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Wednesday, Aug. 17, 2011

Ten ways to reduce America's budget deficit


By ROBERT J. SAMUELSON
The Washington Post

WASHINGTON — It's true: Deficit reduction isn't an economic panacea. It won't instantly boost the economy or the stock market. It won't automatically end financial turmoil. But none of this means that we should ignore deficits. Allowing the government's debt to spiral upward tempts a full-blown future financial crisis.

The recent White House-congressional debt deal created a 12-member congressional super-committee charged with finding $1.5 trillion of savings over a decade. This compares with some projections of cumulative deficits of $10 trillion or more through 2021. Let's engage in a fantasy. Suppose the committee doesn't deadlock and decides to find a bigger solution. What to do?

Here's a 10-step program to fix America's budget problem.

1. Decide to balance the budget over a decade. "Deficit reduction" isn't good enough. The case for balance (albeit at "full employment") is simple: discipline. If people want public services, they should be willing to pay for them.

2. Favor spending cuts over tax increases. Tax increases over the next 15 to 20 years could easily reach 25 percent to 50 percent to cover the costs of (a) the doubling of the 65-and-over population from 2000 to 2030; (b) spiraling health costs and (c) the continuation of other programs at recent levels of national income. These staggering tax increases are too burdensome. They might hobble the economy and would be unfair to younger workers.

3. Cut Social Security, Medicare and other retiree programs. They represent half of non-interest federal spending. Exempting them would require gutting other programs or enacting huge tax increases. We live longer; eligibility ages should be higher. Wealthier retirees can afford steeper Medicare fees and lower Social Security checks. The Census Bureau classifies about 30 percent of the 65-plus population as "high income" (incomes at least four times the poverty line). In 2008, the median net worth of married elderly couples was $385,000.

4. Don't spare current retirees or baby boomers. People don't lose the capacity — or moral obligation — to change just by turning 65. They should bear some of the burden.

5. Evaluate defense needs independently — and pay for them. National security is the government's first job. When America's military is put in harm's way, it should not become a victim of a rich nation's cheapness.

6. Eliminate outdated, ineffective and wasteful programs. Across-the-board domestic spending cuts perpetuate bad programs and penalize the good. This ensures lousy government. Subsidies for farmers, public broadcasting and Amtrak, among others, should end.

7. Lower income tax rates by reducing tax breaks — and make the system more progressive. The idea: spur economic growth. There should be three rates — 10 percent, 20 percent and 30 percent. Capital gains (profits on sales of stocks and other assets) should be taxed at ordinary income rates, not at today's top rate of 15 percent. This low rate is the biggest tax break for the rich; two-thirds of capital gains go to the wealthiest 1 percent. The overhaul should be revenue neutral; all money from ending tax breaks should go to lower rates.

8. Enact an energy or gasoline tax. Even with spending cuts, higher taxes will be needed to balance the budget. A 25-cent-a-gallon (3.8 liters) fuel tax would raise $291 billion over a decade, says the Congressional Budget Office. The actual tax might have to be $1 or more. But it would have an added benefit: curbing oil imports by spurring drivers to buy more fuel-efficient cars.

9. Control health costs. This is crucial, because health spending already represents 25 percent of federal outlays. Unfortunately, there's no consensus on how to do this. The committee should create a group of experts to prepare two plans: one favoring liberals' approach of tougher regulations; the other reflecting conservatives' preference for vouchers and tax credits. The report should be ready by late 2012 for the next president and Congress to debate and decide.

10. Make changes gradually. It's important to limit adverse effects on the economy and to win public acceptance. Increasing Social Security's eligibility age to, say, 70 could occur over 25 years. A $1-a-gallon gas tax could be introduced over six years. Axed programs could be phased out over three years.

Deficits reflect a gap between the benefits Americans expect and the taxes they're willing to pay. There's no way to close it painlessly. But we can distribute the pain in ways that seem "fair" and serve a common good. Once done, this could bolster confidence. Households and businesses would know what to expect. Now, it's unclear whose spending will be cut and whose taxes raised.

The longer we wait, the more disruptive changes will be. Despite this, we've repeatedly delayed. We now have another opportunity to break that pattern; sadly, the odds are that we won't.

© 2011 Washington Post Writers Group


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