Budget proposal includes payroll holiday, national sales tax

Rivlin is the fourth member of President Obama’s fiscal commission to release a debt-reduction plan. The National Commission on Fiscal Responsibility and Reform’s co-chairmen, former Clinton administration chief of staff Erskine Bowles and former Sen. Alan Simpson (R-Wyo.), released their draft recommendations last week.

Members of Congress and their staffs have shared the Bipartisan Policy Commission’s report with Simpson and Bowles, who said “they’re very grateful for the input,” according to Rivlin.  

Another member of the fiscal commission, Rep. Jan Schakowsky (D-Ill.), offered a detailed debt-reduction plan on Tuesday that would cut $427.7 billion from the federal budget deficit by 2015, along with $200 billion in new stimulus spending to create jobs, $144.6 billion in tax increases, $110.7 billion in defense cuts and $17.2 billion in healthcare savings through a “robust public option.”

The Rivlin-Domenici proposal suggests a new 6.5 percent national sales tax — which they called the Debt Reduction Sales Tax — while cutting individual income tax rates to 15 percent and 27 percent and reducing the top corporate tax rate to 27 percent from its current level of 35 percent.

Rivlin called the tax plan “bold, not extreme,” and said it would create a more progressive and simpler tax system. 

“It’s very drastic tax reform — we’re very proud of this, it’s a pro-growth piece of the plan,” she said. “I think the tax package as a whole is pro-saving, pro-investment, pro-growth, somewhat less pro-consumption.” 

Despite the likely unpopularity of potential tax increases, Domenici said a national sales tax is needed or “we cannot solve this problem.” 

The plan also replaces the deductions for mortgage interest and charitable contributions, giving 15 percent refundable credits for anyone who owns a home or gives to charity.

Under the plan, the mortgage-interest credit would be better constructed and aimed at helping lower- and middle-income homeowners instead of those in upper-income brackets, Rivlin said. 

The proposal would also balance the primary budget in 2014, reduce deficits including interest to smaller and more manageable levels, and stabilize the debt below 60 percent of gross domestic product by 2020.

The plan phases in a freeze on discretionary spending for four years starting with 2011 levels, with an estimated savings of $1 trillion through 2020, excluding interest, although it doesn’t include stimulus funding, which is winding down.  

“The deficit reduction plan is phased in slowly so it doesn’t derail the recovery,” Rivlin said. 

Defense spending is frozen for five years but doesn’t include spending for the wars in Iraq and Afghanistan, which the authors said they expected to shrink over the next few years. Total savings through 2020 are estimated at $1.1 trillion, excluding interest.

Domenici called deficits a “quiet killer eating away at the foundation of America.” 

“Everybody must sacrifice so this quiet killer won’t eat us alive before we have a chance to fix what was our doing.” 

On the healthcare front, the plan would reinforce the cost reductions passed as part of the healthcare reform law, including raising Part B premiums — from 25 percent to 35 percent of total program costs, over five years — so they cover more of program’s costs. Tort reform, which wasn’t in the healthcare law, is also part of the plan.

That plan aims to save $756 billion on healthcare costs through 2020. 

The plan calls for a transition of Medicare to a premium-support program in order to control rising costs — which means costs can’t increase more than the growth of the economy plus 1 percent between now and 2018. 

The plan also proposes giving Medicare recipients a choice to stay in the traditional plan — but they have to pay for it if it grows too fast. 

A Medicare exchange also would be created so seniors could choose among competing plans, a possible avenue to reducing costs. 

The Rivlin-Domenici plan doesn’t raise the retirement age but “encourages people to work longer.”

The proposal includes a yearlong suspension of Social Security payroll taxes for employers and employees to free up about $650 billion for consumers and businesses to spend or save. The plan estimates the tax break could create 2.5 million to 7 million new jobs over two years.

The Social Security tax holiday isn’t expected to affect the solvency of the trust funds, which will be reimbursed in full from general revenues at the same time that they would have received payments in the absence of the holiday, Rivlin said.