the chained CPI for COLAs in Social Security and federal retiree pensions as well as for the tax code ($210 billion)
- Implementing a temporary income tax rebate, perhaps similar to the one in 2008 (-$120 billion)
- Taxing carried interest as ordinary income ($20 billion)
- Reinstating the personal exemption phase-out (PEP) and Pease limitation for high earners ($160 billion)
CAP's proposal is a full deficit reduction plan involving tax reforms to increase revenue and progressivity and some spending cuts. They address the following:
- Marginal Tax Rates: Ordinary income would be taxed at five rates of 15, 21, 25, 35, and 39.6 percent, while capital gains would be taxed at 24.2 percent (28 percent including the Medicare surtax) and dividends would be taxed as ordinary income.
- Standard Deductions and Personal Exemptions: These would be replaced with a standard credit of $2,500 for singles and $5,000 for couples. Dependent exemptions would be replaced by an expanded child credit of $1,600 or a $600 credit for nonchild dependents.
- Itemized Deductions: All itemized deductions would be replaced with an 18 percent credit with the exception of the charitable deduction, whose credit would be 28 percent. Similar to now, taxpayers would have to choose to take either the standard credit or the itemized credits.
- Health Exclusion: The authors would cap the health exclusion at 28 percent for people making more than $250,000, mirroring a proposal from the President's budget.
- AMT, PEP, and Pease: CAP would repeal all of these provisions, presumably because they would be unnecessary (personal exemptions and itemized deductions, targeted by PEP and Pease, would no longer exist).
- Estate Tax: The exemption for the estate tax would be set at $2 million and the top tax rate would be 48 percent.
- Other Taxes: CAP also proposes higher taxes on alcoholic beverages, cigarettes, and carried interest. They also assume a 4 percent corporate tax revenue increase from corporate reform, particularly from addressing transfer pricing. They also would legalize and tax internet gambling and extend the R&E credit and clean energy incentives.
- Health Spending: CAP would save $385 billion from extending Medicaid rebates to Medicare, follow the Medicare Payment Advisory Commission's recommendations for reducing payments, increase premiums for higher-earners, utilizing competitive bidding for products and services, and moving away from fee-for-service.
- Other Spending: CAP would reduce other mandatory spending and defense spending by $100 billion each. They endorse measures from the President's budget that would achieve this but aren't more specific than that.
Finally, CAP proposes a $400 billion stimulus consisting of infrastructure spending and a $100 billion tax cut, among other things. Including the stimulus, the authors estimate the plan would save $2.6 trillion over ten years, or $4.1 trillion if already-enacted spending cuts are included. They would have debt as a percent of GDP on a downward path to 72 percent in ten years.
|Areas of Savings from CAP Proposal (billions)|
|Ten-Year Savings/Costs (-)|
|Temporary Tax Cut||-$100|
|Subtotal, Tax Increases||$1,800|
|Other Mandatory Cuts||$100|
|Subtotal, Spending Cuts||$300|
|Already Enacted Spending Cuts||$1,500|
Source: Center for American Progress
All three groups provide valuable policies to which budget negotiators should be paying attention, particularly for ones that have bipartisan appeal. We have said it before: many great ideas have already been provided--it is simply up to lawmakers to put together a politically viable and sufficiently sized package.