Simpson-Bowles Makes A Comeback But Details Remain Unpopular

Oct 16, 2012

By Kristen Friend, staff writer – October 16, 2012.

Simpson-Bowles is back in the spotlight as the 2012 presidential campaign stretches into its final weeks and the so-called fiscal cliff still looms in the distance. The plan, or a grand bargain based upon its principles, is still the poster child for “inside the Beltway thinking” on how moderates should handle deficit reduction.

Although President Obama has never endorsed Simpson-Bowles in its entirety, he has stated during his campaign that he favors a balanced approach to fiscal policy similar to that employed by the plan. The Romney campaign has seized upon Simpson-Bowles as an economic talking point, attacking the President for not getting it passed even though most Republicans strongly oppose it.

During the first presidential debate, moderator Jim Lehrer addressed the issue, asking Governor Romney directly whether he would support the recommendations. Romney deflected the question by saying, “Simpson-Bowles, the President should have grabbed that.” He went on to agree that he did not support the proposal himself, saying, “I have my own plan. It’s not the same as Simpson-Bowles. But in my view, the President should have grabbed it.” [1]

It was Republican vice presidential candidate Paul Ryan who played a critical role in derailing Simpson-Bowles from the beginning. Ryan led a bloc of three House Republicans who provided the “no” votes necessary to ensure the report would not be recommended to Congress. Former New Hampshire Senator Judd Gregg, a Republican, believes his colleagues were unable to move on the plan because of their adherence to the anti-tax orthodoxy of Grover Norquist. “All of the House Republicans were disproportionately affected by the Norquist group on the issue of tax reform,” said Gregg, calling Ryan the clear leader of the opposition. [2]

The Plan

What has become commonly known only as “Simpson-Bowles” is actually a series of policy recommendations that originated from a report issued by the National Commission on Fiscal Responsibility and Reform, created by President Obama in February of 2010. The 18-member committee consisted of six members of the House of Representatives, six members of the Senate and various executives appointed by the president. It was co-chaired by former Senator Alan Simpson and former White House Chief of Staff Erskine Bowles. [3]

The committee was tasked with creating policies that would “improve the fiscal situation in the medium term and … achieve fiscal sustainability over the long run.” [4] The goal was to reach a set of recommendations that would then be considered by Congress.

The commission released its final report on December 1, 2010. The plan purported to reduce budget deficits to 2.2 percent of GDP (from their current level of 9 percent) and cut the federal debt by $4 trillion over 10 years. [5] However, it did not even win the endorsement of the committee that created it. Only 11 of the 18 members voted yes on the recommendations, and legislatively, the plan died there.

It has become standard fare for politicians to talk of supporting a deficit reduction plan like Simpson-Bowles. It is the sacred cow of fiscal policy discussions. President Obama argued during the first presidential debate that his budget plan is based on the Simpson-Bowles recommendations. [6] And Mitt Romney claims to support a plan that is similar (but in reality not anything like) Simpson-Bowles in an effort to moderate his views for the general election. [7]

House Minority Leader Nancy Pelosi has signaled she would support parts of the plan, just not the ones that deal with Social Security. House Speaker John Boehner has said that Simpson-Bowles shows “what the options are” if legislators can “have real leadership and courage.” [8] Courage on which details still needs to be hammered out.

All the talk of liking the plan as a template for action does not translate into votes. When Representatives Jim Cooper and Steve LaTourette managed to get a Simpson-Bowles-inspired plan to the House floor in March of this year, it failed by a vote of 382-38. [9]

There is a lot of noise surrounding Simpson-Bowles, but not a lot of insight into the details. The policies would reduce the deficit, which sounds good to most people when stated broadly. But the way in which this is accomplished prompts harsh disagreement.

Tax Rates and Deductions

The Simpson-Bowles recommendations contain both rate cuts and revenue increases. For personal income taxes, the current number of brackets would be reduced to three, with the top marginal rate falling between 23 and 28 percent. In order to achieve a rate of 23 percent, the commission recommends that all expenditures be eliminated. This includes popular deductions like mortgage interest and student loan subsidies. [10]

The plan would also lower the top corporate rate to between 26 and 28 percent and eliminate all taxes on money corporations earn overseas.

According to the recommendations, Congress could then reintroduce deductions or raise rates as needed to ensure the plan continues to supply needed revenues. Given the current political environment, it is difficult to imagine Congress getting behind any tax increase no matter how large the need for revenue.

Raising Revenues

In addition to eliminating deductions, the Simpson-Bowles plan would increase the capital gains tax rate so that it falls in line with rates levied on personal income. Capital gains would be taxed at a maximum rate of 28 percent as opposed to the current maximum of 15 percent. Another source of revenue would be a 15-cent-per-gallon increase in the federal gas tax. [11]

None of the revenue producing portions of the plan are gaining traction with Republicans. The conservative Heritage Foundation refers to the recommendations as containing “staggering tax hikes” which are not needed when “the problem is spending and spending alone.” [12]

Democrats, for their part, do not like the emphasis on lowering rates. Democratic Senator Chuck Schumer spoke out last week, encouraging the president to abandon the tax principles contained within Simpson-Bowles. In a speech at the National Press Club, Schumer called the whole idea of tax reform a “trap” for the middle class. According to Schumer, the focus of eliminating expenditures and raising revenues should be lowering deficits, not producing another tax cut for wealthy earners. “It is an alluring prospect to cut taxes on the wealthiest people and somehow still reduce the deficit, but you can’t have your cake and eat it, too,” he said. [13]

“If upfront rate cuts are the starting point for negotiations on tax reform, it will box us in on what else we can achieve,” Schumer continued. “Certain conservatives will pocket the rate reductions and never follow through on finding enough revenue elsewhere in the code to reduce the deficit. Or, if they do, it will almost certainly come out of the pockets of middle-income earners.” [14]

Historical Perspective

Republicans like to point to historical precedents to back up claims that lower taxes can produce increased revenues. In one of many heated exchanges during last week’s vice presidential debate, Congressman Ryan pointed out that both Reagan and Kennedy had lowered taxes, prompting Vice President Biden to quip, “Oh, now you’re Jack Kennedy?” [15]

President Kennedy did propose lowering tax rates to help lift the country out of a recession. However, at the time rates were close to 91 percent. Reagan’s 1981 tax package brought top rates down from approximately 70 to 50 percent. All of these numbers are considerably higher than the rates being discussed today.

Reagan did ultimately reduce the top marginal rate again to 28 percent, where it stood at the end of his presidency. President George H.W. Bush, who once referred to Reagan’s supply side theories as “voodoo economics,” was forced to raise the top rate to 31 percent when faced with mounting deficits. [16] [17] The rate was then raised to 39.6 percent under President Clinton. [18]

Columbia University History professor Alan Brinkley puts the debate into perspective, saying, “I think what made such a to-do is that the taxation was drastically different in the 1960s when the top taxation was something around 70 percent and at some point at 90 percent. The ‘Kennedy tax cut’ was within a much higher tax world.” [15]

Decreasing Spending

The Simpson-Bowles plan calls for steep reductions in both defense and non-defense discretionary spending amounting to $200 billion in savings per year over ten (now eight) years. The cuts to defense include close to a 20 percent reduction in the non-war budget, including a freeze in non-combat military pay and an unspecified increase in military health care premiums. [19] The plan as a whole would cut the defense budget by $500 billion more than the president’s proposal over ten years. [20]

Simpson-Bowles also relies on leaving in place many of the changes to Medicare enacted under the Affordable Care Act, including the reallocation of the now notorious $716 billion. [21] It also revisits the issue of a public option and proposes giving more power to the Independent Payment Advisory Board, an entity invoked by Mitt Romney and Paul Ryan in an attempt to re-conjure the specter of death panels.

The Center on Budget and Policy Priorities released a report at the beginning of October that re-evaluates the Simpson-Bowles proposal under current baseline policies. The report points out that approximately 70 percent of the $2.9 trillion in proposed cuts have already been enacted as a part of a series of compromises related to last year’s debt ceiling fight. [22]

The threat of sequestration, a process of enacting automatic spending cuts amounting to $1.2 trillion, half from defense and half from domestic programs, mandated by the Budget Control Act of 2011 also looms if Congress fails to come up with another way of holding spending to previously mandated levels.

Changes to Social Security

The recommended modifications to Social Security are not included in the plan’s deficit reduction calculations. Co-chairs Simpson and Bowles were clear in stating that Social Security is a separate issue from the federal deficit. [22] Social Security operates independently from the federal budget by law and cannot legally add to or take away from operating revenues for the federal government.

Simpson-Bowles proposes sweeping changes to Social Security that are unlikely to win the support of many Democrats. It recommends raising the retirement age over time to 69 and the early retirement age to 64. It suggests changing the way cost of living adjustments are calculated. Supporters of Social Security claim this would create a 6 percent decrease in benefits over 20 years. It also indexes Social Security benefits to income, resulting in phased-in cuts of around 17 percent for those who have earned an average $43,000 per year and up to 36 percent for those who have earned an average of $107,000 per year. [23] [24]

The plan does suggest raising the cap on payroll tax contributions from its current level of $100,000 to around $180,000. [25] Studies have shown that eliminating the cap entirely would secure Social Security’s solvency indefinitely without the need for any benefit cuts. [26]

Both Governor Romney and Congressman Ryan have pointed to a compromise crafted by former President Reagan, House Speaker Tip O’Neill and Alan Greenspan in 1983, when Social Security actually did run out of money, as a model for moving forward. However, the agreement relied heavily on increased revenues to return the program to solvency.

The Greenspan Commission crafted a deal in which middle-income individuals would over pay into the system for several decades, running up the surplus Social Security still enjoys today. FICA (payroll tax) rates were raised, a regressive burden which fell almost entirely on the middle class. In return, once the surplus was no longer enough to cover current retirees, middle-income earners would under pay for a time with the shortfall being covered by higher taxes on wealthier earners. [28]

The middle class has fulfilled its promise of over paying, but the second part of the deal has never been executed. Simpson-Bowles does nothing to address that issue.

Whether tackling lower tax rates for wealthy individuals, suggesting spending cuts or proposing changes to Medicare and Social Security, Simpson-Bowles gets little bipartisan support for its individual recommendations. Yet it continues to be hailed as the shining light at the end of the deficit tunnel. Beltway pundits will likely continue to try to convince the rest of the country that it actually wants what Simpson-Bowles is selling. Whether Congress will be able to act on any of the recommendations – popular or unpopular – remains to be seen.