“A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president's bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest….
The budget gain would be substantial. My colleague Daniel Feenberg of the National Bureau of Economic Research and I have estimated that capping an individual's benefit from tax expenditures at 2 percent of adjusted gross income would reduce the federal deficit in 2011 by $262 billion, or about 1.7 percent of gross domestic product.”
Bottom line: Martin Feldstein, former chairman of the Council of Economic Advisers to President Ronald Reagan and advisor to John McCain during the 2008 presidential election, endorses the Bowles-Simpson task force’s over-arching strategy. It has concluded that new revenues sources, if not higher tax rates, should make up a substantial portion of the effort to reduce the U.S. federal deficit.
Feldstein’s proposal to cap all individual benefits from tax expenditures (income tax deductions for mortgage interest and education costs, and employer payments for health insurance) at 2% of gross incomes, he argues, could eliminate more than a third of the deficit. Sure, they would be politically difficult. However, Feldstein insists that they would increase revenue without reducing incentives to work, save or invest.
Most important, another eminent conservative Republican has abandoned Santa: growth and spending cuts will not be enough to right America’s damning chronic federal deficit.
Yesterday’s temporary tax cut compromise may nudge the economy toward further short term growth and ends Obama’s oft-stated opposition to extending “Bush’s tax cut for the rich.” Nevertheless, the new Congress and the President will have to turn to the Bowles-Simpson deficit reduction package in the New Year. Thanks to Feldstein and other conservatives, there will be many Republicans ready to compromise rather than hold their breath for another two years.