Cut. Slash. Reform.

The co-chairs of the president's deficit-reduction commission issued a report yesterday with more than 50 proposals designed to cut nearly $4 trillion from the federal deficit over the next decade.

Here are a few of its major selling points. 

1. Taxes
A big misconception about the recent deficits is that they've been entirely caused by runaway spending. They haven't. Lost tax revenue -- a function of tax cuts from the stimulus package and income lost to the recession -- accounts for the majority of the hole.

The commission addresses this reality in a pragmatic way. It proposes raising tax revenue -- almost $1 trillion over the next decade -- by dramatically lowering tax rates, while reducing or eliminating tax deductions. Here are a few different scenarios:


Bottom Tax Bracket

Middle Tax Bracket

Top Tax Bracket

Corporate Tax Rate

Current 2010 tax rates





Scheduled 2011 tax rates if Bush tax cuts allowed to expire





Proposed tax rates if all deductions eliminated





Tax rates if child tax credit and earned income tax credit kept





Tax rates with child, earned income, reformed deduction for mortgage interest and health insurance, 80% of current deduction on retirement contributions, and tax corporations only on domestically earned income





Tax rates if child, earned income, mortgage, health, retirement deductions kept, and tax corporations only on domestically earned income





Source: President's Budget Commission.

If you pay mortgage interest, get employer-provided health care, and make 401(k) contributions, that's fine and great, but you wouldn't be able to deduct them from your taxes under the most extreme proposal. To make up for it, some marginal tax rates would be cut in half.

This is, I think, the most sensible way to engage in much-needed tax reform: Broaden the tax base by axing loopholes and deductions, but lower the tax rate in the process. It's a flatter, fairer tax, and it raises a ton more revenue. People would put up with that.

2. Defense spending
Earlier this year, the Pentagon proposed cutting $100 billion in wasteful spending from its budget over the next five years, but plowing that money back into other defense projects (a fascinating form of "savings" calculus).

The president's commission says no -- just cut $100 billion and be done with it.

A few areas it reckons can be slashed (with annual savings by 2015):

  1. Freeze noncombat military pay at 2011 levels for 3 years ($9.2 billion).
  2. Reduce procurement by 15% ($20 billion).
  3. Reduce overseas bases by one-third ($8.5 billion).
  4. Double proposed cuts to contractors ($5.4 billion).

This would be a rare jab to companies like Lockheed Martin (NYSE: LMT), Raytheon (NYSE: RTN), and Boeing (NYSE: BA), but that's reality. Defense makes up nearly 20% of federal spending. It's hard to have a serious discussion about deficit reduction without bringing it into the mix.

3. Social Security & Medicare
The commission proposes reducing Social Security benefits for wealthier workers, and raising the maximum level of wages subject to Social Security taxes, both phased in incrementally until 2050. It would also reconfigure how cost-of-living adjustments are calculated, and increase the retirement age to 68 by 2050 and 69 by 2075, while allowing earlier retirement for those with physically demanding jobs.

These might not seem like draconian cuts. And they're not. But Social Security doesn't need to be shaken upside-down to become fiscally solvent. A few fairly mild tweaks initiated over several decades, and the program becomes permanently viable.

Medicare is by far the bigger problem. The commission's proposal for overhauling health care is meaty, but it boils down to a few broad ideas:

  1. Pay doctors and providers less.
  2. Overhaul the fee-for-service system.
  3. Figure out tort reform -- reduce the cost of defensive medicine.
  4. Increase cost-sharing by broadening premiums, making patients more cost-conscious.
  5. Require pharmaceutical companies to provide rebates on name-brand drugs as part of Medicare Part D.

These proposals will be shocks for both doctors and companies like Pfizer (NYSE: PFE) and Merck (NYSE: MRK). But they address the heart of Medicare's flaw -- that it pays for too much care requested by patients and providers who couldn't care less about cost.

4. Miscellaneous fat
In the long term, the budget deficit is about rising health-care costs and nothing else. Blogger Kevin Drum correctly writes: "Any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on health care."

But there are folds of fat to cut over the medium run. The commission found several areas of non-defense discretionary spending that can be deep-sixed, including (with annual savings by 2015):

  • Reduce unnecessary printing costs ($400 million).
  • Reduce Congressional and White House budgets by 15% ($800 million).
  • Reduce 250,000 nondefense contractors ($18.4 billion).
  • Eliminate funding for commercial spaceflight ($1.2 billion).
  • Sell excess federal property ($1 billion).

(While you're busy picking your chin up off the floor from waste in printing costs, here's another fun fact: The Washington State Employment Security Department just announced that it'll save $115,000 a year by changing the color of its mailing envelopes from gold to white.)

Just get it done
"The problem is real -- the solution is painful -- there's no easy way out -- everything must be on the table -- and Washington must lead," says the commission.

That last part, leadership, is the biggest impediment to getting any of this done. The commission's proposals can bring long-term deficits back to sustainable levels. The question is, are they politically feasible for politicians whose definition of long-term is the time between now and the next election?

You tell me.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.