A Closer Look at Domenici-Rivlin

| Thu Nov. 18, 2010 2:24 PM EST

I got pretty burned out on deficit blogging after spending nearly a week writing about the Simpson-Bowles plan, which I continue to think is a poor starting point for a serious discussion of deficit reduction. So when the Domenici-Rivlin plan (henceforth D&R) came out, I only wrote one post based on their Washington Post op-ed and then couldn't work up the energy to say much more.

Which is too bad. To the extent that long-term deficit reduction is something we should try to address now, D&R is really a much better starting point. So here are some selected bullet points and comments about their plan:

  • One-year payroll tax holiday in 2011 to stimulate the economy. In one sense, this has nothing to do with deficit reduction. In fact, it increases the deficit. But as with tax reform, the argument here is that near-term stimulus is good for long-term growth, and long-term growth is good for deficit reduction. In any case, it's a good compromise idea for trying to get our stagnant economy moving again.
  • NOTE: Throughout the rest of this, keep in mind that my comments are strictly academic. I don't expect Republicans to even pretend to take any of this stuff seriously. In that spirit, a payroll tax holiday is a "good compromise idea" in a theoretical sense, but since in the real world Republicans are solely interested in tax cuts that permanently benefit rich people, there's no actual chance that this will gain bipartisan support. With that caveat out of the way, onward.
  • Cut tax rates, eliminate most deductions and credits. This is similar in spirit to Simpson-Bowles. One oddity of D&R is their endorsement of a reduction in the number of tax brackets to two (15% and 27%). I've never understood the infatuation with this idea. The complexity of the tax code has nothing to do with how many brackets we have, it has to do with how income is calculated and how many different loopholes there are for reducing your taxes. So the whole thing is pointless. What's more, although the D&R tax plan is more progressive than Simpson-Bowles, I suspect that it still gives a considerable break to the very highest earners. For that reason, I'd propose, at a minimum, a third bracket of 40% that kicks in at some very high level. Perhaps $1 million and above.
  • Add a VAT. For some reason D&R call their new tax a Debt Reduction Sales Tax instead of just calling it a VAT. I'm not sure why, but basically it's a 6.5% VAT. I don't have any big problem with this, though I'd probably prefer a carbon tax, which accomplishes much the same thing and helps reduce energy use. In any case, the DRST is basically an acknowledgment that an aging population is going to require higher spending levels than we're used to, so we can't pretend to cap spending forever at 21% of GDP. It's a welcome concession to reality.
  • Rein in the growth of Medicare. D&R do this by phasing out the employer tax break on health benefits, raising Medicare premiums, reducing prices paid to drug companies, bundling payments, medmal reform, and — of course — capping benefit growth to GDP + 1%. I'm beginning to think that this last provision has become the equivalent of "And may God bless America" at the end of presidential speeches: sort of a rhetorical flourish that everyone expects and you can't leave out. And who knows: maybe something like this will actually work. I have my doubts, though. If you say you're going to cut something, I want to hear concretely how you're going to cut it. Telling me instead that you're going to artificially cap growth is a cop-out. That said, D&R do have some useful ideas on Medicare, though they're just a starting point. We'll need much more before this is all done.
  • Fix Social Security. This part of their plan is almost eerily identical to Simpson-Bowles, but it doesn't raise the retirement age. I've already commented favorably on the Simpson-Bowles Social Security plan, and I think D&R is even better. I'd still tweak it a bit, but it's a perfectly fine starting point.
  • Freeze discretionary spending starting in 2012. I'm not a big fan of across-the-board freezes, and I doubt you can make something like this stick in any case. I'd rather see concrete proposals for program cuts, if that's what you think needs to be done. (D&R do make a few specific proposals, but they don't add up to much.) As I've said before, discretionary spending is pretty clearly not a big part of our long-term deficit problem; cuts would almost certainly come from weak claimants, not weak claims; and the political fight it would take to save a small amount of money just isn't worth it. Frankly, I'd jettison this part of the plan entirely, though I realize that by Beltway definitions of "serious," you have to have something like this to be taken seriously as a deficit cutter. Too bad.

That's the nickel version of D&R. As these things go, it's not bad, and unlike Simpson-Bowles it's fairly balanced between spending cuts and tax increases. It also doesn't assume a fundamentally conservative frame from the start by pretending we can limit federal spending to 21% of GDP forever. And the full plan includes a lot more serious detail than Simpson-Bowles, which should make it easier for tax experts to score.

For these reasons, of course, this means that it's a nonstarter with conservatives. It really is pretty balanced, and because of that I expect it to be pretty roundly denounced by all the same righties who denounced liberals for not loving a fundamentally conservative deficit plan.

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