Perhaps the biggest economic misconception on the right is given (a) the aging of American society and (b) the need for the US military to remain unrivaled, that (c) government spending and taxing can somehow be lower in the future than in the past. Maybe much lower. This explains the prevalence of fantasy tax plans (Superlow rates! Superhigh growth!) and Coolidgean nostalgia for nanogovernment. Right now, the CBO’s long-term budget forecast sees spending in 2039 at 25.9% of GDP (vs. 20.4% today), tax revenue at 19.3% (vs. 17.4% today), and total debt-to-GDP at 106% (vs. 74% today). That is a future of debt and spending we want to avoid while yet continuing to provide a robust and reformed safety net and a policy ecology conducive to fast economic growth.
In an new paper, AEI scholars Joseph Antos, Andrew Biggs, Alex Brill, and Alan Viard have fashioned a long-term budget plan that tries to meet those goals (see above chart):
The objective of this plan is to achieve long-term fiscal stability and promote economic growth. We cannot simply tax our way to fiscal stability without suffering the consequences of a slower economy and reduced prosperity. Yet we also cannot address the imbalance simply by cutting spending without regard for the risks of eliminating essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies. The tax proposals presented in this plan raise necessary revenues with the least possible impact on saving and economic growth. Our spending proposals make entitlement programs better targeted and more efficient.
Broad strokes: On the tax side, the ABBV plan would (a) replace the personal and corporate income tax with a progressive consumption tax consisting of a household-level tax on labor income and a firm-level tax on business cash flow, (b) replace energy subsidies, tax credits, and regulations with a modest carbon tax, and (c) increase the gasoline tax to cover highway-related costs. Total tax revenue by 2040 would be just shy of two percentage points above the CBO forecast. (Note that this does not assume higher economic growth from a tax plan which should be growthier.)
On the spending side, the ABBV plan would have Social Security provide a flat, universal benefit that would increase benefits for the roughly one-third of retirees whose current Social Security benefit is less than the poverty threshold. To offset benefits losses to middle- and upper-income Americans, the plan would also create “Universal Retirement Savings Accounts” where workers would automatically be enrolled into a tax-preferred account with a minimum contribution and employer match. At small firms, workers could save through a federally run program similar to the federal employee Thrift Savings Plan.
No surprise, Medicare would be transformed into a premium support system where a subsidy — higher for those in financial need or with higher health risks — would be provided to beneficiaries choosing from among competing health plans. And to help transform Obamacare, the employer-provided health insurance tax exclusion would be replaced by a refundable health insurance tax credit that provides a flat dollar subsidy, with higher payments to those with lower incomes and greater health risk. There’s more, but in overall the plan would reduced projected spending from the CBO forecast by about 3.4 percentage points.
Now I might not agree with all various provisions here — and even the authors might not necessarily be in full agreement — but the plan does present a reasonable and realistic outline (assuming no major technological breakthroughs) for what is possible on taxes and spending going forward — again, given the limits presented above — and what is not. And what is not possible under those constraints are plans that assume long-term spending and taxing at current levels … or historical average levels … or those levels last seen in the early 1950s — all sprinkled with 5% GDP growth pixie dust.
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