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Parsing the Deficit Reduction Plans

SOURCE: AP/Alex Brandon

Erskine Bowles, left, and former Wyoming Sen. Alan Simpson, co-chairmen of the president's deficit commission, speak to the media after a meeting of the commission on Capitol Hill in Washington, Wednesday, December 1, 2010.

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Download a chart that compares the deficit reduction plans now before Congress (pdf)

The Center for American Progress today released our plan for achieving primary balance—when total government revenue equals total government spending except for interest payments on the debt—by 2015. Our plan lands amid fervent debate over at least five others offered by various think tanks and commissions around Washington. The accompanying chart compares the overall amount and makeup of the deficit reduction offered by these six plans, using 2015 as the comparison year. The table uses 2015 because President Barack Obama’s fiscal commission was tasked with achieving primary balance by that year. The CAP plan hits that target. Four of the other plans go well beyond it.

Looking at all of these plans together, there are some clear themes that emerge. First and foremost, serious deficit reduction is going to require some new revenue, which CAP has been saying for some time now. Every single one of these plans would result in higher federal revenue, as a share of GDP, than the federal government would raise under the president’s latest budget plan.

President Obama’s plan results in revenue of 19.0 percent of GDP in 2015, and all six plans add revenue on top of that. This new revenue ranges from just 0.3 percentage points of gross domestic product in the plan presented by the two co-chairmen of the president’s deficit commission, Erskine Bowles and Alan Simpson, to 2.3 percentage points under the plan presented by Rep. Jan Schakowsky (D-IL). CAP’s plan would increase revenue by 0.8 percentage points. The average of all six plans is an increase of 1.1 percentage points.

On the spending side of the balance sheet, five of the six plans, including CAP’s, would cut spending, as a share of GDP, from currently projected levels under the president’s budget plan. And all six plans derive a significant portion of their spending cuts from eliminating or reducing tax expenditures and from cutting defense spending.

The area with the largest disagreement is nondefense discretionary spending. Proposals in this arena range from the Economic Policy Institute’s call for substantially more nondefense discretionary spending to the Bowles-Simpson plan, which would impose rather draconian caps on “nonsecurity” discretionary spending. CAP’s plan for nondefense discretionary spending includes about $12 billion in cuts.

The CAP plan also includes substantial cuts to defense spending and tax expenditures, as do most other plans. CAP would shave $35 billion from tax expenditures and about $60 billion from defense. These are on the low end of the spectrum compared to other plans. The plan offered by the New America Foundation’s Maya MacGuineas and William Galston, for example, would cut tax expenditures by about $140 billion (with half of the savings then going to reducing tax rates), and Rep. Schakowsky finds more than $110 billion in defense cuts.

Across all six plans, overall spending levels average 22.4 percentage points of GDP. CAP’s plan is slightly above that, in large part because our plan achieves less overall deficit reduction than do most of the others. Overall revenue levels average 20.1 percent of GDP. CAP’s plan would raise 0.3 points less than average.

Download a chart that compares the deficit reduction plans now before Congress (pdf)

Michael Linden is the Associate Director for Tax and Budget Policy at American Progress.

Notes on methodology for our analysis of the six deficit reduction plans

Baseline

All of the values presented here are estimates of deficit reduction in 2015 using the president’s fiscal year 2011 budget submission projection of 2015 as a baseline.

Tax expenditures

We consider tax expenditures as equivalent to direct spending. Therefore, we list any proposals in the various plans to limit, reduce, or eliminate tax expenditures as proposals to cut spending. When these proposals are explicitly paired with reductions in the ordinary income tax rates, we display the effect of the reduced rates as a revenue cut.

Consider the plan presented by the Bipartisan Policy Center’s Alice Rivlin and Peter Domenici, which eliminates many existing tax expenditures for a savings of $397 billion. We consider those savings the same as spending reductions. Then the plan adds back in some new tax benefits, which cost $213 billion. Again, we consider that a spending increase. The net savings, therefore, from tax expenditures is $184 billion, and this value is displayed as a spending cut.

Similarly, the MacGuiness-Galston plan reduces tax expenditures, but uses half of the savings to cut income tax rates. As a result, we show the full tax expenditure savings as a spending cut but incorporate the reduction in tax rates as a cut in revenue.

Of course, though limiting or eliminating a tax expenditure is economically equivalent to limiting or eliminating direct spending, it nevertheless has the effect of increasing federal revenue. The values displayed in the “Overall federal spending and revenue levels in 2015” portion of the table reflect this.

Social Security

Many of the deficit plans also include reforms or changes to Social Security, but some keep these reforms sequestered from the general task of deficit reduction. Nevertheless, some of the proposed changes would have an impact on the unified federal budget in 2015. We therefore include those effects in this table.

Longer-term effects

Some of the deficit plans include proposals to reduce the deficit in the long term that phase in after 2015. Because this table sought to display just the medium-term effects of the various plans in a consistent, comparable way, the impacts of these longer-term proposals are not included.

Discretionary spending

Most of the deficit plans have separate proposals for defense and nondefense discretionary spending. The Bowles-Simpson proposal, however, separates discretionary into security and nonsecurity. In order to compare across plans, we have collapsed discretionary spending into one category.

Michael Linden is the Associate Director for Tax and Budget Policy at American Progress.

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