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1 July 29, 2011 The Capitol Grill . We have arrived at the sad precipi ce of the Treasury’s stated deadl ine of August 2 nd , when available sources of funding are reportedly exhausted, other than from raising the debt ceiling. Both parties continue to propose deficit reducti on plans that are unlikely to be agreed to by the other (or even their own). The Treasury has ~$1 trillion in assets that it could sell (including $420 bn in gold, $370 bn in student loans and $85 bn in mortg age backed securities) to delay a default. The Treasury could also prioritize payments to bondhol ders, social security recipients, etc. However, there are market-impact, liquidity and feasibility issues that have to be overcome first (see page 3 for details on payment prioritization and the Treasury’s view of asset sale risks). More importantly, asset sales and prioritization are a temporary fix; some combina tion of markets, rating agencies and unpaid entitlement recipients/vendors will likely force both parties back to the Capitol Grill shown below, where some tough choices will have to be made. In the near term, a small, less ambitiou s deficit reduction / debt ceili ng increase is all Congress may have time for (let’s at least hope for that ). But even if a smaller deal is passed, there wi ll be a lot THE CAPITOL GRILL E. CAPITOL ST, NE AND 1ST ST WASHINGTON, DC 20002 No c redit card s acc ep ted withou t def icit reduction pla n sufficie nt to stabilize debt ratios at ~70 % o f GDP by 2021 ( see next page). The CBO Baselin e st abilizes t he debt ratio, bu t requires $5 trillion le ss in def icits over 10 years compared to the CBO Alternati ve Case, which assumes a con tinuation of most current policie s. Congress must wash hands bef ore return ing to work Pr ime Spending Cuts, billions of d olla rs ov er 10 years Free ze di sc re ti on ar y s pe ndin g a t 2011 le vel s 1, 3 95 Reduce growth in non-defe nse discretiona ry (discr.) spending by 1% a year 327 Freeze non-d ef ense dis cr. sp endi ng at 20 11 lev els 642 Red uce non -defense dis cr. spendin g by 1% a year 932 Freeze no n- de f en se d is cr . s pe nd in g un til 2015 406 Red uce grow th in de fen se spendi ng by 1% a year 286 Freeze def ense spending at 2011 level 611 Reduce def ense spending by 1% a year 862 Cha nge i nf lat ion in de xa tion fo r Soc ia l Sec urity 112 Change Medicare e lig ibility ag e to 67 125 All ow Medicare doctor reimbu rsement cut s 24 9 Change Medicaid grants to states 287 Cha nge Med ic ai d for mula s f or re imburs ement s 181 El iminate ex te ns io n of unemployme nt be nefits 57 S pendi ng cuts already a ssu med to ta ke place by CBO Redu ce t ro ops in Iraq /Afgh by 45k by 2015 1,134 Re ve nue Raise rs, billio ns of d olla rs over 1o years Raise tax rates on ordinary i ncome by 1 % 480 Raise the top 2 ordina ry tax rates by 1% (joint filers starting at $212k ) 115 Raise tax rates on capital gains by 2% 49 Ra ise div id end tax r ate s on HNWt ax paye rs* t o 20% 24 I ncrease corporate income tax rates by 1% 101 Allow all Bus h ta x c ut s t o s un se t a s p la nned 2,502 Allow Bush tax cuts on HNWtaxpayers to sunset 709 Estate /g if t tax rate s/ exe mp ti ons to '09 levels 98 Tax carried interest as ordinary i ncome 21 I mpose a f inancial crisis responsibili ty f ee 30 Phase out mortg ag e interest deduction 215 End deduction f or state and local taxes 862 Curtail deduction f or charitable g iving 219 Limit ta x b enef it of itemized ded uc ti ons to 28% 293 Eliminate oil and g as pref erences 44 End LIFO accounting 98 Reduce write-of f benef its o f corporate j ets 3 Ex ten d depreci ati on ti me for ce rta in equ ipm ent 241 End AMT indexation, middle class tax cuts remain (as per OMB) 1,550 End AMT indexation, middle class tax cuts sunset (as per CBO) 661 Change tax bracket inflation indexation 87 5% Val ue added tax(low estimate) 1,3 90 * High net worth tax payers defined as th ose with adjusted gross inco me per year more tha n $250k. Sources: Office of Management and Budget, Congressional Budget Office, Committee for a ResponsibleFederal Budget, Joint Committee on Taxation, J.P. Morgan Private Bank. Burr Hamilton
