WASHINGTON — A draft proposal to be released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.
The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.
But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.
The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, 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.
Even after reducing the rates, the overhaul of the tax code would still yield additional revenue to reduce annual deficits — a projected $80 billion in 2015.
But how low the rates are set would depend on how many tax breaks are reduced or eliminated. Some of them, including the mortgage interest deduction and the exemption from taxes for employees’ health benefits, are political sacred cows.
The commission’s chairmen — Erskine Bowles, the president of the University of North Carolina system and a former White House chief of staff under President Bill Clinton, and Alan K. Simpson, a former Republican Senate leader from Wyoming — presented their draft to the nine other Democrats and seven other Republicans on the commission at a closed-door meeting on Wednesday morning.
The group, appointed last winter, had made no decisions in advance of last week’s midterm elections, to avoid politicizing the painful options for reining in projected yearly deficits that are building up the federal debt to a potentially dangerous level. Even so, the election results — by emboldening victorious anti-tax conservatives and defeating many fiscally conservative Congressional Democrats — are widely seen as having reduced the already slim chance that a supermajority of the commission could agree to a package of proposals by Dec. 1.
Under Mr. Obama’s executive order last February creating the panel of 12 members of Congress and six private citizens, 14 of the 18 commissioners must agree in order to send any package to Congress for a vote in December. The Senate majority leader, Harry Reid of Nevada, and Representative Nancy Pelosi, who will remain the House speaker until January, have promised in writing that the Senate would vote first and, if it approves a plan, the House would vote as well.
Should the package of proposals fall short of the necessary 14 votes in the deficit commission, as many people expect, proponents of deficit reduction, including some administration officials, hope that at least some of its recommendations could be the basis of efforts to pare deficits once the economy fully recovers.
In any case, the proposals will pose a test or an opportunity for Mr. Obama as he adjusts to the election drubbing that cost his party control of the House and reduced its Senate majority — depending on whether he tacks to the political center and embraces them in his own budget early next year, or shifts more to the left and leaves them on the shelf.
The chairmen’s proposals, and other deficit reports coming out soon from other groups, will present a challenge also to Congressional Republicans by challenging their contention that the budget can be balanced by spending cuts alone — a claim that even many conservative economists and budget analysts reject, given the scale of projected debt as the Baby Boom generation retires and claims federal benefits.
Next Wednesday another bipartisan group of budget experts – chaired by Alice Rivlin, a former budget director both to Congress and Mr. Clinton, and Pete V. Domenici, a former Republican senator from New Mexico who for years was chairman of the Senate Budget Committee – plans to recommend a package of spending cuts and revenue increases that is similar but goes beyond what is now before the fiscal commission. They are sponsored by the Bipartisan Policy Center, a research organization formed by four former Senate majority leaders.
The Bowles-Simpson plan has a ratio of roughly $3 in spending reductions for every $1 in revenue increases, with an additional $673 billion in savings from reduced interest payments on the resulting lower federal debt.
“The Problem is Real – the Solution is Painful,” the chairmen wrote in their slide presentation to colleagues.
Mr. Obama directed the commission to balance the budget by fiscal year 2015; that does not count interest on the debt accumulated to date, which alone is projected to be about 3 percent of the nation’s gross domestic product that year – about the maximum level that many economists consider sustainable in a growing economy.
The commission plan aims to bring federal spending and revenues roughly in line by fiscal year 2020. Spending would be 22 percent of the nation’s economic output by fiscal year 2020 – slightly higher than in past years, but reflecting the growing costs of retirement and health benefits for an aging population – and revenues would be about 21 percent, to create a surplus that year.
By comparison, in the fiscal year 2010 that ended Sept. 30, spending was 23.8 percent of gross domestic product and revenues were 14.6 percent – reflecting the one-time stimulus spending costs and the loss of tax receipts amid high unemployment and slack business activity. That produced a deficit for the year of 9.1 percent of GDP, bringing the public debt to a size equal to 62 percent of the economy.
NYTimes Jackie Calmes
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