Factbox: Deficit-cut panel eyes wide range of options

WASHINGTON Wed Sep 29, 2010 3:40am EDT

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WASHINGTON (Reuters) - A commission looking for ways to reduce the federal budget deficit and put the nation on a more sustainable fiscal footing is considering a number of controversial spending cuts and tax policy changes.

Here is a roundup of some of the approaches under study by the 18-member bipartisan panel set up in February by President Barack Obama. Its final report is due out on December 1. Almost all the ideas under consideration will be politically difficult.

* Social Security: Commission members have made clear the 75-year-old retirement program is on the table.

Comments made by Republican commission co-chairman Alan Simpson criticizing the program have angered a number of advocacy groups and put the commission on the defensive.

The commission is considering raising the eligibility age, which has been rising gradually and currently is set at 67 for those born after 1960. Some lawmakers have suggested raising the eligibility age to 70. They also could raise the eligibility age for early retirement, which is currently 62.

Other proposals include raising the cap on wages that are taxed for Social Security. The commission is also considering limiting benefits for upper-income retirees, a move some Social Security advocates fear could erode support for the program.

To win support for the plan, the commission is said to be looking at raising benefits for low-income retirees.

* Medicare: Tweaking the healthcare program for the elderly and poor by changing payment rates, formulas and the amounts doctors and hospitals are reimbursed could save money.

But lawmakers may be reluctant to tackle the issue again after a bruising partisan battle over some $500 billion in Medicare spending cuts that were included in the healthcare overhaul enacted into law this year.

Still, the panel could call for accelerating some of those spending cuts or ask for more means-testing to limit benefits for the wealthy.

* Budget procedure changes. Some on the panel, such as former Fed Vice Chairman Alice Rivlin may be advocating "voting on entitlements at five-year intervals," one analyst said.

Such a change would take regular increases in spending on Social Security, Medicare and Medicaid off "auto-pilot" and force Congress to regularly review the programs and whether their budgets are realistic.

* Mortgage interest deduction. The ability of home loan borrowers to deduct mortgage interest payments is hugely popular. Trying to eliminate it would be politically difficult, if not impossible.

Critics say the deduction distorts the real estate market; defenders say it is a vital part of the American dream of home ownership. Most industrialized nations have no such deduction.

The commission could recommend limiting the amount of the deduction, or restricting it tightly to a principal residence and not allowing it for a second home.

Another idea is to change the deduction into a tax credit in a way that would leave middle-class homeowners unharmed.

* Other tax breaks: The panel is looking at limiting other deductions, credits and preferences that riddle the tax code.

These so-called "tax expenditures," combined with the mortgage deduction, add up to about $1 trillion a year.

One item that has gotten attention is the so-called carried interest loophole. Financial fund managers now pay the 15 percent capital gains tax rate on much of their earnings.

It is unclear if the commission will address it, but a number of lawmakers want to force these managers to pay regular income tax rates. The top income tax rate is set to rise to 39.6 percent in January from the current rate of 35 percent.

* Other spending cuts: Democratic commission co-chairman Erskine Bowles has told the commission that 75 percent of the deficit reduction should come from spending cuts, while only 25 percent should come in the form of tax increases.

He wants to cap spending at 21 percent of gross domestic product. Government spending currently accounts for 24 percent of the economy.

* Defense spending: Republican Senator Tom Coburn, a member of the commission, outlined a number of areas where he saw wasteful defense spending and the commission's report will likely include some recommendations in this area.

The biggest question is whether the savings will be used for deficit reduction, or be returned to the Defense Department to help pay for the war in Afghanistan and continuing operations in Iraq.

* Value-added tax: The commission is said to be eyeing a new consumption tax or European-style value added tax that would be imposed at various stages of production of goods.

It would be politically unpopular because it would raise the price of goods. But such a tax would likely be offset by reductions in individual and corporate income taxes.

Such a tax would have some trade benefits for the United States because it would be removed on goods shipped overseas.

(Reporting by Donna Smith and Kevin Drawbaugh; Editing by Eric Walsh)

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