According to Politico, the new Simpson-Bowles plan will reduce the deficit by $2.4 trillion over 10 years. That’s less than the $4 trillion frequently bandied about by House Republicans, but more than the $1.5 trillion offered by President Obama. The deficit reduction will come primarily from spending, with $600 billion being raised by cuts to Medicare and Medicaid. Another $1.2 trillion is the result of changes to Social Security cost of living increases, military and civilian retirement, and reduced subsidies to farmers. The new Simpson-Bowles plan would increase taxes by $600 billion, almost exclusively by eliminating or trimming most tax expenditures.
The second Simpson-Bowles plan is less ambitious than the first in total deficit reduction, but that is because the authors take credit for a lot of deficit reduction that has already happened, including the spending cuts that are part of the sequester and the tax increases in ATRA. In their summary memo, they have grayed out the first two steps of their four-part plan, presumably because policymakers have already acted on them. The second plan is essentially the same as the first, particularly the parts mentioned in the summary.
What of tax reform? Simpson and Bowles say that one step of their plan would allow for pro-growth, comprehensive reform by eliminating almost all tax expenditures. The savings would lower rates and simplify the code, along with reducing the deficit. The details are sparse. Simpson and Bowles are a far cry from House Ways and Means Chair Dave Camp.
Tax reform isn’t really the point of Simpson-Bowles. According to the authors, the U.S. debt-to-GDP ratio is much too high at 73 percent. It is critical to get it below 70 percent, they say. Their plan would accomplish that. In fact, it would accomplish a great deal more – it is arguable that the sequester alone would result in a sustainable debt-to-GDP ratio. But deficit reduction and debt retirement aren’t tax reform. And taxpayers and the mainstream press shouldn’t be confused about them.
Tax reform doesn’t have to be revenue neutral. But the point of it shouldn’t be to increase government receipts or to reduce the deficit. It should be to simplify and modernize the tax code. Reducing tax expenditures can certainly be part of that, but it can’t be the beginning and the end. Tax reform will more closely resemble Camp’s plans, which involve technical changes and excisions from the code. Tax reform will focus on opaque areas of the law, like financial instruments, transfer pricing, passive activities, and income characterization. It may or may not emphasize progressivity, but it has to consider the effects of the code on income distribution (something Simpson-Bowles mentions, but doesn’t really address). Payroll taxes, corporate taxes, income taxes, and capital gains rates all must be on the table in a true tax reform effort.
Simpson-Bowles is just another deficit reduction plan -- and a politically infeasible one at that. Its authors want to make it seem grander by attaching tax reform to it, just like Obama wanted his own proposals (which simply include ways to raise revenue that Democrats have proposed ad infinitum over the years) to sound better when he mentioned tax reform at least three times during the State of the Union. But what they are offering isn’t comprehensive enough to qualify as true tax reform. Deficit reduction has its place, but conflating it with tax reform will stall whatever momentum people like Camp are trying to create for a true tax system overhaul.