The two co-chairmen of the President's Commission on Fiscal Responsibility, Democrat Erskine Bowles and Republican Alan K. Simpson, have released the draft proposal of their recommendations. TPMDC has a rundown on the proposals, divided into defense spending cuts; discretionary spending cuts; medicaid/medicare cuts; social security cuts; tax reform.
The latter include raising the federal gasoline tax by 15 cents per gallon and eliminating some tax deductions, including the state and local tax payments deduction and that for payment of interest on home mortgages.
And three tax brackets: 15%, 25%, and 35%, thereby establishing as permanent the bracket for the wealthy at 35%. The 2003 income tax cut reduced the four tax rates from 27, 30, 35,and 38.6% to 25, 28, 33, and 35 percent, respectively. Although the 2003 law, legislated by a Republican Congress and signed by a Republican President, mandated that the rates rise on 1/1/11 to the pre-2003 levels. the Obama Administration and Democrats generally wholeheartedly support extension of all the tax rate reductions, except that for the wealthy from the 38.6% to the 35%. The GOP, naturally, wants to explode the federal debt, increase the gap between the wealthy and the middle class, and starve government functions (except national defense and possibly homeland security) by cutting taxes to 35% for the wealthiest 2% of the populace. And now Bowles-Simpson is urging Congress to make matters worse in that, according to Daily Kos
individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.
Paul Krugman noes
If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent.
Not surprisingly, Bowles-Simpson want to balance the federal budget partly on the backs of the elderly, urging Congress to:
•Index the retirement age to longevity -- i.e., increase the retirement age to qualify for Social Security -- to age 69 by 2075.
•Index Social Security yearly increases to a lower inflation rate, which will generally mean lower cost of living increases and less money per average recipient.
•"Increase progressivity of benefit formula" -- i.e., reduce benefits by 2050 for middle, and, especially, higher earners, relative to current benefits.
•Increase the Social Security contribution ceiling: while people only pay Social Security taxes on the first $106,800 of their wages today, that's only about 86% of the total potentially taxable wages. The co-chairs suggest raising the ceiling to capture 90% of wages.
A pie chart from the Center for Budget and Policy Priorities utilizing data from the Congressional Budget Office highlights the huge impact of tax cuts, and relatively small impact of entitlements upon the national debt:
The source of most Social Security revenues is payroll taxes, mandatory contributions from deductions from the wages of workers and matched by employees. As explained here, the other two sources are "interest earned on revenue not needed to pay benefits and expenses in prior years, and so invested in certificates of obligation and bonds issued by the U.S. Treasury; and income taxes on the Social Security benefits of those with higher incomes." No money, therefore, goes to the trust fund from general revenues. Instead, over $2.5 trillion is owed to the Social Security trust fund from the federal government's general fund- largely to pay for those tax cuts for the wealthy. (See this blog with its debt/savings clock.) Hence, here is the graph of the contribution of Social Security to the budget deficit:
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