Tax Aversion Syndrome and Our Deficit Future by Peter G. Peterson
Jul 24, 2010
Published in the Wall Street Journal – Opinion Section
Too many Americans are out of work. We need to address their hardships with targeted stimulus initiatives such as extending unemployment benefits, which are a very small part of our current deficit. But we cannot continue to ignore our gargantuan longer-term structural deficits. These deficits will soar even after our economy is strong again, and they are the real threat to America's future. We must combine short-term stimulus with a meaningful plan to tackle our long-term structural deficits that would go into effect after our economy has recovered sufficiently.
People fret about the current public debt rising to 60% of GDP, which many economists believe should be the maximum debt level. But they ignore Congressional Budget Office (CBO) projections that, under current policies, the public debt will reach a staggering 233% of GDP in 30 years and nearly 500% in 50 years.
This is an unthinkable and unsustainable path. In less than 50 years, for example, the CBO projects that interest payments on the national debt alone will represent nearly 20% of the entire U.S. economy and consume 100% of government revenues. This leaves not a penny for any government programs, including critically needed education, R&D and infrastructure. With plummeting savings rates, already 47% of the public debt is held by foreign nations. Borrowing trillions more from China, the Middle East and elsewhere will leave us more beholden to lenders whose interests may not align with our own. Given the growing concerns about the global debt crisis, we need to build confidence we are getting our fiscal house in order. This added confidence will help our recovery.
As the very lucky son of poor immigrants, I am also deeply concerned about preserving the social safety net for lower-income families. As we've seen in Greece, safety nets can be brutally shredded in times of fiscal crisis. If we act now, we can combine fiscal responsibility with social justice.
What specific reforms should be included in a long-term fiscal reform program? A plan will only inspire confidence and reach consensus if it confronts difficult issues that have been largely ignored. That means all options must be on the table. President Obama's bipartisan National Commission on Fiscal Responsibility and Reform can play a key role in the development of such a plan.
Some have tax aversion syndrome—they have never met a tax increase they didn't do everything in their power to block. While I believe that spending cuts must play a lead role in any solution to our long-term structural deficits, the sheer magnitude of the imbalances requires revenue increases.
Ideally, the country should raise as much government revenue as possible from a progressive consumption tax. Such a tax can be designed so that it won't overly burden lower-income families but will raise significant revenues and increase our savings rate.
However, given political realities, it is not likely that we could enact a progressive consumption tax that would raise sufficient revenues to meet our needs. Therefore, I would initiate such a tax in conjunction with a simplified income tax (that would have far fewer corporate and individual credits and deductions)—thereby allowing for lower individual and corporate income tax rates.
Finally, we should implement a carbon tax that would reduce our dependence on foreign oil and lending, while improving the environment.
On the spending side, the country needs to address outdated and bloated programs. Why do we spend more on defense than the next 14 countries combined? We should reinstall the tight budget controls that were used successfully in the 1990s, such as caps on discretionary spending and strict pay-as-you-go rules.
Still, the brute fact is that Social Security, Medicare and Medicaid are projected to account for 100% of CBO's projected long-term growth in spending (other than interest costs). With so many more elderly living much longer than ever, we have to ask: If all of us, including the relatively well off, are on the wagon, who is going to pull it? To meet these trillions of dollars of entitlement obligations, we would need to double federal taxes. Wouldn't that be generational theft?
In my view, any reforms to these vital programs should include reductions in benefits for better-off Americans, including options such as raising the payroll cap and making wage and price indexing of benefits more progressive. We should also gradually increase the retirement age for the able-bodied and index it to longevity.
The cost of health care is the most daunting and difficult challenge of our structural deficits. Medicare obligations, for example, are about five times the size of Social Security. To relieve the burden of health-care costs, we need to tackle the largely ignored systemic cost drivers, such as the fee-for-service payment system that encourages unnecessary and expensive procedures. Pilot programs made possible by the new health law can help determine reforms we should adopt and what effects they would have on costs and health outcomes.
There is no way we can simply grow out of the long-term fiscal crisis. The Government Accountability Office has projected that the economy would have to show double-digit growth in real terms for the next several decades. That's clearly impossible. We've run out of painless solutions, but to do nothing is to aid and abet a looming and most costly crisis.
Our short-term economic challenges are here and now, but our longer-term structural deficits can no longer be ignored. As an American Dreamer and a grandfather of nine, I believe that our nation can deal with both at the same time.