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Rivlin Stirs Debate Over U.S. Sales Tax to Trim Debt

Former Federal Reserve vice chairwoman and Democrat Alice Rivlin. Photographer: Brendan Hoffman/Bloomberg
Former Federal Reserve vice chairwoman and Democrat Alice Rivlin. Photographer: Brendan Hoffman/Bloomberg

Nov. 17 (Bloomberg) -- Alice Rivlin, a member of President Barack Obama’s deficit-reduction commission, is trying to stir a debate over imposing a national sales tax to reduce the deficit as part of a plan that includes steep Medicare cuts and a one-year payroll-tax holiday to spark economic growth.

Rivlin, as part of a separate 19-member group sponsored by the Bipartisan Policy Center in Washington, offered a plan for a 6.5 percent sales tax. Her recommendation comes as the president’s panel prepares a Dec. 1 report on options for Congress to trim the national debt.

“We are proposing a very drastic tax reform,” said Rivlin, a Democrat and former Federal Reserve vice chairwoman. “It would give us a slightly more progressive tax system than we have now and is definitely simpler and more pro-growth.”

Like the proposals offered last week by the chairmen of the president’s panel, the Rivlin plan would lower income tax rates while eliminating most deductions and credits. It would replace the home mortgage and charitable contribution deductions with 15 percent refundable credits.

The Rivlin plan may help the presidential panel sell unpopular remedies by painting an even starker picture of the measures needed to tame the debt. All 19 members of the outside group, from former Oklahoma Governor Frank Keating, a Republican, to former Washington Mayor Anthony Williams, a Democrat, signed off on the plan. Rivlin said she’s sharing it with the president’s commission and members of Congress.

Economic ‘Tsunami’

Former New Mexico Republican Senator Pete Domenici, the co-chairman of the policy center group, said the bipartisan consensus on the panel demonstrates the ability of Democrats and Republicans to come together when politics are put aside, and he urged Obama to consider the plan.

“Nothing that we have ever done comes close to the tsunami that is part of the economic problem we have,” said Domenici. “We won’t be a leader any longer if we don’t fix this.”

Alan Simpson, a Republican former senator from Wyoming who is co-chairman of the president’s commission, was skeptical that the official panel would adopt the sales tax proposal.

“There’s no need to get into it about their plan versus our plan,” he said. “We’ve pissed enough people off in America to last forever. We don’t need any more people.”

Proposal Criticized

Simpson and the presidential panel’s other chairman, Erskine Bowles, former President Bill Clinton’s chief of staff, drew criticism when they proposed their $3.8 trillion report on Nov. 10.

Jim Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington, said the Rivlin group may be “somewhat more realistic” about how much revenue is needed to close the deficit.

The Rivlin-Domenici plan would immediately freeze domestic discretionary spending and defense spending. It makes $756 billion in cuts to health care through 2020, including raising Medicare premiums from 25 percent to 35 percent over five years, and starts a premium-support program to limit growth in federal spending on the health-care program for the elderly.

It attempts to increase economic growth with a one-year Social Security payroll-tax holiday designed to create 2.5 million jobs.

“It is a fundamental difference” with the Bowles-Simpson plan, said Steve Bell, a scholar at the Bipartisan Policy Center. “They assume that this deficit-reduction plan in and of itself is sufficient. We don’t.”

Payroll Tax Cap

On Social Security, instead of raising the retirement age, as would the Bowles-Simpson plan, the Rivlin group proposes a gradual increase in the amount of wages subject to payroll taxes, currently $106,800, over the next 38 years to cover 90 percent of all wages. It would also trim the annual cost-of-living adjustments and reduce the growth in benefits for the top 25 percent of beneficiaries.

The Rivlin-Domenici plan seeks to illustrate why a combination of spending cuts and tax increases is the only way to stabilize the debt by 2020.

Targeting domestic discretionary spending cuts alone would require eliminating almost everything from law enforcement and border security to education and food and drug inspection, according to the policy center.

Growing Out of Deficit

The nation also can’t grow its way out of the deficit, the group’s report says. Just to stabilize the debt at 60 percent of gross domestic product, the economy would have to grow at a sustained rate of more than 6 percent a year for at least the next 10 years, it says. The economy hasn’t grown by more than 4.4 percent in any decade since World War II.

Finally, the problem also can’t be solved simply by boosting taxes on wealthy Americans, the report says. Reducing deficits to manageable levels by the end of the decade would require raising rates on the top two income brackets to 86 percent and 91 percent, the report says.

To contact the reporter on this story: Heidi Przybyla in Washington at bfaler@bloomberg.net

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

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