Simpson Bowles – Part 2: How it affects you

Simpson Bowles – Part 2 – How it affects you

Last week I discussed the goals of Simpson Bowles and the comprehensiveness of the proposal.  While the appointed bipartisan commission ultimately rejected its own plan in December 2010, this road map for cutting the long-term debt and deficits continues to resonate in political debates.

Most notably, the proposal calls for shared sacrifice by taxpayers and government employees.  And what makes the plan unique – compared to subsequent plans – is that it addresses both the revenue (taxes) and spending (outlay) sides of government in every sphere.  Even entitlement costs, which are growing at more than twice the rate of the economy, are reigned in to solve long-term funding gaps.   

My goal here with The Huffman Broadsheet is to give you, dear reader, useful information as you contemplate your verdict within this political maelstrom.  The politicians can haggle over spurious details during debates and avoid the full and total analysis involving painful choices that we, as a responsible citizens and taxpayers cannot ignore.

What are the Main Components of the Simpson Bowles Plan?

There are six main parts to “the Moment of Truth” plan. (Click on the title for full document)  Highlights are listed by category.

1)   Discretionary spending cuts

The commission notes that forecasting and controlling discretionary spending was how the government balanced its books in the 1990s.  Members suggest there be enforceable spending caps, realistic disaster budgeting, and that total government employees be reduced through attrition.

2)  Tax reform (click here for quick summary)  

• For individuals: the commission suggests lowering rates and broadening the base of payers through the elimination or curtailment of many deductions. Mortgage interest deduction and charitable donations are two examples.
• Reduce the deficit by ensuring that revenues reach 21% of gross domestic product by 2022.
• Simplify the tax code.

• For companies:  Establish a single corporate rate and lower it to between 23% and 29%.
• Align US tax system with international trading partners by moving to a territorial system whereby income earned overseas is not subject to domestic taxes.

3)   Health Policies

• Reform or repeal those parts of Medicare that are subject to fraud or are inadequately budgeted for such as long-term care insurance.
• Pay for the Medicare “doc fix”, a sustainable growth-rate formula aimed to control Medicare spending, which now equals more than $200 billion.
• Reduce Medicare fraud.
• Address Medicaid funding and state implementation.
• Adequately budget for health care programs.

4)   Other Mandatory Policies

• Protect the disadvantaged.
• End wasteful spending.
• Review and reform federal workforce retirement programs.
• Reduce agricultural programs.
• Give post office greater management autonomy. 

5)   Social Security

• Make retirement benefit formula more progressive.
• Reduce poverty by providing an enhanced minimum benefit for low-wage workers.
• Gradually increase retirement ages based on increases in life expectancy.
• Gradually increase the taxable maximum to cover 90% of wages by 2050.
• Adopt an improved inflation measure to calculate Cost of Living Adjustment.

6)   Process Reform

• Establish a debt stabilization process to enforce deficit reduction targets.
• Design effective automatic triggers for extended unemployment benefits.

Fast-forward 2 years later: Facing the Fiscal Cliff and how it affects you – or “What, me worry?”[1]

Almost two years have passed since the Simpson Bowles plan was rejected.  The economy now faces a potential recession if numerous short-term provisions are allowed to expire.  For individuals, the tax code remains needlessly complex and outdated.  (Refer to charts 1 and 2 to see how you may be affected.[2])

The good news is that:  tax receipts are rebounding and the government operating deficits are shrinking. (See the Congressional Budget Office  October report.)

The bad news it that:  the US cannot continue to “kick the can down the road” forever.

Chart #1:  Federal tax rates for individuals would increase roughly 5% if all provisions in the fiscal cliff are allowed to expire.  Source: Tax policy center