Proposal would reduce federal deficit with tax, Medicare reforms

Originally published on for the Scripps Howard Foundation Wire.

Pete Domenici, a former Republican senator from New Mexico, and Alice Rivlin, a former budget director under the Clinton administration, speak to the Senate about reforming Medicare and taxes. They proposed a bipartisan solution to the federal deficit. Photo by Emily Siner

WASHINGTON – The key to reducing the federal deficit lies in reducing Medicare spending and restructuring taxes to raise revenue, two budget experts told the Senate Committee on Finance on Monday.

Pete Domenici, a former Republican senator from New Mexico, and Alice Rivlin, a former budget director under the Clinton administration, proposed a bipartisan solution to the country’s deficit that Sen. Max Baucus, D-Mo., the committee chair, called “politically challenging.”

They urged the Senate to address the rising cost of Medicare by raising revenue because the government has already cut enough discretionary spending.

“You cannot fix the budget without fixing, in some way, reforming Medicare,” Domenici said. “Roughly 10,000 people are enrolling in Medicare every business day. These are unstoppable trends.”

They said the Senate must act fast. If Congress does not reduce the deficit by $1.2 trillion by the end of the year, extensive across-the-board cuts will occur at the beginning of 2013 – a self-imposed incentive to fix the deficit that was created as part of the budget negotiations in August.

Three separate tax cuts will expire at the end of the year, as well as the extension of benefits for the unemployed.

“Letting that all happen would be an admission that our government isn’t working properly,” Rivlin said.

The proposed budget plan would dramatically simplify income taxes and deductions. Income taxes would have two brackets, 15 and 28 percent, instead of the current six brackets, with rates ranging from 10 to 35 percent. The corporate tax rate would be 28 percent, instead of the current 35 percent.

Capital gains and dividends, however, would be taxed as ordinary income. Capital gains are currently taxed at 15 percent. Under the new plan, high-income individuals who earn most of their money in stocks or options would pay at a higher rate.

The tax plan is estimated to raise enough revenue to achieve the debt-reduction goal, according to written testimony Domenici and Rivlin submitted.

The other half of the proposal is to make Medicare more cost-effective by creating incentives for private, comprehensive health care plans to compete with traditional fee-for-service plans. The government’s contribution to private health care for seniors would be the cost of the second-least expensive plan in each area, meaning that private plans would have an incentive to lower their costs.

Sen. Kent Conrad, D-N.D., said one of the biggest challenges to reforming Medicare is preventing private plans from “cherry picking,” allowing only the youngest or healthiest seniors to enroll in their plans, shifting the cost of insurance to plans that don’t discriminate.

Both parts to the proposal show the “give and take” between parties that Domenici said is so important to finding a bipartisan solution.

“Under ordinary times, perhaps Alice, a Democrat, would not be calling for substantial changes to entitlement programs, and I, a Republican, would be against higher revenues,” he said. “But this is not a normal time, and we cannot let ideological purity stand in the way of what is right for our country.”

Sens. Orrin Hatch, R-Utah, and Olympia Snowe, R-Maine, criticized President Barack Obama’s lack of leadership in working with Congress to confront the impending budget crisis.

Domenici and Rivlin spoke on the behalf of the Bipartisan Policy Center, a D.C.-based think-tank.