A bipartisan and reality-based way to cut tax rates AND reduce the deficit. Really.

The secret to cutting rates and increasing revenues? President Reagan knew it, as do President Obama's fiscal commission co-chairs, Democrat Erskine Bowles and Republican Alan Simpson.

By , Guest blogger

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    Erskine Bowles, left, accompanied by former Wyoming Sen. Alan Simpson, co-chairmen of President Barack Obama's bipartisan deficit commission, speaks on Capitol Hill in Washington, Nov. 10. Their bipartisan plan takes a page from President Reagan's book, cutting tax rates while increasing tax revenues. The secret? Cut out loopholes and broaden the tax base.
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As first reported by the New York Times’ Jackie Calmes, the President’s fiscal commission has just released a proposal endorsed by the commission’s co-chairs, Democrat Erskine Bowles and Republican Alan Simpson. The New York Times provides a link to the pdf of the co-chairs’ presentation slides here.

The plan achieves the commission’s “medium-term” goal of getting deficits under 3 percent of GDP by 2015 (the co-chairs actually hit 2.2 percent) with a mix of spending cuts and revenue increases, eventually converging the spending and revenue lines at around 21-22 percent of GDP by 2025-30. The plan is heavier on spending cuts than tax increases, at a ratio of about 3-to-1 according to the Times article, although that calculation no doubt depends on the starting reference point, or “baseline.” Note that relative to CBO’s official current-law baseline, revenues under the co-chairs’ plan are actually lower, not higher. (Under current law, revenues are 20.1 and 21.0 percent of GDP in 2015 and 2020, respectively, from table 1-2 on page 4 of the CBO report. Under the co-chairs’ plan, they are 19.3 and 20.5 percent; see page 13 of the presentation slides.) Relative to President Obama’s budget proposals, however, revenues do come up, although by only less than 1 percent of GDP by 2020.

More interesting is the fact that the co-chairs have come up with a way to raise revenue/GDP to something above the President’s proposals and something above the “charmed” 18 to 19 percent of GDP (40-year historical average) that Republicans like to insist on, while also managing to lower marginal tax rates–and that they accomplish this without any hocus pocus evoking the magical Laffer Curve. How do they do this? By broadening and leveling out the tax base, filling in the holes in the tax base that are known as “tax expenditures.”

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Because tax expenditures create inefficiencies in the tax system and require increases in marginal tax rates to make up for the lost revenue, reducing or eliminating them represents one of the most promising avenues for bipartisan compromise in any proposals for deficit reduction. Raising revenues in these base-broadening ways would allow both deficit reduction and marginal tax rate reduction (both of which Republicans claim to want) and would allow both deficit reduction and progressive tax increases (both of which Democrats claim to want), since most tax expenditures disproportionately benefit higher-income households.

I’ll have a little more on bipartisan tax policy ideas later this week (including my 100th-or-so installment of the short-term issue of what to do about the Bush tax cuts), as well as in the weeks and months to come.

And as an aside, co-chair Simpson has switched animal references; today he said this:

“We have harpooned every whale in the ocean and some of the minnows,” Simpson said. “No one has done this before.”

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