Here’s What’s Wrong with the Simpson-Bowles Deficit-Reduction Plan

Daniel J. Mitchell
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Posted: Sep 24, 2012 12:01 AM

Many people want to believe in Unicorns, the Loch Ness Monster, and Bigfoot. I think those people are rational and reasonable compared to the folks in Washington that spend their days dreaming of “bipartisan” and “balanced” plans to fix the budget mess.

Here are the two things you should understand. First, you need to grab your Washingtonese-to-English dictionary so you can learn that “bipartisan” and “balanced” are almost always code words for “higher taxes.” Second, budget deals with higher taxes (as the New York Times accidentally admitted) don’t “fix” anything.

The Simpson-Bowles budget plan is a good example of why taxpayers should be quite skeptical. Put together by a former Republican Senator from Wyoming and Bill Clinton’s former Chief of Staff as part of President Obama’s Fiscal Commission, the Simpson-Bowles proposal is viewed by the inside-the-beltway crowd as fiscal Nirvana.

Unsurprisingly, Simpson and Bowles are quite fond of their plan. Here’s their key assertion from a column they recently wrote for USA Today.

The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.

Gee, sounds nice, but let’s look at the details, all of which can be seen by downloading their report.

A main problem is that Simpson and Bowles misdiagnose the problem. I think it’s fair to say that their focus, as they explicitly state in their report, is to “…stabilize and then reduce the national debt.” But as I explain in this video, the real problem is a federal government that is too big and spending too much. Red ink is just a symptom of that problem.

Moreover, the report even includes Keynesian policy, stating that “…budget cuts should start gradually so they don’t interfere with the ongoing economic recovery.”

But let’s set aside rhetorical sins and grade the plan.

Restraining Spending: C+

The plan does impose some restraint on the budget, but the plan – even after being in place for 10 years – assumes that the federal government should grow by about $1.5 trillion and consume nearly 22 percent of economic output. This is far above the 18.2 percent of GDP when Clinton left office, which should be the minimum target for policymakers.

But the components of the plan make me think they won’t even achieve the plan’s anemic targets.

Eliminating Departments and Programs: D

  • The Simpson-Bowles plan does not call for shutting down a single program, agency, or department. Not even cesspools of waste and inefficiency such as the Department of Education or Department of Housing and Urban Development.

Reforming Entitlements: C-

Reducing Bureaucratic Bloat: B

  • In terms of controlling spending, this is the part of the report that is most admirable. It calls for a three-year freeze on excessive compensation and urges reductions in bureaucratic bloat – albeit only through attrition.

Controlling the Tax Burden and Reforming the Tax Code: C-

The best policy, needless to say, is getting rid of the corrupt tax system and replacing it with a simple and fair flat tax. That obviously wasn’t what Simpson and Bowles decided to propose, but the flat tax is a benchmark that allows us to judge the components of their plan.

They basically get two policies right and two policies wrong. If they were major league baseball players, a .500 average would make them superstars. In Dan Mitchell’s policy world, they’re below average.

Lowering Tax Rates: A-

  • This is the best feature of all the revenue provisions. The Simpson-Bowles report proposes a top tax rate of between 23 percent-28 percent, significantly below the current top rate of 35 percent (and well below the 39.6 percent top rate that is part of President Obama’s class-warfare proposal). The corporate tax rate also would be reduced.

Reducing Double Taxation: D

  • The plan would increase the double taxation of dividends and capital gains. The U.S. already has a very anti-competitive system and this would be a step in the wrong direction (though ameliorated by a lower corporate tax rate).

Limiting the Tax Burden: D-

  • The plan assumes that laws should be changed to increase the federal tax burden to 21 percent of GDP from the long-run average of 18 percent of economic output. That’s unfortunate, but it’s even worse than it seems since the tax burden already is scheduled to rise to record levels because of what’s called “real bracket creep.” The Simpson-Bowles tax hikes would be an additional burden on taxpayers.

Eliminating Corrupt Loopholes: B

  • The good news is that some deductions are curtailed and a few are eliminated. The best components are the repeal of the deduction for state and local income and property taxes. So no more indirect preferences that reward profligate states such as California and Illinois. The healthcare exclusion also is capped, which would be a nice step on the long – but important – task of dealing with the third-party payer crisis in the healthcare sector.

I’m not a fan of the Simpson-Bowles plan, but I do give them credit. They decided to focus on the wrong variable and they have some bad policies, but at least it’s a real proposal.

It’s not anywhere close to the Ryan budget, but it’s a heck of a lot better than what the Senate Democrats have produced (nothing) and what the President has proposed (kicking the can down the road).

But doing a better job than the remedial students is damning with faint praise. Just in case you’re tempted to grade them on a curve, just remember that balancing the budget without tax increases doesn’t require any heavy lifting. All policymakers have to do is limit the growth of spending so it grows by an average of 2.5 percent annually over the next decade.

Other nations, such as New Zealand and Canada, got great results when imposing multi-year periods of fiscal restraint. Certainly it’s not asking too much to expect American lawmakers to exercise similar levels of prudence?