Fixing the Budget Deficit Without Raising Taxes


Monday November 15th, 2010   •   Posted by Emily Skarbek at 11:01am PST   •  

The New York Times has a wonderful tool for understanding how the recommendations of the presidential deficit commission could work to close the estimated annual budget shortfalls in the future. You simply go through and select spending cuts and tax increases until the budget shortfall is corrected for both in the present and future.

Below is a screen shot of my results from using the NYT‘s budget tool. As you can see, I was able to more than offset the budget shortfalls through 2030 without raising any taxes. The biggest component of this fiscal program came by capping Medicare growth to GDP. Given the policy options before me, I fell 13 billion short on the current budget deficit. With more dramatic cuts, everyone could take home more of their paycheck and enjoy more economic growth in the future.

If you include the Bowels-Simpson tax reform proposal that reduces tax breaks for companies and individuals, lowers individual tax rates in all brackets, cuts the corporate tax rate from 35 to 28 percent, and removes more particular tax credits like the first-time home buyer credit, my results look like this:

Despite the usefulness of this tool for making public policy proposals digestible, it is important to keep in mind that this is only the first stage in a democratic reform package that is likely to be watered down by both parties. Moreover, while critics on both sides suggest the proposal is dramatic—I would argue the proposed cuts are not nearly as deep as required.

My version would include the following revisions:

  • Instead of cutting foreign aid in half, why not cut it completely? Research shows that foreign aid via government to government transfers is the worst way to help poor people in other countries. To read up on these issues—check out William Easterly’s work (here and here). For a more pop version of the moral hazards involved, read Dambisa Moyo‘s book Dead Aid. Heck, even Bono thinks trade is a better idea than foreign aid.
  • Eliminate all farm subsidies and include provisions banning any agricultural price controls (see here for a similar proposal during the Bush years).
  • Reduce the federal workforce by 30% (a good start would be by abolishing the TSA)
  • Eliminate pension plans from all future government employment contracts
  • Institute mandatory 10% budget cuts to all federal programs
  • Accomplish defense cuts by ending the war in Iraq and Afghanistan
  • Discuss phasing in a privatized Social Security system, while in the meantime raising the benefits age to 70.
  • Reform the recent health care legislation to include more competition and more choice among healthcare providers and third-party payers.
  • Cap Medicare benefits
  • Introduce a flat tax
  • Legalize marijuana, end the war on drugs, and free Americans currently serving costly prison sentences for victim-less drug crimes.

In short, if everything really is on the table then the commission to propose dramatic cuts limiting the size and scope of government should go big or go home. Without dramatic reductions in government spending, America cannot grow its way out of the fiscal-crisis scenario we are facing. No amount of Keynesian hand-waving can remove the fact that the more of GDP government consumes the more difficult it becomes for the private sector to generate the growth and prosperity will all want for our future.




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