The Federal Budget Deficit and the Public Debt: Dealing with a Lurking Problem

December 12, 2016

The Federal Budget Deficit and the Public Debt: Dealing with a Lurking Problem points to three issues that bear most responsibility for the nation’s growing financial risk: demographic pressures, rising health care costs, and the power of compound interest. Without reform, those who depend on government services will pay a dear price, including children and the dependent elderly, and the nation’s economy will suffer from less investment.

To place the budget on a sustainable trajectory, the report features several recommendations that include:

  • Reform Medicare. Establish competition on the basis of quality and price among traditional Medicare and Medicare Advantage plans.
  • Reform Social Security. Among other steps, enact means testing for high-income individuals, gradually raise payroll taxes, and use a more accurate calculation of inflation to determine cost-of-living adjustments.
  • Pare back virtually all tax preferences. For example, provide a flat, 15% refundable tax credit for charitable contributions, and for up to $25,000 per year (not indexed) of mortgage interest on a primary residence. Eliminate the deduction for state and local taxes.
  • Reduce and flatten marginal tax rates. Create a two-bracket income tax with rates of 15% and 28%, and reduce the corporate tax rate to a flat 28%.
  • Eliminate tax preferences for capital income. Tax capital gains and dividends as ordinary income (with a top rate of 28%).
  • Simplify and unify tax credits for families. Establish both a flat refundable per-child tax credit of $1,600, and a refundable earnings credit, similar to the recent Marking Work Pay Credit but substantially larger.