David R. Francis

Obama commission won’t cut deficits. Congress will.

President Obama has created a National Commission on Fiscal Responsibility and Reform to help balance the federal budget by 2015. But few are optimistic about its ability to make substantial cuts.

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    President Obama delivers remarks before signing an executive order creating a National Commission on Fiscal Responsibility and Reform at the White House in Washington Feb. 18. Mr. Obama named a bipartisan panel to tackle US budget deficits and promised it broad leeway to put the country on a path to fiscal responsibility. He tapped former White House chief of staff Erskine Bowles (c.), a Democrat, and former Senator Alan Simpson (r.), a Republican, to lead the 18-member commission.
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It’s hard to find many people with high expectations for the bipartisan deficit-cutting commission that President Obama appointed last month.

The group is supposed to make recommendations to balance the budget by fiscal 2015 (not counting interest on the national debt), but neither conservatives nor liberals put much stock in it.

The United States doesn’t need a commission of “old guys” to figure out what’s needed to reduce the growing federal deficit and debt, says John Makin, a budget expert at the conservative American Enterprise Institute. With a December deadline (after the midterm elections), all it is doing is “kicking the problem down the road.”

There’s another problem: It will take a high level of agreement, 14 of its 18 members, to make any deficit-trimming suggestion to Congress, says Henry Aaron, a more liberal budget expert at the Brookings Institution in Washington.

Thus, any major congressional action will really depend on some sort of political consensus in Congress. That will be “awfully tough” to attain since large numbers of Republicans in both houses have taken formal pledges to not increase taxes, Mr. Aaron notes. And he sees both spending cuts and tax hikes as necessary to get projected budget deficits under control.

Mr. Makin regards spending cuts as “the most reliable way” to reduce deficits, since raising tax rates can slow economic growth. Both analysts agree the US must do something about its present fiscal path.

One optimistic note is that the rate of growth in the Obama budget is lower in all major categories of federal spending (except for net interest on debt) than it was during the eight years President George W. Bush occupied the White House, says Paul Kasriel, an economist at Northern Trust Corp., in Chicago. That projection holds whether scored by Mr. Obama’s own budget office or the neutral Congressional Budget Office.

The biggest challenge ahead relates to “the diversion of productive resources to future retirees,” Mr. Kasriel notes.

Does that imply future cuts in Social Security benefits? Aaron suspects that any major political compromise on deficit reduction will include some cut in those benefits. But he notes these benefits are already scheduled to shrink. A 1983 congressional deal gradually moves up the age when a retiree can get full pension benefits. By 2027, it will be 67. Also, the cost of Medicare payments deducted from Social Security checks to cover drug insurance is rising faster than inflation, Aaron adds. Will Congress make further cuts when many baby boomers’ retirement portfolios and private pensions have been hit by the financial crisis?

Makin sees moving the retirement age to 70 as “not inconsistent” with rising life expectations for Americans. He’d also like pension benefit levels, set annually, linked to average wage increases rather than the higher cost of living index.

Though preferring spending cuts, Makin likes in theory the idea of limiting hundreds of billions of special federal tax breaks, known as tax expenditures. The largest is the tax deduction for interest on home mortgages. But that idea, which Obama floated for high-income Americans, has little support in Congress.

Another major revenue booster would be raising the capital gains tax rate from its present low of 15 percent, says Aaron. As it is, the richest 400 taxpayers – earning $139 million or more apiece in 2007 – paid only 16.6 percent of their individual income in federal taxes. Such a tax hike wouldn’t cover the entire federal income gap, but it would be “a big step in the right direction,” he adds.

David R. Francis writes a weekly column.

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