Dr. Krause continued, "Here are the major points that will dominate the discussion in Congress and the media: Social Security, defense spending, the mortgage interest deduction, and the spending versus taxes debate. This will be interesting to watch, but at this point I'm skeptical about whether the two political parties will be able to work together. I think there are not enough moderates to carry the vote."
Social Security. The original Bowles/Simpson draft called for a 2 year increase in the full and early retirement ages. The plan also called for a lifting on the cap on earnings subject to the Social Security payroll tax. Krause said, "Democrats don't want to raise the retirement age and Republicans don't want to raise the payroll tax cap - I don't believe they will be able to come to a compromise."
Defense Spending. "The one area I think there might be support for reducing the deficit is in cutting defense spending. Both the Democrats and Republicans are likely to accept some minor reductions in military spending," Krause said. "While defense spending is only 20% of the federal budget, this could be an area where some funding can reduced - which will allow the politicians to tell their constituents that they have voted to reduce federal government spending."
Mortgage Interest Deduction. Dr. Krause said, "This is the most popular deduction for homeowners; plus you know that the real estate and home builders will lobby against the ending of this deduction. The elimination of the interest deduction would result in increased taxes collected, but I'm skeptical that this deduction will be eliminated. The good thing is that it might begin to move the conversation towards tax reform and simplification - but I think too many people benefit from this deduction and politicians won't have the stomach to eliminate it or other population deductions."
Spending Reductions versus Tax Increases. "This is the debate that has been occurring in Europe - how much of the deficit reduction should come from spending cuts and how much from tax increases? I believe the combination of expenditure cuts and tax increases need to be implemented so that our accumulated debt in the U.S. drops to about 60% of GDP - presently in the U.S. we are over 85% of GDP and heading higher," Krause said. "Bottom line; this will be interesting politics to watch, but I'm skeptical that the two parties will come to agreement. The bipartisan commission can't even agree on the date to have a vote!"