The Debt Buy-Down Act

Senator John McCain has introduced the Debt Buy-Down Act of 2010. A variation of this bill has been introduced in several previous Congresses (102nd, 103rd, 104th, 105th, and 106th), but the current mood of the country seems especially conducive to this kind of idea.

According to a bill summary released by McCain’s office:

The Debt Buy-Down Act would require the IRS to include a check-off on tax forms providing taxpayers the flexibility to voluntarily designate that up to 10% of their tax liability be put toward debt reduction. In order to ensure that reductions in the debt are protected, the bill also requires an equal amount of permanent reductions in federal spending.

Kind of Gimmicky? Sure. Clever? Very. The more we think about it, the more we like it.

The McCain Debt Buy-Down is in fact an ideal type of mechanism to capture the public’s willingness to make changes to the budget if they would really make improvements to the fiscal picture.

The bill would establish a new Public Debt Reduction Trust Fund to hold taxpayer directed-tax payments (up to 10% of their total income tax liability) which would be netted out of their total taxes. Congress would have to cut spending by an equal amount or an automatic trigger would force across-the-board spending cuts—though it would exempt items including Social Security benefits, benefits for uniformed services, and interest payments. (Our view: Past experiences have shown us that exempting favored programs from these kinds of mechanisms, weakens them. In Red Ink Risking, we proposed that new triggers have no exemptions—other than of course interest—to strengthen the incentive for Congress to thoughtfully choose the cuts rather than be subject to a trigger).

We have talked about this kind of a voluntary debt repayment idea before, and have argued in support of a solidarity fund (and even having the option on tax forms!) in which excess funds and savings from deficit-reducing bills could be walled off – ensuring that when Members of Congress don’t spend their entire budget or enact deficit-reducing bills, the savings are actually used for deficit reduction.

While the public is squarely behind the idea of taking actions to reduce the deficit, many taxpayers are understandably concerned that any money headed towards Washington—either from new taxes or spending cuts—would be spent instead of used to reduce the deficit. Health care savings on the PAYGO scorecard? Increasing the Oil Spill Liability Tax? Yup, we share those concerns. Measures to ensure the savings would actually be saved have to be part of any deficit reduction effort. Think of it as the search for the new ‘lockbox”.

So what would this look like in practice? In FY2010, taxpayers will pay about $950 billion in individual income taxes. Just doing some quick calculations, if every taxpayer contributed 10% of their income tax liability next year (the maximum possible), that would require Congress to enact roughly $95 billion in spending cuts in order to provide that amount of deficit reduction. The Treasury Department would be required to use the money in the trust fund to retire U.S. debt obligations.

Would a cool $95 billion in savings per year fix the budget situation? Nope. On the other hand, would it derail the economic recovery? Nope as well. Would it be a good start to getting the deficit under control? Absolutely.

Reducing spending is essential in bringing the country back onto a sustainable path. So far, Congress has been unwilling to address the country’s mounting debt, and proposals like the McCain debt-buy-down can push Congress to start making some tough decisions, help us get back to a sustainable path, and can also make it easier for taxpayers to get involved in addressing our fiscal future. This is the kind of idea that help focuses the mind and national attention, on the need to reduce government spending and use the savings to reduce the deficit. We hope it catches on.