How to Achieve Tax Reform and a Balanced Budget

-- Despite the upturn in the economy, annual deficits of $400 billion or more are still being projected outward as far as the eye can see . . . by economists of every political stripe;

-- The President’s Advisory Panel on Federal Tax Reform has just issued its recommendations, and they’re not only tepid but they’d make the overall problem worse by further lowering tax rates on families and businesses!

Where is the responsible political leadership we need today? Where are the adults?

It is a question that haunts people of conscience at all points on the political spectrum -- not least of all some of the younger policy analysts in Washington DC.

For example, in a professional tax journal, Maya MacGuineas of the center-left New America Foundation recently had the guts to say we’re facing an “abdication of responsibility by the political class" (ed. note: all sources are in the "RE:SOURCES" section at the end of this article).

And at a New America brownbag lunch event on tax policy last month, Brian Riedl of the conservative Heritage Foundation cried, Lawmakers are in complete denial over what’s going on right now!

Unfortunately, most people on the far left and new right have never cared much about balancing the budget. For them, spending or tax cutting (or both!) is all.

And when the traditional political center has dared to call for fiscal responsibility (as Senator Paul Tsongas famously did in the 1992 presidential primaries), it’s had all the appeal of castor oil.

What makes the radical middle different, and potentially more effective, is that we not only feel, passionately, that a balanced budget matters.

We feel we can only get there by building a better society -- fairer and more sustainable.

The gory facts

It is difficult to overstate how irresponsible our federal budgeting has become.

The spending side is out of control. Most of us don’t realize that U.S. government spending has gone up 33% over the last four years alone (under a supposedly conservative Administration), as you can see from the chart on page three of Brian Riedl’s policy paper.

Even more alarming is that we’re refusing to pay for what we’re spending.

Alice Rivlin and Isabel Sawhill are respected economists who’ve served in high positions in the U.S. government (in addition, Sawhill co-authored one of the first explicitly radical middle policy books, Updating America’s Social Contract, 2000). In a recent report for the blue-chip Brookings Institution, where Rivlin and Sawhill now work, they demonstrated that our budgetary deficit will range from $430 billion to $687 billion every year for the next 10 years! Just look at the chart on page iii of Restoring Fiscal Sanity: Executive Summary.

Why it matters

Not all budget deficits are bad -- some can get us out of recessions. (The radical middle is creative about tax policy, not moralistic.)

But when deficits are as huge and as persistent as the ones projected above, they can only be catastrophic, for the following reasons (all routinely cited by Rivlin & Sawhill, political journalists George Hager & Eric Pianin, and many others):

they slow economic growth, since government has to compete against the more productive private sector for a limited pool of savings (or borrow from abroad);
they increase our borrowing costs, since government borrowing forces up interest rates;
they increase our indebtedness to foreigners, and God help us if they get nervous and begin to reduce their investments here;
they require that more and more revenues be devoted to paying interest on the national debt, now about 18 cents per dollar and steadily rising;
they impose crushing economic burdens on our children and grandchildren, who will have to pay back every penny of the money we’re spending on our own sweet selves;
they promote a devil-may-care attitude that seeps into every other corner of American life

To take a stand

It is not enough simply to say, “Let’s stop!”

As former Reagan Administration policy analyst Charles Kolb told the New America luncheon, Congress and the Administration “simply cannot help themselves.” There is no sense of national purpose any more, no sense of priorities, not even an honest national debate about what our purposes and priorities should be.

In that context -- our current context in a nutshell -- it is inevitable that everyone will just take what they can and then run. Corporations, the middle class, prosperous seniors -- every interest group is culpable. (Inexorably, the neediest groups remain the least well served, programmatically as well as economically.)

The radical middle has a clear sense of priorities. It would build a society that is above all fair and sustainable.

In the long run, we would achieve those goals and balance the budget by reinventing key institutions. For example, we'd replace the current tax system with either a progressive flat tax or a progressive consumption tax. And we'd introduce universal health care through the private insurance system, with incentives for preventive and alternative care. See Five Books that Would Make a Radical Middle Revolution.

But even in the short run, we have much to bring to the table.

In fact, if you pull together 18 tax-cutting and revenue-raising proposals that radical middle thinkers have been offering lately, you’ll discover we can bring the budget into balance RIGHT NOW.

No castor oil is needed. We can generate an additional $700 billion per year simply by trying to create a fairer and more sustainable society ($475 billion / year from fairness measures #1-10 below, $225 billion / year from sustainability measures #11-18 below).

That’s more than enough to balance the budget each year through 2014, according to the Rivlin-Sawhill projections.

Which means we could begin paying down the national debt, something we surely owe to our children and grandchildren. And we'd have a comfort zone in which to begin the hard work of reinventing our key institutions. . . .

Toward a fair society (total saved or raised: $475 billion / year)

1. Impose a surtax to cover emergency spending, $80 billion
We haven’t been raising taxes to pay for national emergencies, like the “war on terror” or Katrina. So following MacGuineas and Rivlin-Sawhill, I’d have the government impose a “temporary surtax” whenever there’s such an event (preferably to be spread out over a number of years). Sawhill reminded the New America luncheon that during the war on Vietnam, LBJ imposed a 10% surtax on all personal and corporate income -- i.e., everyone paid 10% more than they would have otherwise. We're in need of a surtax today. National emergencies rightfully call for “shared sacrifice” on the part of every American. And if we care to question the government’s handling of an emergency, the amount it’s costing us would be obvious, right there in the size of the surtax.

2. Eliminate the home mortgage interest deduction, $75 billion
The principal argument in its favor is that it encourages home ownership. But does it really? According to Washington Post reporter Sandra Fleishman, Britain, Australia, and Canada don’t allow home mortgage interest deductions for tax purposes. And the home ownership rate in all those countries is about the same as it is here (69%)! In real life, this deduction is a totally unnecessary giveaway to middle and upper middle class tax filers. It is a prime example of greed masquerading as sensible public policy. Moreover, as Berkeley economics professor (and former Deputy Assistant Secretary of the Treasury) Bradford DeLong points out, home ownership is subsidized in a myriad of other ways -- e.g., deduction for property taxes, deduction on home equity loans. My dollar figure comes from Fleishman.

3. Close tax loopholes, $75 billion
For every exemption, deduction and credit we don’t tax, MacGuineas says, “we have to impose higher rates on the dollars we do tax in order to raise the same amount of money. This can be both inefficient (since higher marginal tax rates discourage work) and unfair (since two people earning the same amount of income . . . can pay dramatically different amounts in taxes).” MacGuineas suggests closing $150 billion in loopholes; bowing somewhat to political feasibility, I’ve closed half that amount here.

4. Means-test entitlement benefits, $60 billion
We can no longer afford giving everyone benefits that only the poor truly need. Both MacGuineas and Reidl propose replacing unaffordable entitlements with targeted programs for low-income Americans. My dollar figure comes from MacGuineas.

5. Increase the upper limit of earnings subject to the Social Security payroll tax, $58 billion
The Congressional Budget Office (hereafter “CBO”) deftly states, “Subjecting a larger percentage of earnings to the payroll tax would lessen the tax’s regressivity.” My dollar figure comes from CBO and is based on taxing every person’s first $190,000 of earnings.

6. Prevent people from avoiding taxes on their “Cadillac” health insurance plans, $40 billion
According to Sawhill, if we make people pay taxes on everything beyond the average cost of an employer-provided plan, we could save the dollar figure above.

7. Slash corporate welfare, $35 billion
To some extent, “corporate welfare” is in the eye of the beholder. MacGuineas says there’s about $70 billion of it sloshing around; bowing again somewhat to political feasibility (and genuine differences of opinion), I came up with the dollar figure above.

8. Replace the estate tax with an inheritance tax, $30 billion
DeLong and MacGuineas both prefer inheritance taxes to estate taxes. According to DeLong, “an inheritance tax puts the focus on the recipient of [unearned] money, rather than on the decedent.” According to MacGuineas, a fair inheritance tax “would tax all inheritances the same as normal income.” Eliminating the estate tax (-$30 billion) and then adding MacGuineas’s inheritance tax (+$60 billion) produces the dollar figure above.

9. Slash pork barrel spending, $12 billion
Like corporate welfare, “pork” is to some extent in the eye of the beholder. So I took one estimate from MacGuineas ($6 billion) and another estimate from her ideological sparring partner, Riedl ($23 billion), and came up with the compromise dollar figure above.

10. Calculate cost of living increases more accurately, $10 billion
According to MacGuineas and her colleague Alicia Cheng, continually correcting the inflation estimate used to calculate cost-of-living adjustments for government programs and taxes would save the dollar amount above.

Toward a sustainable society (total saved or raised: $225 billion / year)

11. Implement a system of tradable carbon emission permits, $80 billion
We should cap our annual carbon emissions at a certain level, and then allow companies to buy (and sell) emission permits on the open market. MacGuineas estimates we’d take in the dollar figure above; Ted Halstead and Michael Lind, also of New America, project even higher dollar figures.

12. Impose a 50 cents per gallon increase in the gasoline tax, $70 billion
Senator Tsongas famously called for a 50 cents per gallon increase in the gasoline tax in 1992, and many others -- including ecologist Lester Brown and economist Gregory Mankiw -- are calling for the same today. “It would make a major contribution to reducing the federal deficit,” Brown told me, “reduce oil imports . . . help reduce urban air pollution . . . [and] encourage the use of public transportation.” The CBO estimates $18.2 billion / year in revenues for a 12 cents per gallon increase, and I projected that outward to the dollar figure above for a 50 cents per gallon increase.

13. Introduce spectrum user fees, $30 billion
“Rights to the public airwaves, which are valued at hundreds of billions of dollars, are practically given away,” MacGuineas says. “We should charge annual fees for the right to use and profit from publicly owned airwaves.” The dollar figure above comes from MacGuineas.

14. Reduce federal aid for highways, $13 billion
The recent transportation bill demonstrates -- with painful clarity -- that federal highway allocations are not always directed toward the uses with the greatest net benefits. Reducing federal spending on highways by about 40% annually, as envisioned by the CBO, should address this problem, and might even induce some state and local governments to consider public transportation alternatives. The dollar figure above comes from the CBO.

15. Impose additional cigarette and alcohol taxes, $12 billion
“We like to talk about [cigarette and alcohol taxes] as a ‘health tax’ rather than a ‘sin tax,’” one staffer at the Center for Science in the Public Interest told me. “[For example,] research indicates that raising excise taxes on alcohol reduces alcohol problems.” The CBO envisions increasing the excise tax on cigarettes by 50 cents per pack, and increasing all alcoholic beverage taxes to $16 per proof gallon; and comes up with the dollar figure above.

16. Eliminate most energy-related tax breaks, $10 billion
We should “eliminate [most] energy-related tax breaks,” one staffer at the Rocky Mountain Institute told me. “Almost all [such breaks] skew the market and skew rational investment.” He estimates we could easily save the dollar amount above each year.

17. Cap farm subsidies for wealthy farmers, $10 billion
“Despite rhetoric about aiding struggling family farmers,” says the Heritage Foundation’s Brian Riedl, “[farm] subsidy formulas are deliberately written to bypass most family farmers and instead lavish millions on large agribusinesses. Two-thirds of all farm subsidies are distributed to the wealthiest 10% of farmers!” He’d cut $7 billion / year from farm subsidies; MacGuineas would cut more like $20 billion / year. The dollar amount above is my compromise figure.

18. Spend less on “hard power” and more on “soft power,” no $$ change
Like many radical middle policy analysts (including some at the Brookings Institution), I am averse to simply cutting defense spending. Instead, I’d reconceptualize the defense budget as part of an integrated “national security” budget, and seek to spend more on “soft power” (especially international anti-poverty and development assistance) and correspondingly less on “hard power.”

Priority #1: attitude change

Alas, it’s not enough to show that our budget MUST and CAN be brought into balance.

We also have to induce most Americans to WANT to make the effort. To choose long-term caring over short-term greed.

A nonpartisan commission might help, and Senator Chuck Hagel’s recently proposed Comprehensive Entitlement Reform Commission could serve as a model. Hagel’s commission would be empowered (even encouraged) to make BOLD recommendations to Congress for changes in the Social Security, Medicare, and Medicaid systems. Even more important, its members would be appointed by bi-partisan leaders of the House and Senate, but they couldn’t be elected officials. See HERE.

The “Exercise in Hard Choices” might also help. It’s a workbook designed by the Committee for a Responsible Federal Budget to educate us about the choices involved in creating a balanced budget -- in part by encouraging us to come up with own own “hard choices.” It’s being used in high schools now, and by some members of Congress in their home districts, and when it goes electronic and interactive (soon) it could reach literally millions of Americans. See HERE.

Most important of all, though, is political leadership.

Leaders can create rapid attitude change, especially in a country as media-wired as this one. But there is remarkably little political leadership so far on the balanced budget issue, and radical middle thinkers and activists are becoming hoarse calling for it.

We have URGENT fiscal choices that we need to make as a country, and they are NOT being addressed!, Charles Kolb told the New America luncheon.

At that same event, Maya MacGuineas put the ball in our court. With no little passion, she called on voters to finally start REWARDING politicians who dare to make the difficult and long-range choices.

Over one million people now hold some sort of elected office in this country. Perhaps you might consider running for office yourself -- and making responsible budget choices your priority issue.

Since responsible budget choices require fairness and sustainability, it might even be a winning issue.

RE: SOURCES

For on-line suggestions on budget balancing that were used in our article above, see Congressional Budget Office, Budget Options (February 2005); J. Bradford DeLong, Brad DeLong’s Semi-Daily Journal, weblog (April 18, 2005, and November 17, 2005); Sandra Fleishman, “Deduction Eruption,” Washington Post (November 12, 2005); Maya MacGuineas and Alicia Cheng, “Closing the Hurricane Gap,” New York Times (October 7, 2005); "Conversations: Maya MacGuineas," Tax Notes (October 24, 2005); President’s Advisory Panel on Federal Tax Reform, Final Report (November 2005); Brian Riedl, "The Five-Step Solution," Backgrounder #1833 (Heritage Foundation, March 16, 2005); and Alice Rivlin & Isabel Sawhill, Restoring Fiscal Sanity 2005 (Brookings Institution, April 2005).

For hard-copy suggestions on budget balancing that were used in our article above, see Lester Brown, “Tools for Restructuring the Economy,” chap. 11 in ibid., Eco-Economy (2001); Maya MacGuineas, “Radical Tax Reform,” chap. 7 in Ted Halstead, ed., The Real State of the Union (2004); and Mark Satin, “To Balance the Budget, Build a Sustainable Society,” chap. 10 in ibid., New Options for America (1991).

For a brief but solid overview of the whole federal budget-making process, see B. Guy Peters, “Budgeting,” chap. 6 in ibid., American Public Policy: Promise and Performance (6th ed., 2003).

For a great introduction to the politics of budget balancing, see George Hager & Eric Pianin, Balancing Act: Washington’s Troubled Path to a Balanced Budget (1998 ed.). For a history of budget balancing from colonial times to the near-present, see John Makin & Norman Ornstein, Debt and Taxes: How America Got into Its Budget Mess and What to Do About It (1994).

To watch a videotape of New America Foundation’s brownbag lunch event on budget balancing and tax policy (held November 14, 2005), click on Paying for Katrina: Closing the Fiscal Gap.

Other U.S. “better budget” groups include Center on Budget and Policy Priorities, Centrists.Org, Committee for a Responsible Federal Budget, Committee for Economic Development, Concord Coalition, and Tax Policy Center.

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