Debt Ceiling Slows Action on Deficit Reduction

June 7, 2011

According to officials in the administration, the Treasury Department has no immediate plans to tackle tax reform until the debit limit is resolved, causing more chaos among lawmakers who can not reach an agreement on raising the debit ceiling limit let alone the deficit.

Manal Corwin, the deputy assistant secretary for international affairs at the Treasury Department, told a tax conference that corporate tax reform remains an administration priority—but apparently few decisions have been made about how that reform could take shape. She went on to say that Treasury Secretary Timothy Geithner wants Congress to reach a deal on raising the debt limit before moving forward on overall tax reform.

On Capitol Hill, a wide range of business leaders have been testifying on the tax code in recent weeks. Overwhelmingly, the corporate witnesses have said the U.S. must reconsider the current worldwide system of taxation and consider changing the tax rate assessed on profits made abroad and repatriated to the United States.

A primary issue looming over the debate is how to make the reform revenue neutral. Corwin agreed that the overall goal should be to lower the statutory rate and broaden the tax base but said that cannot be done without causing some taxpayers to take on a greater burden.

Corwin acknowledged that if the deficit is going to be revenue neutral, by definition, there are going to be some winners and some losers relative to current law. Clearly, this is of concern for businesses that operate as pass-through entities that worry that they could lose out in a corporate tax overhaul. These business owners pay their taxes at the individual rate and are concerned that they would give up deductions in a corporate rewrite without benefiting from lower rates.

Meanwhile, Senate Democrats have been attacking Republican reform proposals to Medicare, while House Republicans have been urging leadership to back their plan for cutting the deficit, including $380 billion in spending cuts in fiscal year 2012.

Vice President Joe Biden is working with six lawmakers negotiating a deal that would reduce the deficit and win enough support in Congress to raise the debt ceiling. The Biden group is expected to meet for the fifth time on Thursday.

However, five Democratic senators sent a letter to Biden urging him not to include the Republicans Medicare proposal. The group includes Sens. Bill Nelson (D-Fla.), Claire McCaskill (D-Mo.), Sherrod Brown (D-Ohio), and Jon Tester (D-Mont.) who stated, “As the working group moves beyond areas of consensus and into parts of the budget that will require the toughest choices, we wish to identify in advance one proposal that we cannot support in any form—the House-passed plan to dismantle Medicare.”

On the House side, over 100 House conservatives wrote to House Speaker John Boehner, (R-Ohio), calling on him to adopt their “cut, cap and balance” proposal. Their plan calls for cutting $380 billion in discretionary spending in fiscal 2012, which they claim would halve the deficit; impose caps on spending that would ramp it down to 18 percent of gross domestic product; and passage by the House and Senate of a balanced budget amendment to the Constitution.

In the fiscal House 2012 budget resolution—authored by House Budget Chairman Paul Ryan (R-Wis.)—the republican proposed changing Medicare so recipients would be given a subsidy to purchase private health insurance. That would apply to those younger than 55 and does not affect those in and near retirement in any way. When younger workers become eligible for Medicare, they will be able to choose from a list of guaranteed coverage options, similar to the kind of choices in the plans that members of Congress enjoy today. Medicare would then provide a payment to subsidize the cost of the plan. Republicans have argued that health care spending must be part of any solution to truly fix the problem.