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Gang of Six Plan

Friday July 22nd, 2011   •   Posted by Emily Skarbek at 6:55am PDT   •  

The latest effort coming out of Capitol Hill to reduce the debt and avoid default is called the “Gang of Six Plan”, named after its three Democrats and three Republican authors. The plan includes $500 billion in immediate “budget savings”, reductions in marginal income tax rates, and the abolition of the alternative minimum tax.

The plan would create three tax brackets with rates from 8% to 12%, 14% to 22%, and 23% to 29% — a move to fiscally more lucrative position on the Laffer curve. Also in the plan, cost changes to Medicare’s growth rate formula, $80 billion in Pentagon cuts, and $116 billion in entitlement health care cost savings. Notice the wording: “budget savings” and “cost savings” are not spending cuts. They are reductions in projected spending and lack any degree of credible enforcement over time. And that $80 billion in defense spending? Sounds good, but over what time frame? Defense spending this year alone was $712 billion.

Adam Smith’s insight into deficit finance and war spending is notable in this regard.

“Were the expence of war to be defrayed always by a revenue raised within the year, the taxes from which that extraordinary revenue was drawn would last no longer than the war….Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so” (WN 1776 V.3.51).

Moreover, consider the McConnell’s alternative proposition. Under his proposal, Obama would have the power to raise the borrowing limit by a total of $2.5 trillion, requiring three congressional votes on the issue before the 2012 general election. Ah, but the devil is in the details.

McConnell’s plan works out such that Obama could submit three requests for debt ceiling hikes — a $700 billion increase and two $900 billion increases. Each request the president makes would be accompanied by a list of *suggested* spending cuts that *on paper* exceed the debt increase. None of the cuts however, would actually need to be enacted in order for the President to raise the debt ceiling.

The way the plan would work in practice would allow most Republicans and some more conservative Democrats to vote against any debt ceiling hike. Obama could (likely) veto such resolutions. With a Congress unable to override the president’s veto’s – debt ceiling hikes will occur without the spending cuts and politicians would still be able to claim political credit for their respective positions with constituents. And to top it off, the “alternative plan” includes resolutions to set up a committee to find additional spending cuts — down the line.

In other words, politics as usual. Politicians are weaseling out plans to save their skins, drawing up resolutions that create a fiscal house of cards. Working together on Capitol Hill means coming up with some piece of legislation that will allow Congressmen from both sides of the aisle to get re-elected while spending continues to barrel out of control.

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July 2011