The fix for government spending, taxes and economic growth

The fix for government spending, taxes and economic growth

The Federal Government must change how they are funding entitlement programs

Photo by Pen Waggener, used with Creative Commons license.
Photo by Pen Waggener, used with Creative Commons license.

WASHINGTON, January 13, 2015 — Tom Price, R-Ga., is the new chair of the House Budget Committee. On Monday, he spoke at a conference hosted by the Heritage Foundation, where he said that the public debt, now more than $18 trillion, is the country’s greatest problem.

He further noted that we have a spending problem and not a taxing problem. Entitlements (Medicare, Medicaid and Social Security) account for $2.6 trillion of the $3.7 trillion annual budget, so that is where containment must begin.

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Price said that the solution lies in controlling government spending, reducing tax rates and growing the economy to add tax revenue. While he did not offer specifics for how to accomplish this, there is a way.

The government will have to implement changes to spending on entitlement programs. When Social Security was introduced in 1935, workers retired at 65 and lived, on average, until 67, so that they collected benefits for only two years after having worked some 40 years or so.

Today people can collect social security at 66 and live on average to their early 80’s, with many living into well their 90’s and beyond. That means a person can work for 40 years or so and then collect social security for another 20 to 30 years. This is not sustainable..

The somewhat painful answer is to raise the retirement age at least to 70 and eventually higher, especially as medical science advances and extends life expectancy. This would result in more people contributing and fewer collecting, which would reduce spending for Social Security and Medicare.

We can reduce the $1.1 trillion spent on the non-entitlement or discretionary items without much pain. That can be accomplished by using a zero based budgeting technique. That means instead of just determining the additional amount to be spent each year above last year’s level, each department would have to justify the entire budget, not just the annual increase. Starting from a base of zero and working to a budget would likely result in a saving as much as $150 billion per year.

The problem of reducing tax rates, growing the economy and increasing tax revenue can easily be solved by the proper income tax policy. The criteria for that policy are that it be viewed as fair, it raise sufficient revenue, it be easy to administer, and that it not distort any markets. Of course, our current federal income tax system fails on every count.

What tax policy can possibly accomplish all the goals and meet all of the criteria?

A single-rate income tax — say 15 percent — on all income above a livable minimum — say twice the poverty rate, which is about $50,000 per year for a family of four — no matter how that income is earned or how that income is used could do it. All income — wages, rent, interest, profit, dividends or capital gains — above the livable minimum, would b taxed at 15 percent, with no deductions for anything. As a result no specific markets would be distorted by tax policy.

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Individuals would add up all their income, subtract the livable minimum, which varies by family size, then multiply the remainder by 15 percent and pay that in taxes. This system would be fair; every American would be treated exactly the same. It would b easy to administer and almost eliminate the IRS.

In 2013, this policy would have raised about $200 billion more than the current policy. It would greatly accelerate economic growth, likely doubling the rate of growth experienced during the last five years. The benefit of the added growth is that more jobs are created, which turns a receiver of government benefits, like Medicaid, into a self-sufficient, tax paying contributor to the economy. This reduces the deficit further.

The low tax rate for both individuals and corporations would solve the tax inversion problem. This has occurred because the U.S. corporate tax rate, which can be as high as 40 percent on some marginal income, is much higher than the corporate tax rate in almost every other industrialized country, prompting U.S. companies to relocate their headquarters. This has produced an annual multi-billion dollar tax loss for the U.S. In addition, American firms have about $2 trillion dollars in overseas banks which cannot easily be brought back to the U.S. to be used as investment capital.

The newly sworn in Congress has vowed to tackle America’s fiscal problems and find a solution that achieves the goal of strong economic growth. Let’s hope they look for a fix like this.


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