Confronting the Looming Fiscal Crisis

June 20, 2012

The Senate Finance Committee met yesterday to listen to an updated plan from former Senator Pete Domenici and Dr. Alice Rivlin of the Bipartisan Policy Center (BPC) on how to keep the U.S. economy from confronting the “fiscal cliff.” The plan, originally drafted in November 2010, takes a new approach to reforming Medicare and the federal tax code. The authors of the plan deem these two institutions crucial to stabilizing the national debt. According to Dr. Rivlin, the Medicare reform reduces the rate of growth of that program in a sensible way, while the tax reform plan provides a fairer, simpler federal tax code that raises more revenue in the future. How does the plan accomplish this?

The BPC Tax Reform Plan is essentially a complete overhaul of the current federal tax system. It establishes a two-bracket income tax with rates of 15 percent and 28 percent. The 28 percent rate will apply approximately to income above $51,000 for single earners and $102,000 for couples. The corporate tax will also be lowered from its current level of 35 percent to 28 percent. Equalizing the top income bracket with the corporate tax will remove the incentives for changing the way business is accounted for due to tax reasons, according to the BPC.

The BPC’s Medicare reform implements a more market-based approach for beneficiaries where they have the option of choosing among private healthcare plans or a traditional fee-for-service Medicare plan. The private plans that participate in this marketplace would be required toaccept all applicants and provide benefits that have at least the same value as fee-for-service Medicare. Private companies would help to promote a competitive price for health care services, and the federal contribution in each marketarea would be tied to the cost of the second-least expensive approved private plan or fee-for-service Medicare.

You can read more about how these reforms would be implemented in Senator Domenici and Dr. Rivlin’s testimony, here.

Over the coming months, members of Congress will debate over whether to implement these reforms or other reforms as the sequester, or forced budget cuts agreed to in last August’s debt ceiling deal, is scheduled to go into effect on January 2nd, 2013. Any chosen path requires that significant cuts be made to government spending, but we hope that Congress will handle America’s tax dollars efficiently, and choose a plan over an ultimatum.

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