It was back in January, nearly a year ago, after the Congressional Budget Office released its 2010 budget when we called for the U.S. to adopt a Deficit Manifesto.  This called for lawmakers to increase revenues, decrease projected spending, or enact some combination of the two.  At the time, the federal budget was expected to show a deficit of $1.35 trillion or a whopping 9.2% of GDP.  “The Moment of Truth” is being released by the White House deficit commission and the promise is to slash the deficits down to a manageable level.

We now have a post-mid-term election Congress that has a much different mix than just a few weeks ago.  Change is on the way, or a reworking of change.  We want to warn here that this is a first effort that is likely to face many changes and much opposition along the way before you bank on this too much as a wild success.  When that CBO data came out it was expected to be slightly smaller than the 2009 deficit, but it was expected to be the second largest since World War II as a share of the economy as a whole.

Lastly, the then-CBO projections were for deficits to average about $600 billion annually from 2011 through 2020.  This is unsustainable.  Enter the deficit panel.  This may be the first start of good news for the future generations of America in more than a decade.  America has been addicted to tax cuts, addicted to stimulus, and addicted to spending.  Unless we want to turn our children into serfs or unless we want to create hyperinflation by printing about $20 trillion down the road to pay off the national debt, this is the price we all have to pay.

The deficit commission is coming out and the tax and spending structures are going to be changed if these measure are actually enacted.  At least, we are assuming so if it can manage to pass through Congress.  There are still some cuts here and some balancing acts.

Corporate tax rates will drop to a single rate between 23% to 29% proposed, under the current peak of 35%.  The commission admits that the country’s competitive position in a global economy cannot be successful without a different tax structure.  To compensate for lower corporate rates, the panel is recommending eliminating all other industry specific subsidies.

For individuals, the deficit commission will recommend a simplified tax code with bands of 12%, 22% and 28%. It is also recommending that taxes on capital gains and dividends would fall into the same rates rather than having a separate class of taxation.

Another deduction is going to be proposed, and that is a cap on the limits of homeowner interest deductions.  That will also only apply to primary residences.  Home equity loans will no longer have tax deductible features.  The cap will end at $500,000 mortgages.

The goal from the commission here is to issue a report that could lower Uncle Sam’s budget deficit down to to 3% of GDP by 2015.  It will require 14 of the 18 to vote in favor for Congress to begin a vote.  in short, today’s propsal is a non-binding proposal and it may not ever see the light of day.

More specific plans are calling for a cut of 200,000 federal government jobs by the year 2020.  Defense spending will also have to see cuts.  Medicare, Medicaid, and Social Security ages are also set to rise (to 68 by 2050 and 69 by 2075).  A national gasoline tax will also be imposed if this proposal comes into play.

If this works as planned, some $4 trillion in deficit reductions can be seen through 2020 and the deficit will fall to roughly 2.3% of GDP by 2015.  There is also a condition included here in the proposal that none of the tax changes can occur until the specific spending cuts are in place.

This is a start.  Just a start.  We are not going to interpret as anything other than a start.  After the lobbyists get their feet in the doors and after those in Congress make their own negotiations, then you may get an idea of what the deficit cuts may really look like.  Making cuts and changing taxes will create many winners and many losers in this effort.

Whether all of the specifics today are good or bad is one argument.  It is a start.  The start also needs to be finished, with more spending cuts to come down the road.

The Deficit Manifesto has arrived.  At least the first chapter, at any rate.  Now it is time to prevent further QE2 efforts.

There must be more than just some support for the first effort here.  All 30 Dow Jones Industrial Average components are higher after the open this Wednesday.

JON C. OGG

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