Deficit Plan Matches $3.8 Trillion Math With Tough Politics

A plan offered by the leaders of President Barack Obama’s commission to reduce the federal deficit might work. It just won’t happen.

The co-chairmen proposed a $3.8 trillion deficit-cutting plan yesterday that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction. It would reduce the annual deficit from $1.3 trillion this year to about $400 billion by 2015 and start reducing the $13.7 trillion national debt.

“Mathematically it apparently works,” said Stan Collender, a former Democratic House and Senate budget analyst and managing director of Qorvis Communications in Washington. “Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”

The plan would raise the gas tax, slash defense spending and farm subsidies and bring down health-care costs by clamping down on medical malpractice suits. The Social Security retirement age would rise to 68 in about 2050 and 69 in about 2075.

Its release created instant opposition from Democrats, some Republicans and groups such as the Mortgage Bankers Association and the Aerospace Industries Association.

Democratic House Speaker Nancy Pelosi called the targeting of Social Security and Medicare “simply unacceptable,” and Republican Representative Jeb Hensarling of Texas expressed opposition to proposals to raise taxes.

Obama Reaction

Obama, in Seoul as part of a 10-day tour of Asia, said he had yet to read the plan and that critics should withhold their judgment until the final report. He urged congressional leaders to match rhetoric with action and join him in making difficult decisions about taxes and spending.

“So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts,” Obama said at a press conference with South Korean counterpart Lee Myung-Bak. “If people are, in fact, concerned about spending, debt, deficits and the future of our country, then they’re going to need to be armed with the information about the kinds of choices that are going to be involved.”

Panel co-chairman Erskine Bowles, former chief of staff to President Bill Clinton, joked that he and co-chairman Alan Simpson, a Republican former Wyoming senator, would have to enter a “witness protection program.”

‘Harpooned Every Whale’

“We have harpooned every whale in the ocean and some of the minnows,” said Simpson. The plan, he said, is sure to be unpopular. He and Bowles said the proposals should be viewed as a starting point for negotiations. The panel meets again next week to consider changes.

“Is America ready for an adult conversation on the deficit?” said Representative Jim Cooper, a Tennessee Democrat. “It’s ‘put up or shut up’ time.”

None of the proposals would take effect next year to avoid disrupting the economic recovery. The savings would come between 2012 and 2020, cutting the deficit from the current 9 percent of the nation’s gross domestic product to about 2.2 percent in 2015, exceeding Obama’s goal of a reductions to 3 percent of GDP.

$8 Trillion

The government is projected to run $8 trillion in deficits over the next 10 years, which would push the national debt to more than $20 trillion. If the proposal were adopted without change, the government still would have deficits of $350 billion a year.

“It puts out there how big and real the problems are,” said Oklahoma Republican Senator Tom Coburn, a member of the committee.

Under one option, income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent. Now there are six tax levels ranging from 10 percent to 35 percent. The corporate income-tax rate would be cut to 26 percent from 35 percent.

The plan includes two less sweeping alternatives to ending all tax breaks, including one in which a pared back mortgage tax deduction would be retained. Under that proposal, homeowners could not take the break for second homes, mortgages worth more than $500,000 or home equity loans.

Wiping out all tax breaks, including the home mortgage- interest deduction, while lowering rates would cost taxpayers $100 billion a year. Members of the panel could decide to keep some of the breaks by offering offsetting cuts, Bowles said.

‘Not the Time’

John Courson, chief executive officer of the Mortgage Bankers Association in Washington, said eliminating or reducing the mortgage deduction would drive down home values.

“Of all the times to do it, now is not the time,” he said in an interview.

Still, Michael Ettlinger, vice president for economic policy at the Center for American Progress in Washington, said the fact that the deduction disproportionately benefits wealthier homeowners might create political will to revise it.

Overall, yesterday’s proposal would raise taxes by $751 billion over 10 years, including a 15-cent increase in the gas tax that would be phased in starting in 2013. Farm subsidies would be cut by $3 billion a year.

The plan calls for discretionary spending to be cut by $1.4 trillion over 10 years, while mandatory spending -- including Social Security, Medicare for the elderly and Medicaid for the poor -- would be reduced by $733 billion.

John Rother, executive vice president for policy at the senior citizens’ group AARP, said his group would oppose the plan because it would be “dramatically lowering benefits over time” in Social Security and Medicare.

‘Drop Dead’

Bowles and Simpson “just told working Americans to ‘drop dead,’” said AFL-CIO President Richard Trumka. “The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires.”

The plan spells out $100 billion in defense cuts, including freezing Defense Department salaries and noncombat military pay at 2011 levels for three years, cutting overseas bases by one- third and doubling proposed cuts in defense contracting.

The Aerospace Industries Association, the trade group for U.S. defense contractors, said it had “grave concerns” about proposals to reduce funds for purchasing, research and development. “We cannot abandon the security of future generations,” said the group, which represents Lockheed Martin Corp., Boeing Co., and Northrop Grumman Corp.

Bowles said about three-quarters of the savings would come from spending cuts, with the remainder from tax increases.

Freeze Federal Salaries

It would reduce congressional and White House budgets by 15 percent, freeze federal salaries for three years and cut the federal workforce by 10 percent. House Republican leader John Boehner of Ohio, who will become speaker in January, said before the plan’s release that he supported a freeze on federal hiring and government workers’ pay.

The proposal would also end government funding of National Public Radio and the Public Broadcasting Service, begin charging fees to visitors to the Smithsonian Institution museums in Washington, raise fees at national parks and merge the Department of Commerce with the Small Business Administration.

It would eliminate the Office of Safe and Drug-Free Schools, whose budget Obama proposed more than doubling from 2008 levels. The plan said that “while school safety should be protected, violence and drug abuse are problems that occur far less on school grounds than elsewhere.”

Agreement Needed

The panel needs agreement from 14 of its 18 members before a plan can be sent for an up-or-down vote in Congress.

Dan Seiver, a finance professor at San Diego State University, said the plan’s strength is its attack on many budget areas long considered untouchable. “You’re not really going to get fiscal sanity without goring everybody -- everybody has to sacrifice,” he said.

Orin Kramer, general partner of hedge fund Boston Provident Partners LP and a Democratic Party fund-raiser, said he doubts an agreement can be reached.

“The most central question that somebody should ask is: ‘What are the prospects for a grand bargain that will change the path of federal fiscal policy?’” Kramer said. “And the chances of that under current conditions are zero.”

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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