Scaffold for debt reduction and spending control

Hooray! We managed a “baby step” toward budgetary peace this December. And yet, our elected officials still bicker endlessly over cuts to Social Security, Medicare and defense spending. We keep struggling with the specifics. The Simpson Bowles recommendations have gone nowhere. The “Super Committee” has given up. “Grand bargains” have eluded this Congress.

What our politicians need is a simple set of ground rules in place while they negotiate fiscal reforms – a superstructure to forestall rising debt and interest burdens while our factions clash. The “scaffold” described below would provide a structure within which we could continue working toward fiscal health while details of specific budget cuts and tax reform were debated over time.This proposal contemplates tax cuts, but they would have to be earned, not spoon fed. 

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Starting in 2015, we should reinstate tax rates that were in effect in 2000, before the fiscally crippling tax cuts made in 2003. These – call them the “2000 rates” -- would remain in effect after 2015 while Congress continued to whittle away at spending – or posture indefinitely. Tax rates for everyone would have to revert to 2000 rates, not just rates in the top income brackets. We need everyone – that is, everyone fortunate enough to have a job and income sufficient to generate tax liability -- to “have skin in the game.” But this temporary tax hike would be paired with a strong incentive to make further spending cuts – a reward in the form of future tax cuts. The 2000 rates would later be reduced back to our current (low) 2013 rates in phases, depending on three conditions.  

First, the nation would have to run a surplus for three years in a row. Second, annual interest paid on the federal debt would have to stay below 3 percent of total annual federal expenditures for three years in a row. Not only would we be gradually reducing our total debt, we would no longer be squandering so much of our hard earned tax dollars each year on interest, especially when rates rise. Better fiscal management would allow us to keep that money in the private sector or spend it more productively (e.g., on education, research or tangible infrastructure). Even at today’s low rates, interest on our debt accounts for about 6 percent of federal spending.

Once we met these first two conditions, a tax cut, reducing rates to halfway between the 2000 and 2013 rates, would kick in. We would get the remainder of the rate reduction, back down to 2013 rates, when the national debt had been reduced to its historic average – about 50 percent of GNP. GAO figures would be used in these computations.

Under this proposal, we would see no tax cut from 2000 rates before 2018, and realistically not for a few years after that. But the mere implementation of a plan to manage our spending should inspire market confidence conducive to economic growth. Businesses would take comfort in a debt management program, which might spark growth sufficient to offset potential job losses from higher taxes and ongoing spending cuts. Experience has shown that higher tax rates have not thwarted growth when markets were stable and politicians behaved responsibly. Thus, even with its initially higher tax rates, the “scaffold” could still deliver a mildly increasing GDP against which to measure our total debt, reducing the debt as a percentage of our production and making the 50% target more manageable.

The scaffold would generate a larger revenue base to pay down the debt, while our yearned for tax relief would induce spending cuts needed to hit realistic fiscal reform targets. Higher tax rates alone, without trimming spending, would not provide the political reciprocity needed to push forward and resolve the problem long term. The downstream tax relief incentive would make a difference.

Our economy is no job spawning leviathan, but it finally has some resilience. Under the circumstances, we should no longer cling to our current rates. After all, those rates still produce deficits and ongoing increases to our debt. Until we address our excess debt problem, we have forfeited to our children the right to retain our low 2013 rates. But maybe we can earn them back.

Wells is an attorney and Seattle partner in the Pacific Northwest regional law firm of Lane Powell PC.

 

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