Posted June 21, 2012

Domenici: "We cannot allow ideological purity to stand in the way of what's right for our country."

By Loren Adler and Shai Akabas

Rebecca Morris contributed to this post.

In testimony on June 19 before the Senate Committee on Finance, a prominent Democrat made the case for entitlement reform and a long-time Republican called for tax reform that raises additional revenue. Dr. Alice Rivlin and Senator Pete Domenici, co-chairs of the Bipartisan Policy Center’s Debt Reduction Task Force, argued that healthcare and revenues are the two essential pieces for solving the debt puzzle. Several sitting senators on both sides of the aisle declared that the bipartisan Domenici-Rivlin plan, Restoring America’s Future, is the best comprehensive framework for doing precisely that.

Given our aging population, addressing Medicare’s rising cost while preserving its guarantee for older and disabled Americans is a vital element for any debt reduction plan. Domenici stressed that we “cannot fix the budget without…somehow fixing Medicare,” highlighting that there are currently “10,000 people entering Medicare every business day.”

The Domenici-Rivlin plan maintains traditional Medicare as the default option, but in Rivlin’s words, gives seniors a choice “on a well regulated exchange between traditional Medicare and an array of private comprehensive plans.” This Defined Support structure is estimated to save roughly $300 billion over its first ten years in effect and significantly more over the following decade. Rivlin concluded that Medicare reform should not “shift cost to the private sector or to vulnerable beneficiaries,” but should “make Medicare a leader in the efficiency and effectiveness of healthcare delivery for everybody.”

The Task Force’s plan also proposes substantial changes to the other side of the government ledger by reforming the tax code to make it more progressive, more pro-growth and to raise additional revenue. Rivlin encouraged Congress to “take the radical approach of starting over” from scratch, instead of “reviewing the current complexities of the tax code.” The Domenici-Rivlin reform only maintains a few essential add-ons and preferences to its clean-slate structure.

The result is a vastly fairer and simplified code that contains just two individual tax rates of 15 and 28 percent, reduces the top corporate rate to 28 percent, and taxes capital gains and dividends as ordinary income. Domenici and Rivlin would also phase out the exclusion for employer-provided health benefits that encourages businesses to provide lavish health benefits over additional monetary compensation. Additionally, the plan would transform the current deductions for mortgage interest and charitable contributions into 15-percent refundable credits. Rivlin emphasized that this would “[help] the middle class most, rather than giving benefits to the high end.”

In addition to the detailed structural reforms proposed by the Task Force, the budgetary changes that, without action, are scheduled to occur at the end of this year were also a topic of discussion. This lineup – known as the upcoming “fiscal cliff” – includes expiration of the “Bush” tax cuts, expiration of the Alternative Minimum Tax “patch,” across-the-board spending cuts (i.e., the sequester), expiration of extended unemployment insurance benefits, and expiration of the “doc fix.” Domenici and Rivlin stressed that, in tandem with the general need for a plan to reduce deficits, we must prevent the occurrence of this economic disaster, which the Congressional Budget Office recently estimated would likely cause a recession in the first half of 2013.

The committee members, along with Domenici and Rivlin, encouraged action as soon as possible because the widespread uncertainty generated by these pending policy changes is already causing economic damage. Due to the fact that realization of this fiscal cliff would be particularly harmful, it presents – and should be used – as an opportunity to set up significant deficit reduction. Rivlin called for “substitut[ing] a grand bargain” in place of current law and indicated that such a plan should cross party lines by containing both entitlement reforms and revenue increases.

Like Senator Domenici stated, “we cannot allow ideological purity to stand in the way of what is right for our country.”

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Economic Policy Project