Taming the Deficit, Together

February 12, 2007

WITH the new Democratic majority in Congress, President Bush finally talking about fiscal responsibility and the 2008 primary season about to begin, finding common ground between Democrats and Republicans on budget issues could not be more important. We are borrowing large sums from foreigners, leaving a legacy of debt, paying more than $1,600 per family in taxes just to cover the interest on the debt, and setting aside nothing to deal with future contingencies or investments.

True, last year’s deficit of $248 billion, at 1.9 percent of gross domestic product, was not large by historical standards, and next year’s may be even smaller. But a failure to deal with deficits and overall debt sends the message that we have no plan for the sea of red ink that will engulf the nation when the baby boomers begin to retire next year.

With this in mind, the four of us propose a balanced package of spending cuts and revenue increases that could eliminate the deficit in five years and set the nation on a sustainable course for the long term. None of us agrees with every part of this proposal, but we think as a whole it works as a model for compromise. More important, it demonstrates how people of good will from both parties can come together to produce a package that not only curtails deficits but also greatly improves the long-term fiscal outlook.

On spending, we would put a hard cap on all appropriations that freezes spending at fiscal 2008 levels. This would allow one federal program’s financing to increase only if another program’s budget were cut. We also propose accelerating the increase in the retirement age to 67 from 66, improving the way Social Security benefits are indexed for inflation and making other modest adjustments in the major entitlement programs.

These cuts to spending, however, would save only about half of the money needed to balance the budget in 2013. Further spending reductions are unlikely to garner much Congressional support and could even compromise national security. To make up the balance we propose to increase revenues – not by raising income tax rates but by dealing with some of the flaws in the current tax system.

The major reform would be to broaden and simplify the tax base by turning almost all itemized deductions into 15 percent credits against taxes. We would also place a cap on how much of employer-paid health insurance premiums could be excluded from taxes.

To increase energy security and reduce global warming, we would impose a carbon fee or tax on energy producers of $15 per metric ton of carbon emissions, phased in over a three-year interval, which could raise about $35 billion a year. This fee could be collected by auctioning off permits to private companies under a cap-and-trade system, or levied as a direct tax on the businesses (which in turn, of course, would pass costs along to consumers).

We must also collect more of the taxes already owed. The Internal Revenue Service recently did an audit analysis of the tax year 2001, and found a gap between what was owed and what was remitted of at least $290 billion.

Finally, we suggest reforming the alternative minimum tax, probably through adjusting the way it is pegged to inflation; as it is, too many middle- and upper-middle-class families will find their taxes rising in the next few years because of the tax. The resulting shortfall in revenues would be made up for by continuing to tax the very small number of estates worth more than $7 million per couple.

In all, our plan would give the nation a fiscal-responsibility dividend of $57 billion per year over five years, the interest saved on the debt. Some of this money would be put toward deficit reduction, but the remainder could be invested in high-priority programs like early childhood education, combating terrorism around the globe and state-based children’s health insurance programs.

Of course, reining in the deficit is only part of the challenge. To chip away at the national debt and sustain a healthy fiscal outlook into the deep future, fundamental reform of Social Security and Medicare will be needed, and everything will have to be on the table. On Social Security, for example, lifting or removing the cap on payroll taxes, indexing benefits for our increased longevity, and slowing the growth of payments to wealthier retirees would go a long way toward improving its solvency.

Festering deficits, a poorly designed tax system, an addiction to oil and uncontrolled entitlement spending are all symptoms of what is wrong with our current politics. Those jockeying for position in the 2008 presidential race should emphasize that deficits matter, that bipartisan solutions are needed and that it is possible to make fiscal progress while improving the tax system, health care and energy security. More specifically, they should promise to eliminate the deficit within five years and to set the budget on a sustainable trajectory for the longer term. Our package shows that it can be done.