Let the Screaming Begin

Posted by IStockAnalyst.com

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Axe Spending,  Slash Government Employees – Simplify & Cut Taxes. I the President’s National Commission on Fiscal Responsibility and Reform Proposal the overall goals are to achieve $4 trillion in deficit reduction through 2020, reduce the deficit to 2.2% of GDP by 2015, cap revenue at or below 21% of GDP, reduce the debt to 40% of GDP by 2037, modify the tax code, reduce tax rates, slow down the rate of healthcare costs, and to lengthen Social Security’s solvency.

It’s broken up into 5 parts:

1. Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.

2. Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.

3. Address the “Doc Fix” not through deficit spending but through savings from payment reforms, cost-sharing, and malpractice reform, and long-term measures to control health care cost growth.

4. Achieve mandatory savings from farm subsidies, military and civil service retirement.

5. Ensure Social Security solvency for the next 75 years while reducing poverty among seniors.

Discretionary Spending Caps:

The spending caps don’t kick in until 2012 – no mention if it’s before of after the elections – and will only be rolled back to 2010 levels. Starting in 2013, there will be an additional 1% cut in discretionary budget authority every year though 2015.

$200 billion in cuts, split evenly between defense and domestic spending, can be found on pages 19 and 20 of the report.

A few that caught our attention include:



  • Freeze federal salaries, bonuses, and other compensation at the Department of Defense for three years.
  • Freeze noncombat military pay at 2011 levels for 3 years.
  • Reduce spending on Research, Development, Test & Evaluation by 10 percent.
  • Reduce overseas bases by one-third.


  • Freeze federal salaries, bonuses, and other compensation at non-Defense agencies for three years.
  • Cut the federal workforce by 10% (2-for-3 replacement rate).
  • Eliminate 250,000 non-defense service and staff augmenteecontractors.
  • Eliminate all earmarks.
  • Slow the growth of foreign aid.

Comprehensive Tax Reform:

The proposal includes 3 plans for changing and simplifying the tax code. Each calls for the elimination of some tax credits, write-offs and deductions (maybe even including the mortgage deduction). In return, the income tax-rates will be lowered.

The Zero Plan (we think the zero stands for zero deductions and tax credits) would set income tax rates at 8%, 14% and 23% and rise as credits and deductions are added back in. Capital gains and dividends would be taxed as ordinary income. The corporate rate would be reduced to 26%.

Wyden-Gregg Style Reform would repeal AMT, PEP, and Pease, establish 3 rates –15%, 25% and 35%, and triple standard deduction to $30,000 ($15,000 for individuals).

However, it would repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions, limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000 and limit charitable deduction with floor at 2% of AGI.( iStock is not a fan of discouraging charitable contributions.) The Wyden-Gregg makes no mention of cap-gains or dividends.

The 3rd option calls on the Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012. In the meantime, it would give a “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted.

This plan makes no mention or suggestion as to whether all or some of the Bush tax-cuts should be extended, or for how long. To iStock – option 3 is by far the least attractive of the plans.

Of the plans – we probably prefer option 1 without exemptions.

Reducing Health Care Costs:

Paying doctors less and tort reform sums up this section fairly well.

In addition to alienating Drs and lawyers, starting in 2020, the panel suggests containing growth in total federal health spending to GDP+1% by establishing a process to regularly evaluate cost increases.

With benefits and costs of Obamacare up in the air and not address by the commission, nobody knows what healthcare costs for the federal government and states are going to be. There have been plenty of headlines about employers dropping coverage, the McDonalds exemption, increasing premiums…

All of these issues are likely to drive more – not less – people into government provided healthcare. In addition, the high cost of paying for pre-existing conditions will have to come from somewhere.

In all likelihood, a greater share of the cost of healthcare is going to be hoisted upon the federal and state governments. Under that scenario, iStock is not sure that paying Dr.s and lawyers less and GDP+1% are real solutions to containing this monster’s escalation.

Mandatory Savings:

The two biggest savers are using a lower inflation calculation for indexing costs and reducing farm subsidies by $3 billion per year. In addition, federal workers will have to pay ½ of their pension costs – not the current 1/14th.

Most of the cost cuts in this section are small; between 2011 and 2020 the total saving is estimated to be $248 billion. Besides military personnel and federal employees, most American’s won’t even notice the difference.

Strengthening Social Security:

The idea is to have people work longer, receive smaller cost of living adjustments, tax more income, reduce benefits for high income earners (means testing) and have state and local government employees start to contribute in 2020 (no federal employees?).

Anybody that’s ever paid attention knew years ago that these Social Security changes were inevitable. Heck, when I was ten, thirty-four years ago, my dad told me these adjustments were coming. What the hell took the government so long to admit it?

This is the first year that the “trust fund” is paying out more money than it is taking in. Seniors are not seeing any cost of living increases, while costs are going up. Social Security is already broken.

Entitlement reform, while likely to shortchange many, is 100% necessary. Between Medicare and Social Security, the US has somewhere between $70 and $140 trillion in unfunded liabilities. We have read that there is not that much money in the entire world!

Like it or not, we have real structural problems that require real solutions. The President’s National Commission on Fiscal Responsibility and Reform is a good way to get the national conversation started on how and what changes we are willing to make. However, the time for talk is short, and the need for action is now.


iStockAnalyst.com Staff