NCPA - National Center for Policy Analysis

Pigs Fly as Washington Faces Up to Deficit

November 16, 2010

Last week in Washington the cochairmen of President Barack Obama's deficit commission released a plan that actually could solve the nation's pending fiscal crisis, says Kevin Hassett, director of economic policy studies at the American Enterprise Institute.

Let's be blunt about the problem at hand:

  • 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 (GDP) 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 money spent on 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 United States for less-taxing climes.

Hassett does have a few gripes, though.

  • Its strategy to reduce health care costs -- capping the growth of federal spending on health care at the rate of GDP growth plus 1 percent, after 2020 -- amounts to little more than wishful thinking that puts off the tough decisions.
  • Treating capital gains as ordinary income, as the chairmen propose, is a bad idea as well, because it moves us away from the economic ideal that taxes consumption instead of income.

Still, Bowles and Simpson produced a proposal in line with academic principle, not political nicety, which constitutes a pleasant surprise, says Hassett.

Source: Kevin Hassett, "Pigs Fly as Washington Faces Up to Deficit," Bloomberg, November 15, 2010.

For text:


Browse more articles on Tax and Spending Issues