CHICAGO (Reuters) - A major overhaul of the U.S. tax code and steep cuts to social programs are needed to deal with mounting U.S. debt, according to the former co-chairs of a deficit panel put together by President Barack Obama, who never fully endorsed their plan.
Politicians from both sides of the aisle need to work together to prevent a full-blown debt crisis, Erskine Bowles, former chief of staff to Bill Clinton, and Alan Simpson, a former Republican senator, told a group of financial advisers in Chicago on Thursday.
"The fiscal path that America is on today is simply not sustainable," Bowles said at the Charles Schwab Corp (SCHW.N) Impact conference.
U.S. deficits have topped $1 trillion for each of the past four years and the country's debt has surpassed $16 trillion.
Bowles pointed to five areas where he said spending must be cut in order to get the deficit under control: healthcare, defense, the "inefficient" tax code, social security and interest on the national debt.
"If we do nothing and we breach this 'fiscal cliff' and we don't get an agreement immediately thereafter, you know what happens the next year, in 2013? We go back into recession," he said, referring to the year-end expiration of Bush-era tax cuts and the launch of automatic spending cuts.
The result would be a hit of about $600 billion to the U.S. economy next year, according to the nonpartisan Congressional Budget Office.
Bowles said he put the chances of a deal happening by the end of the year at around 33 percent.
He said that every dollar spent last year in the United States was on mandatory spending - Medicare, Medicaid, and Social Security - and interest on the debt, while every dollar spent on the wars in Iraq and Afghanistan, on national security, homeland security, education, and infrastructure, was borrowed.
"This is not a problem we can solely grow our way out of, it's not a problem we can solely tax our way out of, and ... it's not a thing we can solely cut our way out of," he said.
Both Bowles and Simpson bemoaned the fact that compromise has seemingly become a dirty word in politics. "If you can't learn to compromise on an issue without compromising yourself, you should never be in the legislature," said Simpson.
In 2010, the Simpson-Bowles panel called for a mix of spending cuts and tax reform to trim the debt by $4 trillion over a decade.
Obama did not embrace the plan and it never got off the ground, though the concept has received renewed attention as Congress gets closer to going over the fiscal cliff. The plan called for about $3 in spending cuts for every $1 in new revenue to achieve its goals.
Both Democrats and Republicans are in favor of extending the Bush tax cuts to lower and middle income Americans, but the president is in favor of letting them expire for the wealthiest 2 percent of the population.
However, Senate Republican leader Mitch McConnell warned on Thursday, "What we won't do is raise tax rates."
Editing by Jim Loney