Debt Reduction Revisited: What You Should Know for a Thursday Evening with Domenici-Rivlin

By Alex Engler

With former Senator Pete Domenici and Dr. Alice Rivlin coming to speak at Georgetown’s McNeir auditorium on Thursday (details below), it is a good time to revisit the important work of the debt-reduction duo. They have kept quite busy co-chairing a task force sponsored by the Bipartisan Policy Center that just released its second report. The report is an update to a paper published in November 2010, just seven days after the President’s Commission on Fiscal Responsibility and Reform—led by Alan Simpson and Erskine Bowles—unveiled its budget plan. For the last two years, Rivlin-Domenici and Simpson-Bowles have been the driving forces in the debt reduction conversation.

With good reason, too. Both reports widen the discussion beyond Washington’s platitudes and bring to the table reasoned takes on debt reduction. They are not the same, however. The Center for Budget and Policy Priorities, a respected think tank and DC’s leading advocate for impoverished Americans, called the Domenici-Rivlin report “superior to Simpson-Bowles in most areas” specifically praising its more generous Social Security plans, more lenient treatment of discretionary spending, and more balanced scale between spending reduction and revenue increases.

Domenici-Rivlin 2.0 boasts stabilizing the publicly held debt at sixty percent of GDP and balancing the primary budget (meaning the budget not including interest payments) by 2014. Those are both very appealing numbers and signal an aggressive plan to address the debt. While Senator Domenici has been adamant in advocating for the plan as a holistic remedy that cannot be adopted in pieces, given the tax deal signed by Barack Obama’s autopen on January 3, the prospect for complete adoption is unclear.

The report leads with a one-year holiday from the payroll tax for employers and employees. You may notice that this does nothing to address the deficit, and in fact it exacerbates it to the tune of $120 billion. The paper notes that the Congressional Budget Office estimates this would create between 2.5 and 7 million jobs, and although this tax holiday may be an effective economic stimulus, it may also make the pill of deficit reduction easier to swallow for the American public.

It is no small pill, either. A 6.5 percent value added tax (VAT), which to consumers is functionally identical to a sales tax like those in place in most states and many localities. Iowa has the median rate for state and local sales tax, with a combined rate of 6.8 percent, so the VAT would be tantamount to doubling the tax added for purchases. In turn, however, income taxes would drop for most Americans, and the number of tax brackets would be reduced from the current six to just two: 15 percent for individuals up to $50,000 and couples up to $100,000 and 28 percent for everything above that. The plan also includes capital gains and dividends as normal income, ending the preferred status they enjoy now.

After a slew of other changes including making childcare credits (slightly) more generous, limiting deductions, and lowering the corporate tax rate to 28 percent, the proposed tax system could be more progressive than the one we have in place today. It also raises more money, and, according to the Tax Policy Center, would only require half of all households to file annual tax returns.

Domenici-Rivlin also touches on Social Security, most notably with regard to the cap on income eligible for payroll taxes. Right now, all Americans contribute 6.2 percent of the first $110,000 of their income to payroll (aka FICA) taxes that fund Social Security and Medicare. Over 36 years (from 2014 to 2050), the plan would raise that cap so it would encompass 90 percent of all income earned. The cap would obviously be substantially higher, though the report does not specify exactly how high. They would also change the calculation of cost of living adjustments, a proposal that Georgetown’s own Jason Fichtner has discussed extensively, which amounts to a small reduction in payments.

The Medicare proposal remains one of the more controversial of the plan, with the creation of a Medicare exchange that allows for private plans to compete with the current public options. The plan also proposes an out-of-pocket maximum payment that would prevent one-time health care costs from financially crippling a Medicare beneficiary, a valuable idea that has been conspicuously absent from the debate.

This is just the tip of the iceberg (they propose a one-cent per-ounce soda tax too) of an ambitious and fascinating perspective on how to solve one of the most complex issues facing the United States. If you have made it through this, then you will enjoy Dr. Rivlin and Senator Domenici Thursday night, who are going to be even more compelling in person. We hope to see you there.

More About the Event:

Debt Reduction Revisted: A Conversation on Policy and Politics, will take place on January 10, 2013 at 7:00pm, at Georgetown University’s McNeir Auditorium. Please RSVP to Senior Marketing Director Lauren Barth if you wish to attend.