A Look Inside the Super Committee
The GOP opposes raising tax rates, but one idea being considered is limiting deductions as a percentage of income.
By Stephen Moore
WSJ.com
'I can find $1.5 trillion of budget savings in my
sleep," says Jeb Hensarling, the Republican
co-chairman of the 12-member deficit reduction
committee. "The hard part is getting six Democrats
to agree to do it."
If he can't, there will be no consensus on a plan
to reduce deficits over the next decade and the
so-called super committee will surely blow up, just
as most on Wall Street and in Washington are betting
will happen. To beat the statutory deadline for a
congressional vote before Thanksgiving, a deal, if
there is one, will almost surely have to be struck
by the end of this week.
Insiders on the panel say that the deal being
offered by Democrats is less than $1 of spending
cuts for every $1 of new taxes. Democrats want to
count the $900 billion of discretionary spending
cuts already agreed to in the debt bill and $1
trillion in troop withdrawals from Afghanistan and
Iraq, which may not happen. Meanwhile they are
insisting on close to $1.2 trillion of tax increases
in exchange for less than $1 trillion in entitlement
reforms. The president's own deficit reduction
committee, Simpson-Bowles, offered $2 of cuts for
every $1 of new taxes. The GOP House budget passed
last spring contained some $4.5 trillion in
cuts—three times more than the super committee must
find.
Democrats also keep pressing for higher tax rates
on the rich. "We have no intention whatsoever of
raising tax rates—period," Mr. Hensarling states
emphatically.
But raising rates and raising revenues are different. Eliminating loopholes in exchange for making the Bush tax cuts permanent after 2013 is on the table—and by broadening the tax base, this could bring in tens of billions of new revenues each year. Says Mr. Hensarling: "Republicans want more revenues. We want more revenues by growing the economy; we're not happy with revenues at 14% of GDP, but we don't want to do it by raising rates."
One positive development on taxes taking shape is a deal that could include limiting tax deductions, perhaps by capping write-offs on charities, state and local taxes, and mortgage interest payments as a percentage of each tax filer's gross income. That idea was introduced on these pages by Harvard economist Martin Feldstein.
In exchange, Democrats would agree to make the
Bush income-tax cuts permanent. This would mean
preventing top rates from going to 42% from 35%
today, and keeping the capital gains and dividend
tax rate at 15%, as opposed to plans to raise them
to 23.8% or higher after 2013.
And there is some indication that corporate rates
might actually be pushed lower. Republicans would
agree to a broader tax base and Democrats would
accept a rate of between 25% and 28%, down from 35%
now.
One member of the committee tells me on
background that this means getting rid of certain
deductions, including immediate write-offs of
capital purchases, write-offs for interest expenses,
and green energy subsidies in the tax code that can
drive effective tax rates down to zero for major
U.S. firms. He says this is an area where progress
is being made.
Another policy Republicans are fighting for is
allowing corporations with foreign subsidiaries to
repatriate capital back to the U.S. at a one-time
tax rate of 5.25% (on income already taxed once in
the country of origin) instead of having to pay a
charge as high as 35% today.
The big fiscal breakthrough Mr. Hensarling and
his GOP colleagues are hoping for on the spending
side of the ledger is first-stage reforms in the big
three entitlements—Medicare, Medicaid and Social
Security.
Republicans want a gradual rise in the retirement
age for the giant cost drivers Social Security and
Medicare; higher co-pays and premiums for Medicare;
and a tweak in the cost-of-living benefit formula to
more accurately reflect the real inflation rate.
A change in the index formula (substituting the
rise in prices rather than the rise in wages) to
calculate benefits for Social Security and other
federal programs would save about $200 billion over
the next decade. And it would reap two to three
times more in future decades. As Mr. Hensarling puts
it, these reforms "are huge, because they start to
bend the cost curve downward on the big
entitlements."
Changes to entitlements should hardly be
considered partisan, he adds. "You've had the
president of the United States himself say, the
biggest drivers of our fiscal insolvency are
Medicare, Medicaid and our health-care programs,"
Mr. Hensarling says. "He's also acknowledged that .
. . tax increases alone are not going to be able to
help."
Nevertheless, Democratic negotiators on the panel
won't acknowledge that fiscal fact of life. They
insist that those who lose health-care benefits
under Medicare or Medicaid be moved into the subsidy
system under ObamaCare, which negates most of the
budget savings. And they've taken any reforms of the
$2.4 trillion ObamaCare program off the table. The
White House, meanwhile, has not participated in the
negotiations, which irks GOP negotiators.
If there is no deal, there will be a $1.2
trillion sequester of spending over the next 10
years with nearly $600 billion coming out of the
defense budget. Mr. Hensarling fears those cuts to
the military would be "draconian," but he adds, "I
have a hard time believing a 10-year sequester of
national defense of that magnitude would ever
happen." He says, "At some point the American people
rise up and say 'Wait a second, we continue to live
in a dangerous world, this is not smart.'"
Does Mr. Hensarling think there will be a deficit agreement? "Our backs are finally against the wall," he says, and both sides are "finally starting to get serious." Still, his expectations are modest. "We're not going to be high-fiving each other over any deal that's reached."
Mr. Moore is a member of the Journal's editorial board.