Deficit reduction commission report: a rare bit of D.C. honesty

This morning saw the release of a very important document by the White House’s deficit reduction commission, chaired by Republican, Alan Simpson, and Democrat, Erskine Bowles.  Expect me to write about this earthquake of a document for many months going forward as I track the aftershocks emanating from the epicenter of this moment.

The 59 page document entitled “The Moment of Truth” cuts through polarized partisan bunk and tells it like it is.  Namely, regardless of who is to blame for the country’s poor, debt-burdened, balance sheet, something needs to be done and quickly.  Duh!  Focused squarely on how the United States collects taxes and spends money, TMOT proposes the following:

• The $1.1 trillion in tax breaks that pepper the tax code are to be systematically evaluated.  These breaks include the mortgage tax deduction – perhaps the largest tax subsidy for an industry (home builders) ever.  But don’t worry if passed as legislation as proposed, most of you would never be affected.  The specifics are that all taxpayers would receive a 12% nonrefundable tax credit.  The mortgage-interest deduction would be for loans less than $500,000.  Additionally, second home mortgages would receive no tax credit.
• Capital gains and dividends would be taxed at regular income tax rates rather than at special reduced rates.
• Limitations would be placed on the ability of individuals to deduct the cost of health insurance premiums on a pre-tax basis.
• To offset some of these large blows to subsidies, the report proposes a reduction of tax rates under some scenarios.
• The report proposes increasing the retirement age to 68 by 2050 and to 69 by 2075 to help make Social Security more solvent.  An exemption would be created for people who are absolutely unable to work beyond age 62. 
• To jump start the economy they propose a payroll tax holiday.  NOTE: This was a suggestion I made on the blog nearly a year ago, well before this idea made it into the mainstream.  You likely heard it here first.
• It would cut 200,000 Federal government jobs by 2020.  This is roughly 10% of the current workforce.  Additionally, the government’s share of gross domestic product would be capped at 21% by 2035.
• A reduction in military spending – which is overwhelmingly the single-largest contributor to the debt of the United States.

The goals of these proposals are:

• To achieve a $4 trillion reduction in the budget deficit by 2020.
• Reduce the deficit to a very paltry 2.3% of gross domestic product by 2015.  This way of thinking of government debt is very intelligent.  Think of it in personal terms.  If only 2.3% of your income was spent on debt payments wouldn’t you be happy?  Wouldn’t you likely be very soundly secure in your finances?  Thought so.
• Reduce total debt to 40% of GDP by 2035.  Here, think of the U.S.’s total debt as you would think of your home’s mortgage as a percentage of your total assets.  In other words, this is your net worth.

I could address each of these points in turn, but feel that would be a waste of time because these points will be debated and re-debated many times.  I can say that I am a proponent of all of the major points, especially a reduction in military spending.  Currently the U.S. spends more on its military, and its wars, than all of the rest of the countries on the planet COMBINED.  No, I am not kidding.

One aspect of the proposal I am very opposed to is the taxation of investment gains at overall income tax levels.  The reason is that of all of the things I would want to incentivize for your average Jane and Joe American is investments.  My suggestion would be to tax capital gains that are short-term in nature at overall income tax levels.  I would also change short-term capital gains to a 18 month horizon from its current 12 month horizon.  The effect would be to encourage investors to initially invest in things they felt would perform well over longer periods of time.  This, in turn, would reduce the amount of speculation in the stock markets and lead to lower volatility.  After 18 months, I would suggest a gradual reduction in the tax rate to 0%.  The longer you hold, the lower the taxes.  My idea is to get folks focused on their future wealth, and not so much on their short-term need for an adrenaline rush.

Jason