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Facing up to deficit peril

Last week in Washington, beneath a flock of pigs flying south, the co-chairmen of President Barack Obama’s deficit commission released a plan that actually could solve the nation’s pending fiscal crisis.

At once radical and sensible, the plan establishes the two chairmen, Democrat Erskine Bowles and Republican Alan Simpson, as visionaries. If Obama wants to deliver the country from the malaise it finds itself in, he should heed the advice of his appointees.

Let’s be blunt: The U.S. is on a path toward the kind of debt crisis that has roiled Greece. The Congressional Budget Office estimates that, based on current policy, the debt held by the public as a percentage of gross domestic product will escalate to 87 percent by 2020 from 62 percent now.

The plan finds the sweet spot in the deficit debate, maximizing money collected through taxation while requiring necessary cuts in government spending.

On the tax side, the authors understand the benefits of a broad base. Their emphasis on reducing tax breaks, including the deduction for home-mortgage interest, would allow for significant rate reductions, perhaps down to three tiers of 8 percent, 14 percent and 23 percent.

Incredibly, the proposal also gets the top corporate tax rate, now 35 percent, all the way down to 26 percent, a long-overdue change that could make corporations rethink any plans to leave the U.S. for less-taxing climes.

Beginning a tax overhaul by closing loopholes is a strategy that should appeal to those on the political left, the ones who so far are voicing the loudest criticism of the Bowles-Simpson plan.

A chart released with the plan shows that eliminating all tax breaks, other than the refundable credits targeted toward the poor, would reduce the after-tax income of those in the top 1 percent of the income distribution by almost 14 percent, those in the middle quintile by about 4 percent, and those at the bottom by only about 1 percent.

On the other side of the ledger, tough choices on entitlement spending would be phased in gradually to limit the pain. Social Security spending, for example, would be cut by raising the retirement age to 68 in about 2050 and to 69 by 2075, and the rate at which benefits grow over time would be reduced.

What might the Bowles-Simpson consensus deliver, if enacted?

The probability of U.S. default would be reduced to close to zero. Americans would be freed from fears of big future tax hikes. And the sickly U.S. economy would get a dose of chicken soup that might produce surprisingly swift results.

Bowles and Simpson may have chosen to release their outline last week, with little advance notice, because they hope to generate public support to pressure reluctant commission members to support the final plan. Any reluctant members should be ashamed. If we stay on the path to ruin when the path to salvation was visible along the way, the culprits will be easy to identify.

This plan pays little attention to crass political calculus and is based on a well-established academic consensus. If you want to have low tax rates, then you need to have a broad base. If you want taxes in general to be low, then you need to control spending. Rocket science it isn’t. But it’s as good as economics gets.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist and was an adviser to Republican Sen. John McCain in the 2008 presidential election.


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