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Clarifying Some Misunderstandings about the “Gang of Six” Plan

July 19, 2011 at 5:57 PM

Some of the early reporting on the deficit reduction plan that the Senate's "Gang of Six" released today appears to have incorrectly or incompletely described two principal elements of the plan: its reductions in health care programs and its revenue increases.

Some reports today have said that the Gang of Six agreed to expand its health care cuts by $117 billion to convince Senator Coburn to return to the Gang. Other reports seem to have assumed that the $1 trillion in revenue that the Gang of Six plan would raise over the next 10 years is similar in amount to the $1 trillion in revenue that was purportedly part of the $4 trillion deficit reduction plan that the White House and Congressional leaders were discussing before Speaker Boehner pulled the plug on it 10 days ago. Neither of these reports or assumptions is correct.

The Size of the "Gang's" Health Care Cuts

The Gang of Six could not reach agreement on the size of reductions in health care entitlement programs (Medicare, Medicaid, CHIP, and various provisions of the health reform law). As a result, the Gang's documents show two different levels of cuts in these programs, with some members of the Gang supporting the lower level and some supporting the higher level.

Specifically, the plan calls for either $383 billion or $500 billion in cuts in these programs over ten years, with $298 billion of them earmarked to offset the costs of permanently fixing the flawed "sustainable growth rate" (SGR) provision of Medicare law that requires deep cuts in payment rates to physicians (which Congress has canceled each year to keep them from taking effect).

The $383 billion figure is close to the figure for this category of cuts in the Bowles-Simpson deficit reduction plan -- as are most figures in the Gang of Six proposal. Some news accounts reported that Senator Coburn rejoined the Gang in return for an additional $117 billion in health care cuts. Those reports are inaccurate. Instead, the Gang agreed to show both the lower number and the higher number that Coburn favors -- and to agree to disagree on this issue. That's why two figures, about $117 billion apart, appear throughout the Gang of Six's documents.

The $1 Trillion in Increased Revenue

The Gang of Six plan calls for $1 trillion in higher revenues over ten years. But the magnitude of any revenue increase or decrease depends on the baseline against which the change in revenues is measured.

The Gang of Six used the same revenue baseline concept as the Bowles-Simpson commission (and as President Obama's 2012 budget and his April budget framework). This is the so-called "plausible" baseline, which assumes the President and Congress make permanent the Bush tax cuts for people with incomes under $250,000, while letting the tax cuts for people over $250,000 expire on schedule at the end of 2012.

One trillion dollars in added revenue over the "plausible baseline" is very different from $1 trillion in added revenue relative to a baseline that assumes all of the Bush tax cuts become permanent -- including those for people who make over $250,000 a year. The $1 trillion in revenues in the $4 trillion deficit-reduction plan that Speaker Boehner walked away from used this lower revenue baseline. Thus, the $1 trillion in revenue increases in that plan would not produce the same overall level of revenue as the $1 trillion in the Gang of Six plan. Measured against the same baseline as the Gang of Six, Bowles-Simpson, and Obama budget, the failed $4 trillion plan would generate only about $300 billion in added revenue (because $700 billion in "savings" from letting the upper-income tax cuts expire was already in the baseline).