How to Break the Supercommittee’s Tax-Increase Roadblock: View

Call us unduly optimistic, but we keep seeing signs that the congressional supercommittee just might be able to come up with a budget-cutting deal before its Nov. 23 deadline.

Democrats have indicated a (still insufficient) commitment to entitlement reform. Republicans have made (still insufficient) progress in allowing more revenue.

But one of the chief obstacles remaining is a semantic one: Congressional Republicans still furiously object to anything that might be considered “new taxes.” To help, here are a few ideas we’ve been arguing for that will raise revenue and restrain entitlements -- and that can plausibly be called something other than new taxes. We estimate these ideas could save roughly $1.76 trillion over 10 years.

First, phase out the mortgage-interest deduction. It costs about $100 billion a year and disproportionately benefits the well-to-do. Worse, it can goad people into buying homes they can’t afford. Start by limiting the deduction to only principal residences and reducing the maximum amount of eligible mortgage debt to $500,000. Full deductibility can then gradually yield to ever-smaller partial deductions. We estimate the savings over 10 years could be about $200 billion.

If that reform seems too audacious given the state of the housing market, then consider this: Phase out deductions and credits for taxpayers earning more than $500,000 a year -- in exchange for a lower tax rate. Such a move could yield roughly the same savings over 10 years.

Ending Corporate Breaks

Next, we should eliminate corporate tax breaks. Abolishing a provision that rewards companies that use “last-in-first-out” accounting would raise about $70 billion; ending tax breaks for corporate jets would generate $3 billion; and stopping subsidies for oil and gas companies gives us about $40 billion over 10 years. Reducing farm subsidies -- by lowering direct payments to farmers and overhauling the crop insurance program -- could cut $28 billion. And subjecting “carried interest” to the same tax rate as regular income would generate $20 billion.

We should also phase out the deduction for corporate- sponsored health insurance. It’s the biggest tax expenditure of all, costing an estimated $260 billion a year. Employees in higher tax brackets get even bigger exclusions. End that privilege and start paring back the overall break, and we could save roughly $500 billion over a decade.

Restraining Benefits

On the other side of the ledger, we need to restrain benefit growth. The first step should be to use a “chained” Consumer Price Index for Social Security and all other inflation-indexed federal programs. Estimated savings for this would be $232 billion over 10 years.

Perhaps the supercommittee’s most difficult task will be to reduce health-care costs -- but this isn’t impossible. We could save $125 billion over a decade by gradually increasing the age when Medicare benefits begin, to 67 from 65. We could shave some $75 billion by increasing Medicare cost-sharing with a $550 deductible, a 20 percent co-payment and a cap on out-of-pocket costs beyond $7,500. To prevent dilution of such incentives by Medigap plans, first-dollar coverage could be barred for savings of $53 billion. Increasing premiums for high-earners would trim $38 billion.

On Medicaid, states could be given more flexibility to use managed care, and the government could stop paying matching funds for state taxes paid by health-care providers. This would save about $110 billion. Expanding Medicaid drug rebates to the Medicare drug program would trim $160 billion.

And overhauling the medical-malpractice system by deducting workers’ compensation and insurance payments from jury awards, allowing safe havens for providers who follow best practices, and capping noneconomic damages could save about $62 billion.

Finally, increasing pension contributions by federal employees, and basing the benefit formula on workers’ highest five years of earnings instead of the highest three years, could save about $47 billion.

Go Big

In total, our back-of-the-envelope estimate is that these increases that are absolutely, positively not new taxes would save roughly $1.76 trillion -- well above the $1.5 trillion that the supercommittee was told to save. As a bonus: Savings of this magnitude leave some bargaining room for lowering marginal tax rates or negotiating the schedules for phasing out deductions. What’s more, they offer a base for “going big” -- and shooting for a plan with $4 trillion or so in savings that could fundamentally transform our budgetary future.

It’s been clear from the start that fixing our long-term fiscal woes would require lowering spending and raising revenue. If Republicans insist that we can’t raise taxes, a program of “increases” that limits distortive deductions and simplifies the tax code would go a long way toward healing our economic wounds.

To contact the Bloomberg View editorial board: view@bloomberg.net.