TD Ameritrade Conference

Tax Reform Will Be a 'Death Struggle': Alan Simpson

Alan Simpson (l.) and Erskine Bowles
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Congress has done the easy part of deficit and debt reduction, but the more difficult decisions on controlling health care costs, reforming the tax code and fixing entitlements still lie ahead, Alan Simpson and Erskine Bowles told the TD Ameritrade conference on Friday.

"As intransigent as both parties have been, they have been able to get something done," Bowles said. He noted that the "pitiful" revenue deal at the beginning of the year brings in $650 billion, the continuing resolution cuts $700 billion in spending and last year's budget control act cuts another $1 trillion.

"The problem is, they've done the easy stuff," Bowles said, pointing to raising taxes on the wealth and capping discretionary spending without delineating what will be cut. (Read More: Americans Are Willing to Pay to Keep Social Security: Poll)

Tackling the Debt

The Simpson-Bowles' debt commission proposed $4 trillion in deficit cuts as the minimum needed to stabilize the debt and put in on a downward trajectory.

The tougher decisions lie ahead. Bowles said Congress needs to reform the tax code to make the U.S. globally competitive, control health care costs, address entitlements and tackle wasteful defense spending.

Alan Simpson, the former Republican Senator from Wyoming, said tax reform is the death struggle in Congress. "Everyone knows what we need to do here," Simpson said, "But when you get into the politics it's a horror show."

As he has in the past, the Senator put the blame on anti-tax crusader Grover Norquist, who opposes additional tax increases and has made it more difficult for needed reforms.

Tax expenditures, which include things like the mortgage interest deduction and charitable giving, need to be eliminated or curtailed, Simpson said. "Only 20 percent of the American people use 80 percent of these deductions which pull out more than $1.1 trillion," he said.

Bowles added that if you eliminated all deductions, and cut the deficit by $100 billion annually, the top marginal tax rate could fall to 23 percent and corporate tax rates could drop to 23 percent. That he said would help create "dynamic growth."

Health care is the other area the pair said needs to be addressed if the debt and deficit is to be brought under control. Bowle's said that by the end of the decade one-third of the federal budget could be spent on health care costs, up from 10 percent in 1980. (Read More: Here's How to Save $2 Trillion on Health Care)

"This is the number one cause of our deficits," the former Clinton administration official said, "We make promises we can't keep."

If everyone needs health care, Bowles said we need more primary care doctors and nurse practitioners instead of specialists. There needs to be tort reform so doctors stop practicing defensive medicine and generics should be favored over branded pharmaceuticals.

He also noted that the Obama administration still hasn't addressed tort reform, means testing, cost sharing or dealing with the eligibility age for Medicare and Social Security.

Bowles said the growth in health care has to slow to rate of growth of the economy, and if in 10 years that growth hasn't slowed, more drastic actions, like shifting to a defined contribution type plan, will be needed.

There's also room to cut defense spending without altering the force structure or making the country less safe, Simpson said. He expects Chuck Hagel to be confirmed as the next defense secretary and added, "When he gets there, he knows where the bodies are buried."

Simpson also warned Republicans about using the debt limit to push through more spending cuts. "The debt limit is about paying your debts not cutting spending," he said.

Bowles also said he was encouraged by some of the recent economic data including Friday's jobs data, he added, "I still think America faces some really tough decisions. And how long we can postpone these issues and still have an economy that moves at a steady pace, I'm not sure."