With less than two weeks to go before the Treasury-announced August 2nd deadline to raise the debt ceiling, members of Congress are desperate for some sort of plan that will break the current stalemate over what type of deficit reduction should accompany the ceiling increase. So are the financial markets, to judge by their reaction.

This desperation perhaps explains the energy with which members of both parties received the “Gang of Six” plan released Tuesday.

We caution our members not to get too excited. While there are several very positive aspects of the Gang’s plan, this proposal will not be ready to join the debt ceiling legislation. Candidly, we doubt it will ever be ready. The more folks dig, the more they will realize that there’s less to the gang’s plan than one might expect.

Let’s set policy aside and focus on the legislative process envisioned by the bipartisan Gang (Senators Conrad, Durbin, Warner, Chambliss, Crapo and Coburn). If implemented, the plan would start by reducing discretionary spending by $500 billion through 2015 through statutory spending caps. Frankly, that’s the best provision in the whole plan. Five hundred billion in savings won’t fix our fiscal mess, but it’s more spending reduction than Congress has ever enacted before.

But they didn’t stop there. Once adopted, the plan outlines a two-step process. Step one gives several authorizing committees six months to produce spending cuts for programs under their respective jurisdictions and, for the Finance Committee, reforms to the tax code as well. (That’s how they get to their top-line $3.7 trillion in savings.) These reforms would be packaged together and sent to the Senate floor where they would need sixty votes to pass. If the package gets sixty votes, the bill would remain at the Clerk’s desk, pending step two.

For step two, the Finance Committee would be required to produce another bill reforming Social Security. This bill would require sixty votes to pass the Senate, too. If the Senate successfully passes this bill, then it and the bill held at the desk would be sent to, we’re not sure. The House? The President? If the Social Security bill fails, then the earlier bill fails, too.

How does this mark an improved process? Regular order in the Senate already requires legislation to get sixty votes, so the process in this plan actually makes it more difficult for the Senate to adopt spending cuts by forcing the Senate to hit that sixty vote threshold three separate times. The Senate could take up and pass the first and second spending cut bills now if sixty votes were available — they don’t need this “special” process to do it.

Given this backwards procedural approach, it’s obvious the Gang plan is not the answer to our fiscal challenge. Meanwhile, our fiscal imbalance is literally threatening our fiscal solvency. Even if the debt ceiling were raised before the Treasury-imposed deadline, the S&P has indicated it would downgrade our AAA rating unless Congress adopts significant ($4 trillion over ten years) deficit reduction at some point in the near future.

Which begs the question: Why not just use the budget process? There is nothing preventing the Senate and Gang leader Conrad from producing a budget resolution — he’s still the Chairman of the Budget Committee. That resolution and the reconciliation bills it generates would only need fifty votes to pass the Senate — not sixty — and would have a much greater chance of success. It is always easier to get to fifty once than to have to get to sixty twice.

Gang of Six on Taxes

One bright spot in the Gang’s plan might be their broad outline for what tax reform might look like. According to the summary released yesterday, the plan would:

Require the Finance Committee to report tax reform within six months that would deliver real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth as follows:

Require the Finance Committee to report tax reform within six months that would deliver real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth as follows:

o Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates by establishing three tax brackets with rates of 8-12 percent, 14-22 percent, and 23-29 percent.

o Permanently repeal the $1.7 trillion Alternative Minimum Tax.

o Tax reform must be projected to stimulate economic growth, leading to increased revenue.

o Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund.

o If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.

o To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending.

o Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families.

o Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries.

o Maintain or improve the progressivity of the tax code.

o Establish a single corporate tax rate between 23 percent and 29 percent, raise at least as much revenue as the current corporate tax system, and move to a competitive territorial tax system.

Lower rates, AMT repeal, territoriality–these are all real reforms that would markedly improve how income is taxed.

As with the rest of the plan, there are definite shortcomings and holes in this outline. As some of our Hill friends made clear, itb�s kind of difficult to legislate ranges for marginal rates — is the top rate going to be 29 percent or 23 percent? It makes a difference. Moreover, compared to current policy, this plan calls for a $2.3 trillion tax increase over the next ten years– or more than $800 billion more revenue than the President called for in his most recent budget. That’s a big increase on employers at a time when unemployment is over nine percent.

Nonetheless, the headline for your S-Corp team is the Gang’s support for lowering both the corporate and individual rates. That approach is completely contrary to the approach outlined by the Administration, which has made it clear it wants to lower the corporate rate only, while allowing the top individual rate rise to nearly 45 percent.  The call to make our tax system territorial is also a direct refutation of the Administration’s effort to strengthen our global approach to taxation.

So, let’s take our good news where we can find it. We now have three senior Democrats on record supporting reducing the overall top rate on business and individual income from 35 percent to 29 percent or lower. That’s significant, and something we hope the tax-writing committees can build on as they work to revise the tax code.