Scenarios: Possible ways to balance the budget

WASHINGTON (Reuters) - President Barack Obama's fiscal commission meets for the first time on Tuesday to consider ways to bring the United States' stubborn budget deficits under control.

All options are on the table, the commission's co-chairs say, and few of them are likely to be palatable. The commission will probably recommend a combination of tax increases and spending cuts, experts say, as relying on either approach by itself would result in drastic changes.

The consequences of relying on spending cuts or tax increases alone were laid out in stark detail earlier this year in "Choosing our Fiscal Future," a report issued by the National Research Council and the National Academy of Public Administration.

CUT SPENDING, DON'T RAISE TAXES

Policymakers would have to dramatically slash spending if they wish to keep taxes at historic averages.

The retirement age would have to be raised to 68 by 2050 from 65 and benefit payments would have to be reduced substantially. The poorest recipients would get $871 per month in 2010 dollars, 25 percent less than they get now, while the wealthiest would get $1,238 per month, a 60 percent reduction.

Defense spending would have to be cut 20 percent by 2019 and held at that level. This would mean that the Pentagon would not be able to develop new weapons systems and would not have the capability to fight a war the size and duration of the Afghanistan conflict.

Other domestic spending would have to be cut 20 percent as well. This would reduce highway construction, agricultural subsidies, trade promotion and other business-development programs. The federal government would hand over responsibility for education and social-service programs, like unemployment insurance, to the states.

KEEP BENEFITS INTACT

Benefits programs like Medicare and Social Security are projected to consume an ever-larger portion of the budget as millions of baby boomers retire over the coming decade.

In order to keep benefits and spending programs at current levels, taxes would have to be raised dramatically.

U.S. government expenditures could eventually account for half of the entire economy, along the lines of Sweden or France.

U.S. residents would see their tax bills rise by an average of 33 percent over the coming decade, which would result in an 8.6 percent decrease in after-tax income.

By 2050, the top personal income-tax rate would be 50 percent, up from 35 percent now.

Payroll taxes for Medicare and Social Security would double.

VAT TAX?

The United States would also have to add a value-added tax, or VAT, to provide additional revenue.

The White House has repeatedly said VAT is not under consideration by Obama. But the commission has wide leeway to make recommendations.

In an interview with CNBC last week, Obama said the VAT is something that has worked for other countries but would be novel for the United States. He said he wanted to "get a better picture of what our options are."

Alternatively, the government could raise the additional revenue by revamping the tax code. Homeowners would not be able to deduct the interest they pay on their mortgages, and workers would have to pay taxes on a larger portion of their healthcare benefits. Taxpayers also would not be able to itemize other deductions.

This approach would forgo the need for a VAT, but it still would lead to net tax increases. Consumers' after-tax income would decrease by 7.4 percent in 2020, the report said.

(Editing by Mohammad Zargham)