New deficit plan would cut $6 trillion

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- The country got a little shock therapy last week when the co-chairmen of President Obama's debt commission offered their recommendations for curbing U.S. debt. One of their goals: reduce deficits by $4 trillion over the next decade.

On Wednesday, a leading group of economists, budget experts and former government officials is doing them one better -- offering a plan that would save $6 trillion by 2020.

The Bipartisan Policy Center's Debt Reduction Task Force is led by Republican Pete Domenici, a former senator from New Mexico, and Democrat Alice Rivlin, the founding director of the Congressional Budget Office and a member of the president's debt commission.

In broad strokes, the task force's recommendations echo the proposals from Erskine Bowles and Alan Simpson.

But the panel's report also diverges in some very significant ways from the Bowles-Simpson plan. Most notably it calls for a one-year $650 billion payroll tax holiday as well as a national sales tax that could raise trillions in revenue over 30 years. And it would not formally raise the retirement age for Social Security.

Overall, the Domenici-Rivlin plan would stabilize the amount of accumulated U.S. debt below 60% of GDP by 2020. That's roughly where debt as a percentage of the economy is today.

But barring changes to current policies, the debt is slated to top 87% by 2020 and approach 200% by 2035, according to the Congressional Budget Office.

Between 2012 and 2040, the Domenici-Rivlin plan would generate a staggering $84 trillion in debt-reduction savings, with roughly equal amounts generated from the spending and tax sides of the ledger and the rest coming from savings on interest payments.

Spending: Freezes, cuts

Freeze defense spending: The Domenici-Rivlin plan would impose a five-year freeze on defense spending, after which the growth rate would be capped at the rate the economy grows.

In addition, the plan recommends that the savings identified by Defense Secretary Robert Gates be used to reduce the deficit rather than be reinvested in defense. Other suggestions include reforming military health care and prioritizing defense investment.

Freeze non-defense domestic spending: The plan would impose a four-year freeze, after which the growth rate would be capped at GDP growth. Among the recommended changes to accommodate the freeze: terminate ineffective programs and set priorities for government programs.

Reduce farm program spending: Among the recommended changes, farm payments to producers making more than $250,000 would be eliminated. (10 ways to cut Uncle Sam's budget)

Taxes:New break, new sales tax

Simpler, reformed tax system: The plan would reduce the current six income tax rates to just two (15% and 27%). It would reduce the corporate tax rate to 27% from 35% today.

It would also simplify the federal tax system so much that nearly 90 million households -- or roughly half of all tax filers -- wouldn't have to file a federal tax return.

The panel would also eliminate most tax credits and deductions, which currently cost federal coffers roughly $1 trillion a year.

But its plan preserves some key tax breaks, such as those for mortgage interest and charitable contributions, which would be converted to tax credits. The conversion will benefit more taxpayers but would represent a smaller tax break for many who currently take the deductions. (How Bowles-Simpson would blow up the tax code)

New sales tax: One proposal from the panel sure to draw fire is the "Debt Reduction Sales Tax" -- which is a form of a value-added tax or VAT.

The tax would be phased in, starting at 3% in 2012 and increasing to 6.5% in 2013. It would raise revenue to help reduce deficits. One aim of delaying its start is to spur economic recovery by encouraging people to buy more to avoid the tax coming in 2012.

For simplicity's sake, the tax would be broad and exempt very few purchases. But consumers -- particularly low-income households -- would get tax rebates to compensate them for taxes they pay on essential items like food and medicine.

The sales tax is estimated to raise a net of $150 billion in new revenue in 2015 after accounting for the rebates. From 2012 to 2040, it would raise an estimated $9.3 trillion in net revenue.

Payroll tax holiday: To help create jobs, the panel believes a year-long payroll tax holiday for employers and their workers in 2011 "will immediately add money to employee paychecks while incentivizing companies to hire new workers."

The panel estimates this $650 billion tax cut could create between 2.5 million and 7 million jobs.

The trust funds of Social Security and Medicare, which are normally supported by the payroll tax, would instead be reimbursed from general revenues in 2011. In reality that means the government would have to borrow the money to make the trust funds whole.

Social Security: Solvent for the long run

Payroll tax revenue increase: The Rivlin-Domenici proposal would over nearly 40 years raise the amount of wages subject to payroll taxes (currently $106,800). In their plan, 90 percent of all wages earned in the country would eventually be subject to the payroll tax.

Incentive to work longer: Technically the Rivlin-Domenici panel doesn't raise the official early or full retirement ages for Social Security benefits. But as time goes on, benefits would be reduced for those who retire at 62 to account for increasing longevity.

Include more workers in the system: Newly hired state and local government workers would be required to pay into the system by 2020.

Change cost-of-living adjustments: Retiree benefits would still be adjusted for inflation, but the plan calls for a new formula that offers what some say is a more accurate reading of inflation. In any case, it's a less generous formula than the current one in use.

Adjust benefits for high- and low-income workers: The growth rate in benefits for the top 25% of beneficiaries would be slowed; while the plan would increase the minimum benefit for long-time lower-wage workers. To top of page

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