The One Penny Solution

Sugar Beet Harvesting Pile

2-7-13: Washington is in a swivet these days over across-the-board cuts March 1 that threaten to wreak havoc with domestic agencies and military readiness. But the reality is that if every American were to get one penny less on each dollar of government benefits and pay one penny more on each dollar of taxes, the budget improvement would be almost the same.

Indeed, based on new estimates this week, just a 1 percent increase in revenues and a 1 percent cut in spending would add up to more than $800 billion over 10 years — roughly the same as the almost $790 billion in appropriations cuts in the March sequester.

A 1 percent reduction is only one possibility. But it suits two political forces that seem to be merging.

The first is the mounting frustration among Republicans over the lack of progress on the debt — a frustration that feeds into the desire seen in the House for more streamlined solutions that can be explained to voters. The second is the message of President Barack Obama’s inaugural address, which celebrated collective action — “common effort and common purpose” — to meet the challenges facing the nation.

The politics and math serve two purposes: establish a spirit of shared sacrifice and reduce the deficit challenge to more workable proportions.

In this case, for example, it could be a 1 percent reset with no exceptions for Social Security or those earning less than $250,000. Abraham Lincoln is already the rage. Why not at least explore putting his penny to work to reach a larger deal?

“The danger is you are lighting every fuse,” said former Sen. Alan Simpson (R-Wyo.). “But it’s a citizens’ approach to getting them off their [asses]. What we have now is madness. And the citizens of America will have to solve this if the politicians won’t.”

“It’s a very interesting idea and candidly, not one I had thought of,” said Erskine Bowles, who helped to lead the presidential debt commission with Simpson in 2010. “As a businessman, I don’t typically like an across-the-board approach, but I like that this is spread out to cover entitlement spending as well.”

New numbers from the Congressional Budget Office report Tuesday provide some framework.

CBO shows deficits falling over the next few years but then stubbornly rising in the latter part of the decade as more baby boomers retire and interest payments balloon on the accumulated debt.

Caught most in the middle is the Pentagon. Between the March sequester and the continuing resolution, or CR, the Joint Chiefs of Staff are trapped in a situation that poses a real threat to military readiness. But CBO shows that by 2020, interest payments on the debt will have overtaken total defense spending, even with an allowance for

House Republicans say they would like to try to bring the whole budget into balance by 2023. But CBO’s numbers suggest that would take $4 trillion in new deficit reduction on top of the March across-the-board cuts or $5 trillion altogether in just 10 years.

The risk for the GOP is that by overreaching, it ends up missing chances — like in the farm bill debate last year — to make real incremental progress.

A middle ground might be to at least stop digging the hole deeper. That is: Can Congress and the White House agree to balance revenue and spending to cover all costs but for the interest owed on the debt?

Here CBO’s baseline, with some adjustments, shows a roughly $3 trillion gap between what the government will collect in revenues and spend out over the next 10years.

These numbers assume that Medicare continues to pay physicians at current rates and the across-the-board cuts in March do not take place. At the same time, the spending totals allow for $1.1 trillion in future outlays for overseas contingency operations — a cost CBO insists on including but that Obama has promised to reduce after a decade of war.

Breaking down the numbers further shows how the 1 percent across-the-board option could make the math work for a potential compromise building on what Obama has already put on the table in talks with Speaker John Boehner (R-Ohio).

On top of the 2011 debt accords, Obama has proposed to cut appropriations by another $200 billion, coming from defense and domestic programs alike. Together with the $800 billion from the one penny concept, that narrows the gap to $2 trillion.

Here the White House says the president’s last offer included about $600 billion in savings from health care and nutrition programs, as well as government subsidies, such as payments to farmers. In turn, Obama asked for about $600billion in matching revenues — a big bone of contention for Republicans. But the president is said to still be willing to throw in a far-reaching consumer price index change in which Senate Minority Leader Mitch McConnell (R-Ky.) wants to alter the way inflation adjustments are made for both government benefits and the Tax Code.

Altogether, these proposals could reduce the initial $3 trillion gap to about $700 billion. Here CBO’s report is also relevant.

CBO includes a policy option that would cut its own OCO baseline in half and save about $580 billion. If that were applied against the remaining $700 billion, the two sides would be within striking distance of the $3 trillion target.

For sure, finalizing the balance between revenues and spending reductions would still be contentious. Actually living with the numbers will require countless hard decisions.

But it might all begin with some across-the-board approach like this one: just a penny on the dollar.

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