Solving the Fiscal Crisis: Comparing the Plans to Reduce the Budget Deficit

November 17, 2010

Brookings Senior Fellow Alice Rivlin sits on both President Obama’s National Commission on Fiscal Responsibility and Reform (chaired by Alan Simpson and Erskine Bowles) and is the co-chairman of the Bipartisan Policy Center’s debt reduction task force, also known as the Domenici-Rivlin panel, which has now released its final report. Rivlin discusses similarities and differences between the president’s commission’s initial report and the Domenici-Rivlin panel and what needs to be done to get the nation’s fiscal house in order.

U.S. Not Alone in Fiscal Crisis
“Clearly we are not alone in this problem. It is a world-wide problem and many countries, including European ones, are coping with rising deficits, and have taken very strong action and run into protests in the streets, and rioting and other things. I would not predict that here. It is much less in our tradition. We don’t have national strikes. The kinds of things that we have to do in this country are not as drastic or as punishing as the kinds of things that are being done in countries like Greece, which let their budget deficits get out of control and are not as wealthy a country as we are.”

Two Deficit Reduction Plans

“There are several differences between the Domenici-Rivlin plan and the Bowles-Simpson plan, although they have broad similarities because the problem is the same and there are a limited number of things you can do. On the tax side we have a very bold tax reform in the Domenici-Rivlin proposal. We simplify the income tax drastically and bring down the rates while broadening the base. We get rid of most of the exclusions and deductions and other things that narrow the base which enables us to bring the rates down to just two rates – 15 and 27 – which is lower than what we have now, and a top corporate rate of 27. But we also introduce a broad-based consumption tax that we think is necessary to raise enough revenue, even with the spending reductions which we are proposing (which are major). That will be controversial. We call it a debt-reduction sales tax at a rate of 6.7 percent, and it will certainly be a controversial item. It was not in the Bowles-Simpson proposal, but it is a plausible way for the United States to go since we are the only major nation that does not have a broad-based consumption tax.”

Forcing Spending Priorities

“The Domenici-Rivlin plan has very aggressive spending reductions over the foreseeable future. We cap non-defense discretionary spending, as it is called (all of the things that the government does that are not national security – parks, education, prisons, and all of those things). We cap that total and freeze it, actually, so that the dollar amount does not go up for four years, then goes up more slowly. We think that will force the Congress and the administration, together, to look very carefully at priorities, and say ‘What do we really need to be spending? Which things could be combined or which things have outlived their usefulness?’ So we hope it will force a rethinking of what the government does, so that we can do it more effectively and efficiently. On the defense side, similarly, we freeze spending for four years and hope that that will enable a real focus on “How do we defend the country in a more efficient way?” and a rethinking of what our role is in the world.”