The Debt Commission’s Trial Balloon

Here is Arnold Kling at Econlog:

Lots of tax reform (get rid of the mortgage interest deduction, the health care deduction), and no VAT. Cuts in Social Security benefits, but trying to maintain benefits for the elderly poor. On Medicare, more or less the kitchen sink. I think they endorse everyone’s ideas for cost control–left (threatening the public option), right (saying something positive about consumers sharing costs), and center…..

This looks like President Obama’s golden opportunity to triangulate. My guess is that he will seize it. I hope he does. We could do worse.

Paul Krugman and Brad De Long are both negative. Greg Mankiw is positive. Ezra Klein and Tyler Cowen are noncommittal.

Wall Street Journal says it’s 75% spending cuts and 25% tax increases. More on this later.

Comments (15)

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  1. Bruce says:

    I smell a rat.

  2. Devon Herrick says:

    The problem with a debt commission is by the time there is enough political will to form one, it’s too late to slow the growth of the debt without pain. Back when it would have been easier to alleviate the problem, no politician had the backbone to suggest it.

  3. Ken says:

    I disagree with Bruce. I think the whole package is worth considering.

  4. Larry C. says:

    If the split is 75%/25% and the highest tax rate is 23%, that sounds like a pretty good deal.

  5. Virginia says:

    I agree with Devon. Our politicians will not do anything until we are staring into the abyss.

  6. Al Farragosa says:

    Haven’t had much time to review anything but the news stories about this but if Pelosi says it’s “simply unacceptable,” some of it must be good.

  7. Linda Gorman says:

    Fail, based on news reports. The so-called tax reforms are disguised tax increases.

    What part of the not one more dime for government message did they not understand?

    Did they recommend that Medicare be transformed to look like a private insurance plan? How about Medicaid? Was all funding for health care pilot studies under ObamaCare eliminated? Is Social Security to be transformed into defined contribution along the Chilean model? Was the Department of Education abolished along with a student loan phaseout? Were all arts subsidies cut? No more bike trails or museums? Uneconomic mass transit system subsidies zeroed out? Ethanol subsidies eliminated? Green energy subsidies zapped? NPR a goner?

    No? Then how dare you ask for tax increases!

  8. Don Levit says:

    You are right on.
    SS needs to be designed the way it was intended, as a self-supporting retirement/insurance plan, without using general revenues.
    The trust fund merely provides the amount that SS can pay its beneficiaries without an appropriation from Congress.
    The actual paying of the benefits comes from tax revenue and debt, just like battleships are paid for.

    The trust fund makes it no easier to pay beneficiaroes, whether its balance is $10 billion or $100 billion.
    Same for Medicare – it needs to be insurance as we know it, not the same model as Social Security.
    The retirement plan for federal employees is actually designed like Social Security.
    The government actually states it is not designed to be a pension plan.
    I can provide objective governmental links on all this information, for anyone who is interested.
    Don Levit

  9. Bart I says:

    It’s a gold mine of ideas. The ore needs considerable refinement, but it’s still valuable. Some proposals are really good, others really bad.

    Most of the cuts are inadvisable in the current environment, but the commissioners state this at the outset anyway.

    The mortgage interest deduction has never been justifiable, nor the special treatment for capital gains on a residence. The deduction for property tax is arguable, but it treats renters unfairly.

    I have no problem with increasing the gasoline tax, but it should probably apply equally to all end-user purchase of liquid petroleum products. The proceeds should be used to amortize defense costs in the middle east, as well as to pay for domestic transportation.

    The revenues from both of the above should mainly go to reduce income tax rates, with a bias toward offsetting the impact of the above reforms on those hit hardest by the above reforms.

    I’m all for reducing Social Security COLAs, but not for the ideas to make it more progressive. Any special benefits for the elderly poor should come out of the general fund.

    Even better than tinkering with COLAs would be to base adjustments on the actuarial state of the trust fund. It should be treated more like a preferred stock dividend, and less like an inflation-indexed bond yield.

    Currently, Social Security COLAs are based on a special CPI for wages (not on cost of living as generally believed). But it doesn’t adjust for changes in demographics, such as the size of the working population relative to number of retirees, nor does it adjust for trends in population, retirement age, or life expectancy.

  10. Bart I says:

    [Petroleum tax] proceeds should be used to amortize defense costs in the middle east, as well as to pay for domestic transportation.

    I should have said “…priced to amortize…” instead of “…used to amortize…”. If a petroleum tax offsets these costs, then income taxes could drop correspondingly.

  11. Neil H. says:

    Biggest problem: no prefunding of Social Security and Medicare. They will continue to be run as Ponzi schemes.

  12. Bart I says:

    As long as I’m spilling my guts, another suggestion which would be revenue-negative in the short term but nearly neutral in the long term, is to eliminate the 10% penalty for IRA and 401-K withdrawals before age 59, and gradually increase the IRA contribution limit to match the 401-K limit. The two should be consolidated anyway; it makes no more sense for an employer to be involved in an individual’s savings than for that employer to be involved in health care.

    The above would turn the income tax into a virtual consumption tax, at least for the lower income levels.

  13. Brian Williams. says:

    Whatever this debt commission is costing, I don’t think we are getting our money’s worth.

  14. steve says:

    “Is Social Security to be transformed into defined contribution along the Chilean model?”

    At least as recently as 2006, Chile was having big issues. Have they been resolved?


  15. John Goodman says:

    Steve, the Chilean social security system is working just fine — at least in comparison to other pay-as-you-go systems in Latin America. Only problem is that the last government greatly increased the number who will qualify for a minimum benefit, meaning that at the margin most retirees will not be paying for their own pension.