The Moment of Truth: REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM
Start: 2010-12-01, Publication: 2011-02-01
We propose a six-part plan to put our nation back on a path to fiscal health, promote economic growth, and protect the most vulnerable among us. Taken as a whole, the plan will: • Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history. • Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP). • Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code. • Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%. • Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly. • Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.
Fostering an Economic Recovery -- The Government Accountability Office has said that we could have double-digit growth for a decade and still not grow out of the current fiscal situation. At the same time, we cannot get out of this fiscal hole without sustained economic growth. According to the Office of Management and Budget, a one-time 1 percent decrease in GDP would increase the deficit by more than $600 billion over the course of the decade; if annual growth were 1 percent lower every year, the deficit would be over $3 trillion larger. A plan to reduce the deficit must therefore promote economic growth and not undermine the economic recovery. Our plan would accomplish these goals in at least four ways: * Reduce the deficit gradually. In order to avoid shocking the fragile economy, the Commission recommends waiting until 2012 to begin enacting programmatic spending cuts, and waiting until fiscal year 2013 before making large nominal cuts. In addition, revenue changes would not begin until calendar year 2013, after spending cuts are already well underway. * Put in place a credible plan to stabilize the debt. A number of economists have argued that putting into place a credible plan to reduce future deficits can have a positive effect on the economy. This so-called “announcement effect” could help to prevent interest rate increases and also mitigate uncertainty among individuals and businesses. In addition, stabilizing the debt will improve the country’s long-term growth prospects by reducing the “crowd out” of private investment and by forestalling a potential fiscal crisis. * Consider a temporary payroll tax holiday in FY 2011. In order to spur short-term economic growth, the Domenici-Rivlin Bipartisan Policy Center Commission recommended a temporary payroll tax holiday in 2011. Assuming it is accompanied by sufficient future deficit reduction, Congress should consider a temporary suspension of one side of the Social Security payroll tax, financed by transfers from general revenue. Though this would cost $50-100 billion in lost revenue (depending on the design), CBO estimates that a payroll tax holiday of this magnitude would result in significant short-term economic growth and job creation. * Implement pro-growth tax and spending policies. In designing its proposal, the Commission made growth and competitiveness a priority. For example, our discretionary plan maintains important funding for education, infrastructure, and high-value R&D, and establishes a Cut-and-Invest Committee to continue to reprioritize spending toward investment. Our tax plan, meanwhile, cuts corporate and individual rates significantly, while simplifying the code, broadening the base, and lowering the deficit. It also makes us more globally competitive by moving to a territorial tax system like those of our international partners.
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