My View: Maya MacGuineas and Bill Galston

A Balanced Plan to Stabilize Public Debt and Promote Economic Growth

Yesterday, we released a new budget blueprint to stabilize the debt by the end of the decade. The plan, which would start to phase in in 2012, is fashioned to help promote economic growth by phasing in only once the economy is strong enough, but at the same time, signaling to markets and business that the U.S. would get back on a sustainable fiscal track.

It is guided by 5 principles:

  • Shared sacrifice
  • Economic growth
  • Protecting the most vulnerable
  • Increasing transparency and the need for fundamental tax reform
  • Facing up to demographic and health care realities

The plan achieves the medium-term goal through a 50-50 split between spending reductions and tax increases (though most revenue changes come from tax expenditures cuts, which are really closer to spending reforms.) Under the plan, outlays in 2020 would amount to 22.0% of GDP, down from CBO’s estimate of 25.2% for President Obama’s budget. Revenues would total 21.4% of GDP, up from 19.6%. The deficit would fall from 5.6% of GDP to 0.7%.

The plan includes a war surtax starting in 2015 to cover any ongoing war-related costs; a suite of changes which would return Social Security to solvency; a long-term healthcare budget; a new framework for reducing tax expenditures; and a number of reforms to improve the tax code including replacing part of the payroll tax with an energy tax. 

Galston-MacGuineas Plan Summary

Policy Description Savings in 2020 ($ Bil)
Defense
  • Reduce weapon systems, reform compensation, reform contracting, cover all war costs beyond 2015 with a war surtax
80
Domestic Discretionary*
  • Freeze domestic discretionary spending for 3 years and limit to inflation for rest of the decade 
60
Social Security
  • Speed up increase in normal retirement age and index early and normal retirement ages to longevity
  • Switch to the Chained CPI
  • Use progressive indexation for higher earners
  • Include state and local workers
  • Create a minimum benefit and an old-age bonus
  • Use some proceeds from a carbon tax to reduce the payroll tax and make payroll tax more progressive
  • Establish mandatory 2% add-on accounts with progressive matches for low and moderate-income workers
75
Health
  • Institute tort reform
  • Raise Medicare premiums
  • Index the eligibility age for Medicare
  • Expand the Medicare Commission
  • Reduce health subsidies 
110
Other Spending
  • Index federal government salaries to private sector wage growth
  • Phase out farm subsidies and replace them with insurance against catastrophic income loss
  • Additional savings from other entitlement programs
75
Tax Expenditures
  • Reduce tax expenditures by 10 percent and limit growth
  • Divide the proceeds between lower tax rates and deficit reduction
300
Revenues
  • Enact a broad-based carbon tax, with some proceeds going to reduce the payroll tax and the rest to deficit reduction
  • Enact revenue-neutral corporate tax reform to reduce rates while broadening the base
100
  Policy Savings 800
  Interest Savings 300
  Total Savings 1,100
 

Note: President Obama’s FY2011 budget serves as the baseline.

 * Savings would be higher compared to more realistic growth trends, but the President’s baseline already assumes relatively low levels of discretionary spending.

 

The plan was released at the CRFB “Let’s Get Specific” forum, featuring many specific budget ideas by experts and politicians and we remain hopeful that the coming year will be the year of getting specific on crafting a national fiscal fix.

For more details, read the full paper here.

Maya MacGuineas is director of the Fiscal Policy Program at the New America Foundation and president of the Committee for a Responsible Federal Budget. Bill Galston is a senior fellow at the Brookings Institution.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Carbon Tax to Cut Payroll Taxes & Deficit

hi Maya MacGuineas,

 

Glad to see you and Bill Galston are "brooking" the subject of carbon taxes with payroll tax cuts.   It's a great way to encourage low-carbon energy -- a big win for the climate, and much-needed stimulus for employment.   Hope you and your readers will check out www.carbontax.org.  

 

Thanks,

 

James Handley

Carbon Tax Center

Review of proposals

I see several major fallacies with the proposals.

 

First, they seem aimed to reduce the rate of growth of the deficit, instead of reducing the deficit.

 

Second, they don't fix the incentive structure, whereby politicians can buy votes with someone else's (mainly future generations') money.  This incentive will not change unless politicians can also buy votes, when they save money, and only PolticalSheepdog can offer this incentive.  As long as politicians can get elected spending someone else's money, the likelihood of passage or prolonged installation of most of these reforms will be small.

 

Third, few of these reforms focus on the creation of greater efficiency in the economy, when we could make deficit reduction less painful, if we reduced the inefficiency in economy, which costs consumer at least a $tillion.  Again, only PoliticalSheepdog can solve inefficiency in a massive way.

 

Fourth, none of these proposal focuses on tax collection, which is grossly inefficient.  For example, only a low percentage of income taxes like 5% are reviewed.

 

Sincerely yours,

 

James L. Gamble III

410-255-1496

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