Clarifying Some Misunderstandings about the “Gang of Six” Plan

July 19, 2011 at 5:57 pm

Some of the early reporting on the deficit reduction plan that the Senate’s “Gang of Six” released today appears to have incorrectly or incompletely described two principal elements of the plan:  its reductions in health care programs and its revenue increases.

Some reports today have said that the Gang of Six agreed to expand its health care cuts by $117 billion to convince Senator Coburn to return to the Gang.  Other reports seem to have assumed that the $1 trillion in revenue that the Gang of Six plan would raise over the next 10 years is similar in amount to the $1 trillion in revenue that was purportedly part of the $4 trillion deficit reduction plan that the White House and Congressional leaders were discussing before Speaker Boehner pulled the plug on it 10 days ago.  Neither of these reports or assumptions is correct.

The Size of the “Gang’s” Health Care Cuts

The Gang of Six could not reach agreement on the size of reductions in health care entitlement programs (Medicare, Medicaid, CHIP, and various provisions of the health reform law).  As a result, the Gang’s documents show two different levels of cuts in these programs, with some members of the Gang supporting the lower level and some supporting the higher level.

Specifically, the plan calls for either $383 billion or $500 billion in cuts in these programs over ten years, with $298 billion of them earmarked to offset the costs of permanently fixing the flawed “sustainable growth rate” (SGR) provision of Medicare law that requires deep cuts in payment rates to physicians (which Congress has canceled each year to keep them from taking effect).

The $383 billion figure is close to the figure for this category of cuts in the Bowles-Simpson deficit reduction plan — as are most figures in the Gang of Six proposal.  Some news accounts reported that Senator Coburn rejoined the Gang in return for an additional $117 billion in health care cuts.  Those reports are inaccurate.  Instead, the Gang agreed to show both the lower number and the higher number that Coburn favors — and to agree to disagree on this issue. That’s why two figures, about $117 billion apart, appear throughout the Gang of Six’s documents.

The $1 Trillion in Increased Revenue

The Gang of Six plan calls for $1 trillion in higher revenues over ten years.  But the magnitude of any revenue increase or decrease depends on the baseline against which the change in revenues is measured.

The Gang of Six used the same revenue baseline concept as the Bowles-Simpson commission (and as President Obama’s 2012 budget and his April budget framework).  This is the so-called “plausible” baseline, which assumes the President and Congress make permanent the Bush tax cuts for people with incomes under $250,000, while letting the tax cuts for people over $250,000 expire on schedule at the end of 2012.

One trillion dollars in added revenue over the “plausible baseline” is very different from $1 trillion in added revenue relative to a baseline that assumes all of the Bush tax cuts become permanent — including those for people who make over $250,000 a year.  The $1 trillion in revenues in the $4 trillion deficit-reduction plan that Speaker Boehner walked away from used this lower revenue baseline.  Thus, the $1 trillion in revenue increases in that plan would not produce the same overall level of revenue as the $1 trillion in the Gang of Six plan.  Measured against the same baseline as the Gang of Six, Bowles-Simpson, and Obama budget, the failed $4 trillion plan would generate only about $300 billion in added revenue (because $700 billion in “savings” from letting the upper-income tax cuts expire was already in the baseline).

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More About Robert Greenstein

Robert Greenstein

Greenstein is the founder and President of the Center on Budget and Policy Priorities. You can follow him on Twitter @GreensteinCBPP.

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6 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. James E. #
    1

    What I noticed in the plan by the Gang of Six is what baseline will be used to calculate the reduction along with increase in revenue. In the end it will be based on what is agreed by the parties involved better known as the devil is in the detail. The S-B plan would have been a better option but both sides have have used this a framework toward what both sides wanted to achieve.

  2. Lehorn #
    2

    What exactly is “plausible base line”. Do they have a number or in this case, numbers?

  3. 3

    I have read before, via Ezra Klein, that Obama’s April plan included more revenue than the plan he was negotiating w/ Boehner – presumably because, as explained here, it was calculating additional revenue on top of the enhanced baseline. In the plan outline published on whitehouse.gov, however, I can’t see any evidence of that: the plan calls for $4 trillion in deficit reduction, with 1/4 (coming from increased revenue, and it proposes both letting the Bush cuts for the top 2% expire and instituting vaguely defined tax reform that would reduce tax expenditures. Since Bowles-Simpson style reform would render the Bush cuts moot, lowering all marginal rates while reducing expenditures, it’s not clear how sunsetting the Bush cuts for the top 2% and engaging in tax reform would interact. At least, it’s not clear in the outline published on the White House site. at http://goo.gl/5Lx14 : is there a more detailed outline available elsewhere?

  4. Faith #
    4

    I’m confused — how do the Bush tax cuts expire for $250,000 and over if the top tax rate is 29%? I suck at math — I need help here.

    • James E. #
      5

      The way the it is currently in place (until the end of 2012 when it is was originally to expire at the end of 2010) the top rate is 36%. If the Bush tax cut expired, the rate will revert to the Clinton rate which was 39.6% along with the elimination of the 10% bracket, and changes in the capital gains.

      Obama has decided let the top rate revert as planned while keeping the rate for other brackets in the same bracket.

      The question remains what will be the decided point of the tax rate or vague tax reform will result in the negotiation.

  5. K Anderson #
    6

    Thank you– Quite helpful-
    K-



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