The Market Ticker - Deficit Commission: Sacred Cow Slaughter?

This is interesting.... although light on details......

Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.

That's going to be tough.  Let's look at the chart:

$200 billion is a darn good slice out of the pie.  Probably not impossible, but also definitely not easy.  The sacred cow slaughter necessary to get there will be sizable - and painful - in these "discretionary" programs.  Among other things Education pretty much has to get whalloped (I'd argue it should be zeroed, incidentally.)

Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.

That means removing exemptions - lots of them.

Achieve mandatory savings from farm subsidies, military and civil service retirement.

This means higher prices at the grocery store and closing bases.  To the extent they're overseas, they'll hurt the foreign nations.  To the extent they're here, they will trash local economies, and that will not be well-received.

Caps revenue at or below 21% of GDP and gets spending down to 22% and eventually to 21%.

That puts revenue at $2.8 trillion today - which is higher than today's tax revenue.  How, again, are you going to do that?  Oh yeah - taxes are going up, not down (yes, I know, they'll be lower base rates but far fewer deductions.  To a large degree I support this - but the devil is in the details, of course.)

$200 Billion in Illustrative Spending Cuts in 2015:

• More than 50 examples of how to meet 2015 target
• $100+ billion in potential Defense savings
• $100+ billion in potential Domestic savings
• Cuts spending $200 billion below the 2015 levels in the Presidents Budget

Nice idea.  Here's the problem - that's a small number.  $200 billion is only 5% of the current budget of $4 trillion.  And we've already got people saying "no way!"

Well, that's not enough!  The rest is revenue, but the point stands here - a 5% budget reduction net-on-net is about 1/4 of what it has to be, assuming the revenue raises are still there.

This proposal is relying on Ponzi growth assumptions - again.  For this reason I don't think it's going to work.  It certainly is better than nothing, but given the protests already being heard, well...

Then there are specifics.  For instance, they want to "integrate" kids of service personnel into local schools.  This means they're going to shift the current cost of schooling picked up by the military to the state budgets, which means your taxes go up to cover those people, when their parents are living on base and thus not paying property tax.

That will be popular: NOT!

You have to watch these things - some of them are not spending reductions or cost savings - they're cost-shifts.  That's typical Washington slight-of-hand games.

To be fair, there aren't too many of those, but there are some, and those need to go.  True reductions aren't cost-shifts.

On the tax side, this is what I get up front:

I like the consolidation into three rates and one corporate rate, elimination of the AMT, Pease and PEP.

I can deal with keeping the Child Tax Credit and EITC, but we shouldn't.  The reason for this is simple - everyone should have skin in the game.  The reduction for the bottom tax brackets on a bracket basis is 20%, which is meaningful from the Bush rates, and even more if they expire (nearly 50%.)

Note that all of these changes they propose also treat capital gains as ordinary income.  Now that's a difference.  But it's arguably one we should adopt.

The problem with tax expenditures is that they're often marketed to the lower classes as something they get, and the wealthy pay.  That's a lie.  While the wealthy don't get much from the refundable credits they get more on an "all credit" basis than do the poor!

The Wyden-Gregg plan outlined is one I can support.  But - we have to stop companies from using offshore shell corporations to evade taxes.  That's something places like Google are abusing and it has to end.  These firms are here because they like our legal certainty - it's very friendly to them.  Threats that they will leave are hollow if they have to pay taxes on operations and earnings here, and that is easily enforced.

I'm far less bullish on the Health Care "fixes."  Frankly, they won't work.

Cost-sharing and other games in Medicare are both a non-starter and won't do a thing.  You have to tackle two places we don't want to go:

1. Promising people things we cannot pay - e.g. "Everyone can have two free hip replacements."
   
2. Cost-shifting of effectively all development expenses for new drugs and devices onto US Consumers through re-importation bans and similar games - that is, protection of different-zone, different-nation pricing instead of allowing the market to work by forcing such distortions out into the open where the market will fix them by purchase and resale back into the United States.

The latter is a major problem.  We have the so-called "benefit" of this when it comes to companies offshoring labor, but when people want to have it work the other way we have medical drug and device makers block it with legislation.  That has to end.
The Social Security issues are also real, but the obvious changes there are ones that they've identified - with one exception: The government has to be prevented from stealing the funds in the so-called "Trust."  The easiest way to do this is to force the Treasury to issue actual marketable Treasuries to the Trustees, which gives them the option of selling them at any time into the market (choosing to hold cash instead.)  This would serve as a powerful check and balance on government overspending, as the FICA Trustees would be effectively the "super-investor" with the biggest interest in the solvency of the government debt system.  Given that they hold the biggest single chunk, this is as it should be!
My initial read? 
There's good things in here.  But there are signs of  magical thinking too, and that's got to stop.