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6 senators push bipartisan plan to cut deficit

The bipartisan "Gang of Six" senators on Tuesday offered a major plan to cut the deficit by almost $4 trillion over the coming decade, but whether it can break through the budget debate will depend on whether Republican lawmakers can find a way to endorse well over $1 trillion in new tax revenues reaped as Congress overhauls the loophole-choked U.S. tax code.

The plan would also repeal a new long-term care program established under last year's health overhaul and force an additional $500 billion in cuts from federal health care programs over the upcoming decade, according to documents provided to senators but not publicly released.

It also appears that the revenue increases are significantly higher than advertised by plan proponents because the measure assumes that the more than $1 trillion cost of repealing the alternative minimum tax over the coming decade will be offset by curbing tax breaks as tax reform is debated. The minimum tax was enacted in 1969 to make sure taxpayers pay at least some income tax, but it was never indexed for inflation it and now threatens more than 20 million tax filers with big tax increases unless extended next year.

The Gang of Six plan is separate from a politically freighted effort to lift the nation's borrowing cap and avoid a first-ever default on U.S. obligations. President Barack Obama and Capitol Hill Republicans, however, have failed to reach an accord on what kind of spending cuts to pair with any increase in the borrowing cap.

The six senators are Tom Coburn, R-Okla., Mike Crapo, R-Idaho, Saxby Chambliss, R-Ga., Kent Conrad, D-N.D., Mark Warner, D-Va., and Dick Durbin, D-Ill.

Their plan calls for an immediate $500 billion "down payment" on cutting the deficit as the starting point toward cuts of more than $4 trillion over the coming decade that would be finalized in a second piece of legislation. Most of those savings would come from four years of caps imposed on the day-to-day budgets of Cabinet agencies set by the annual appropriations bills.

It would also curb the growth of Social Security benefits by moving to a lower inflation adjustment for annual cost-of-living updates.

Depending on how one keeps score, the measure would save $3.7 trillion to $4.7 trillion over the coming decade. The lower figure is measured against a lower spending "baseline" based on a fiscal 2011 budget law enacted earlier this year. But if measured against Obama's request for the current 2011 budget year — the standard used by Obama's deficit commission last year — the plan would save the higher figure.

The tax reform outline would set up three income tax rates — a bottom rate of 8-12 percent; a middle rate of 14-22 percent; and a top rate of 23-29 percent — to replace the current system that has a bottom rate of 10 percent with five additional rates, topping out at 35 percent.

It would reduce but not eliminate tax breaks on mortgage interest, higher-cost health plans, charitable deductions, retirement savings like individual retirement accounts and tax-free savings accounts known as 401(k)s and tax credits for families with children.

Like the president's deficit commission, the Senate group's plan calls for a fundamental overhaul of the tax code that would slash special tax preferences and deductions as a way to lower tax rates — along the lines of the 1986 tax reform measure signed into law by President Ronald Reagan. It would skim more than $1 trillion of the revenue to reduce the deficit and, advocates say, spur the economy and further fill federal coffers because of growth.

Further complicating matters is the fact that the Bush-era tax cuts expire next year. According to the Congressional Budget Office, extending the Bush cuts amounts to a further tax cut, but Republicans have long insisted that extending the Bush tax cuts and maintaining rates at current levels is simply current policy.

Relative to CBO estimates, therefore, the Gang of Six plan would provide a $1.5 trillion tax cut over 10 years; but measured against current tax policies, it's a tax increase exceeding $2 trillion under Congressional Budget Office estimates.

The plan assumes that the taxes paid on large estates would revert to 2009 levels rather than follow a more generous estate tax cut plan passed last year.

The measure would ensure that both domestic programs and the Pentagon budget absorb cost cuts.

The plan wouldn't produce a balanced budget but would reduce deficits as a share of the size of the economy down to 3 percent by 2014 and down to 2 percent by 2019, levels that would stabilize the debt and ensure that it doesn't swamp the economy by forcing up interest rates and crowding out investment.

The measure also calls for overhauling programs like Medicare, Social Security and farm subsidies. The details of the changes would be left to congressional committees to draw up in a manner similar to the existing budget process.

Much of the responsibility would fall to the powerful Finance Committee, which has sweeping responsibility for tax policy and health care programs such as Medicare. The panel would be directed to find savings from other federal health care programs to cover the $300 billion cost of making sure the fees doctors receive under Medicare aren't cut under an outdated 1997 budget law. It would also have to come up with another $200 billion in health savings to devote to defraying the deficit.

In addition, the Armed Services Committee would be assigned $80 billion in savings, mostly from cuts to military retirement and health care accounts, but the Agriculture Committee would only have to find $11 billion over 10 years from farm subsidies. Conrad and Chambliss are strong supporters of farm programs.

The plan also envisions overhauling laws governing medical malpractice to generate further savings from the health care system.

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