Some Democrats on the congressional supercommittee are proposing a $2.3 trillion deficit-reduction plan with equal amounts of spending cuts and tax increases.

The Democratic proposal includes a so-called trigger that would raise $650 billion if the U.S. tax code isn’t revamped by Jan. 1, 2013, according to a document party members are circulating. Tax writers would receive instructions to cap individual tax rates at 35 percent, overhaul corporate taxation and maintain the progressivity currently in the code.

Democrats presented this offer to Republicans on Nov. 7 at a meeting at which Republican Pat Toomey of Pennsylvania outlined a proposal that included some net tax increases, according to a Republican aide and a Democratic aide familiar with the plans.

Democrats and Republicans on the 12-member committee remain hundreds of billions of dollars apart on tax revenue with less than two weeks remaining until the deadline to come up with a plan. Even with a fresh series of proposals this week, committee members said yesterday that they don’t have an agreement.

“We are at a bit of an impasse at the moment,” said Senator Jon Kyl, an Arizona Republican.

Democrats rejected Toomey’s proposal, which would reduce the top individual tax rate to 28 percent, saying that it would shift the tax burden away from high-income taxpayers.

“We have a big gap with respect to where we are on revenues,” supercommittee member Senator John Kerry, a Massachusetts Democrat, said yesterday.

The Republicans’ proposal “will not work. We’ve told them that very directly,” he said. “This is not complicated: They’ve got to put real revenue on the table in a way that helps us get the job done.”

At the same time, Republicans and some Democrats described the Toomey proposal as a significant step toward breaking Republicans’ no-tax-increase stance.

“Republicans have put revenues on the table,” said Senator Lamar Alexander of Tennessee, the No. 3 Republican in the chamber. “Democrats have put entitlements on the table. We need to put more of each on the table and get a result.”

Michael Steel, spokesman for House Speaker John Boehner, referred to comments made by Senator Richard Durbin of Illinois suggesting that the “core” of an agreement is emerging.

“Right now we are waiting for a response to what the second-ranking Democratic leader in the Senate called ‘a breakthrough,’ and we’ve seen nothing,” Steel said yesterday.

Reducing the Deficit

Under the outline of the Democratic document, the supercommittee would cut the federal budget deficit by $2.3 trillion over the next decade, with $1 trillion each coming from spending and revenue and $300 billion from interest savings.

The Democrats say the plan is a working draft, and it shows that Democrats and Republicans may be moving closer on revenue. In another proposal Democrats offered late last month, they had insisted on $1.3 trillion in additional tax revenue.

The revenue increases would start with what the document described as a $350 billion “down payment” of “miscellaneous revenue provisions.”

If Congress doesn’t agree to a tax-code overhaul, the trigger would generate $325 billion by limiting itemized deductions for top earners. The proposal refers to an idea floated by Harvard University professor Martin Feldstein, who said individuals shouldn’t be able to claim itemized deductions that provide benefits of more than 2 percent of their adjusted gross income.

The remaining $325 billion would come from a surcharge on individual income tax liability before credits. Details of the surtax weren’t included in the document.

The Democratic plan also would include $350 billion in cuts to Medicare, with $250 billion from providers and $100 billion from beneficiaries. Another $200 billion in cuts would come from other mandatory programs. The plan would include $400 billion in cuts to discretionary programs, with $200 billion from defense and $200 billion from non-defense programs.

According to the document, the cuts in entitlement programs would take effect only upon enactment of a tax code overhaul or implementation of the trigger.

Republicans have proposed reducing the budget deficit by revamping the tax code. Lawmakers are trying to break a partisan impasse over tax increases in exchange for spending cuts as the supercommittee seeks to cut at least $1.2 trillion from the budget deficit.

Additional Revenue

Toomey’s proposal would generate about $300 billion in additional tax revenue, when compared with the revenue that would be raised by extending the tax cuts scheduled to expire in 2012. In addition, Republicans propose generating several hundred billion dollars from non-tax revenue sources such as asset sales.

A Republican aide said the Democratic proposal was a sign that the two sides aren’t close and said the Democratic tax proposal wouldn’t generate enough economic growth.

According to Republicans, their proposal would cut about $1.2 trillion from the deficit over 10 years, with about $700 billion of that amount coming from spending reductions.

Supercommittee co-chairwoman Patty Murray, a senator from Washington, said after meeting with fellow Democrats on the panel that members of her party are waiting for Republicans “to bring us back a fair and balanced proposal.”

“They clearly understand that the proposal that was given to some of our members was not fair and balanced,” she told reporters.

Congress set up the bipartisan panel in August in legislation that resolved a standoff over raising the federal debt limit. The supercommittee was instructed to create a 10- year plan to cut at least $1.5 trillion from the budget deficit by Nov. 23.

If the panel can reach an agreement, its proposal would be subject to up-or-down votes in the House and Senate. The law requires automatic, across-the-board spending cuts in 2013 if Congress doesn’t pass the plan by Dec. 23.

Bloomberg News


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