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The President’ Fiscal Commission, set to release their recommendation for addressing America’s long term debt crisis in early December, has conjured up much speculation on what direction they will go – tax hikes, spending cuts or a mix of both.  From our perspective, it’s clear we have a spending problem, not a revenue problem. Thus, the recommendation should focus on spending cuts.

Certainly this approach is not the one expected from the Commission though, with 12 of the 18 members chosen by President Obama and Congressional Democrats more prone to tax increases than spending cuts. That being the case, it was welcome news to hear the two leaders of the Commission express their ideas on a possible proposal – one that involved three-fourths spending cuts and the remainder focusing on restructuring the tax code. In effect, this would more closely mirror the example being set by David Cameron in Great Britain right now.

The general outline of the plan would:

• Deficit: cut $3.8 trillion from the deficit, bringing it to 2.2% of GDP by 2015 from the current 9%;
• Social Security: raise the retirement age slightly over time while adjusting down the rate at which benefits grow;
• Medicare: pay doctors less for services provided and call for “comprehensive” legislation to reduce malpractice costs;
• Discretionary Spending: reduce congressional and White House budgets by 15%, freezing federal salaries and cutting the federal workforce by 10%; $1.4 trillion in discretionary cuts would apply equally to domestic and defense programs;
• Tax Code: eliminate the mortgage interest deduction and many other deductions in exchange for lower marginal rates of 8%, 14% and 23%.

It’s a pleasant surprise that co-chairs Bowles and Simpson have taken a serious shot at reducing spending, but increasing tax revenue to pay for the recent increase in the size of government is a dangerous precedent to set.  These changes would increase federal revenue well above its post-WWII average and represent a permanent increase in the size of government.  If their tax proposals were revenue neutral, they’d be a positive step towards a fairer, simpler tax code.  While most economists support the idea that tax reform to broaden the base and lower the rate is good, pro-growth policy, the fact remains that we have a spending problem, not a revenue problem.