Pearlstein Comes Out with His Own Fiscal Plan

Today in the Washington Post, Steven Pearlstein took the "Deficit Challenge", proposing his own plan on how to reduce future deficits through a combination of spending and tax changes. He's right on the mark when he says that there's no lack of commentary and reports on where our future deficits and debt are headed if we don't change course, but that what has been missing "is a framework for tackling the budget challenge in a way that is economically coherent and politically viable." (See Red Ink Rising for a refresher on the extent of our budget challenges, and here for an illustration of the kinds of changes necessary to stabilize the debt at 60 percent of GDP by 2018.)

Here's what Pearlstein proposes on the spending side:

• Hold federal health spending increases to GDP growth plus 1 percentage point a year.
• Raise Social Security and Medicare eligibility age by one month for each two-month increase in life expectancy.
• Slowly reduce COLAs on Social Security benefits and slowly increase Medicare premiums for wealthy seniors.
• Limit growth of discretionary spending to inflation, excluding funding for wars, natural disasters, and safety-net spending.

Pearlstein also offers several ways to increase revenues:

• Impose a VAT of 6 percent, with rebates for lower-income households.
• Reduce corporate tax rate from 35 percent to 25 percent (and close enough loopholes to increase corporate revenue by 5 percent).
• Increase the standard deduction and personal exemptions.
• Tax wages, salaries, and capital gains at only three rates: 17 percent for income from $50,000 to $150,000, 27 percent for income from 150,000 to $250,000, and 37 percent for income above that.
• Tax interest, dividends, and long-term capital gains at 20 percent (up from the current 15 percent).
• Reduce Social Security payroll tax slightly to 12 percent, and over time impose it on wages up to $150,000, up from current cap of $100,000
• Raise Medicare payroll tax slightly to 3 percent and apply it to all income.
• Replace gas tax with carbon-based transportation fuels tax at a rate that would raise $25 billion more each year.
• Eliminate the inheritance tax, but require all estates to pay any deferred and unpaid capital gains taxes on all assets before distribution to heirs.

Pearlstein admits that he is not sure whether the additional savings and revenues from these options would be enough to "[fill] the budget 'hole".  We're not exactly sure either about how much this all would save, but we're also working on some back-of-the-envelope calculations to get an idea for how much deficit reduction he's talking about.

Pearlstein is arguing that reducing future deficits doesn't require "the wisdom of a blue-ribbon panel [or] the end of American life as we know it," it just requires that policymakers have "an open mind, some common sense, and a health dose of political courage."

CRFB whole-heartedly agrees that if we implement a plan now that would take effect as the economy recovers, the required changes will be much less harsh than if we wait for markets to force changes on us. But it will still take some pretty tough decisions, as Steven illustrates in his article. CRFB would like to congratulate Pearlstein for getting specific - he now joins Congressman Paul Ryan in putting out a proposal for how to get our federal finances back on a sustainable course.

Click here for a list of all previous "Deficit Challenge" posts.