Federal budget mess: Six ways to fix it

Surprise! It turns out America's problem with runaway budget deficits is solvable, after all. That, at least, is the opinion of some prominent think thanks that have been offering ready-made blueprints. As Republicans and Democrats seek to boost the limit on federal borrowing while reining in future deficits, here are six proposals, ranging from liberal to conservative, that grew out of a "solutions initiative" sponsored by the Peter G. Peterson Foundation.

1.Bipartisan Policy Center

President Obama signs the bill to extend Bush-era tax cuts on Dec. 17, 2010. He has indicated that he does not want to extend them again. (Jim Young/REUTERS)

This group is all about showing that Democrats, Republicans, and independents can work together to make tough choices. It says its plan "attacks our debt problem from all sides" to steer the nation off an unsustainable debt path.

Taxes. Overall federal tax revenue would rise to 23.1 percent of GDP by 2035, similar to a Congressional Budget Office (CBO) baseline, which assumes an end of Bush tax cuts.

• Eliminates most deductions, to "broaden the base" of taxable income.
• Simplifies the tax code from six income tax brackets to two, with rates of 15 and 27 percent.
• Imposes a new "debt reduction sales tax" of 6.5 percent.

Spending. Federal spending would fall to 23.7 percent of GDP in 2035 from the CBO baseline forecast of 28.3 percent.

• Reduces defense spending sharply, to 2.4 percent of GDP.
• Sets budget-process reforms to trigger spending discipline if Congress can't act.

Entitlements. Spending on health and Social Security programs would be restrained to 15.4 percent of GDP in 2035, a bit below the CBO baseline.

Transitions Medicare to a “premium support” model that limits growth in federal support per beneficiary (to annual rise equal to GDP growth plus 1 percent, versus current projections of GDP plus 1.7 percent).
• Enhances Social Security benefits for the very old and very poor.
• Raises the cap on payroll tax, so that 90 percent of earnings are taxable.
• Changes cost-of-living formula for Social Security, to more accurately reflect inflation.

Deficit or surplus. Deficit of 0.7 percent of GDP in 2035, versus a 5 percent deficit in the CBO baseline forecast.

Debt. The plan brings public debt down to about 38 percent of GDP by 2035. That's an aggressive reduction compared to most other plans, and compared to CBO forecasts that debt could be at 92 percent of GDP or much higher by that year.

American Enterprise Institute

Republicans such as Rep. Paul Ryan (R) of Wisconsin, pictured here in a Kenosha, Wis., town hall on April 26, have received blowback from voters for their plans to change Medicare. (Jeffrey Phelps/AP/File)

This conservative think tank emphasizes what it calls a balanced approach to federal deficits. Raise taxes too much, and economic growth will suffer, the AEI scholars warn. But cut spending too much and you'll eat away at vital services for the elderly or investments for the economy.

Taxes. Overall federal tax revenue would rise to 19.9 percent of gross domestic product (GDP) by 2035. That's up from levels in the recent past of about 18 percent of GDP, but below a baseline Congressional Budget Office (CBO) forecast, which sees tax revenues of 23.3 percent of GDP in 2035.

• Replaces income tax with a progressive consumption tax.
• Eliminates most "tax expenditures" such as deductions and credits that reduce federal tax revenue.
• Imposes a carbon tax.

Spending. Federal spending would total 22.8 percent of GDP in 2035. That's a bit below current levels, and a big cut from the 28.3 percent seen in the CBO's baseline forecast.

• Holds defense spending to 4 percent of GDP. (CBO baseline anticipates 3.3 percent.)

Entitlements. Spending on health and Social Security programs would fall sharply to 12 percent of GDP in 2035 from the CBO's baseline forecast of 16 percent of GDP for that year.

• Offers a flat Social Security benefit of $850 per month, indexed to wage growth.
• Eliminates payroll taxes on workers over age 62.
• Repeals Obama health-care reforms.
Converts Medicare to a program that provides income-adjusted support to pay health insurance premiums.
• Converts Medicaid into block grant to states.

Deficit or surplus. The federal deficit would fall to 2.9 percent of GDP in 2035, versus a 5 percent deficit in the CBO baseline forecast.

Debt. The plan brings public debt down to an amount equaling about 60 percent of one year's GDP by 2035. Although that's still high, it's considered below the danger zone for a debt crisis. And it's below current levels that are expected to reach about 75 percent of GDP next year.

Center for American Progress

Raising taxes on tobacco sales could help balance the budget, the Center for American Progress says. (Brandy Baker/The Detroit News/AP/File)

This group offers a left-leaning mirror to the American Enterprise Institute on the right. Both groups call for a balance between promoting economic growth, curbing deficits, and not damaging the nation with too-big cuts to defense or domestic programs. The CAP approach is more liberal, but achieves a budget surplus.

Taxes. Overall federal tax revenue would rise to 23.8 percent of GDP by 2035, similar to the CBO baseline.

• Adds a carbon tax, raises the gas tax.
• Creates or boosts levies on Internet gambling, alcohol, and tobacco.
• Simplifies tax code: Fewer deductions, with a flat income tax rate of 15 percent for households with income below $100,000.
• Imposes a temporary millionaire surcharge.

Spending. Federal spending would fall to 23.2 percent of GDP in 2035 from the 28.3 percent CBO forecast.

• Cuts defense spending to 3.2 percent of GDP.
• Boosts spending in some areas (education, energy), while cutting in many others.

Entitlements. Spending on health and Social Security programs would be restrained to 13.7 percent of GDP in 2035, compared with 16 percent in the CBO forecast.

• Adds Medicare payment reforms to bring down costs within Obama health-care law.
• Expands power of the Independent Payment Advisory Board (IPAB) to impose cost-control strategies in Medicare and perhaps beyond.
• For Social Security, eliminates cap on payroll tax, so that all earnings are taxed.
• Reduces Social Security benefits for the wealthy, while boosting them for the very old and poor.

Deficit or surplus. Surplus of 0.6 percent of GDP in 2035, versus a 5 percent deficit in CBO baseline.

Debt. The plan brings public debt down to about 42 percent of GDP by 2035. Like the Bipartisan Policy Center, that's a steep reduction toward the all-clear zone.

Heritage Foundation

A tax deduction for college tuition would be one of the few tax deductions to survive in the Heritage plan. (David Goldman/AP/File)

Think of this group as most in line with Rep. Paul Ryan (R) of Wisconsin. Like the House budget plan Mr. Ryan crafted, Heritage envisions a sharp curtailment of the size of government. Big spending cuts allow the debt to fall, deficits to shift to surplus, and taxes to remain low.

Taxes. Overall federal tax revenue would remain low at about 18.5 percent of GDP in 2035, well below the CBO baseline forecast of 23.3 percent.

• Replaces current income tax and payroll tax with a flat (single rate) tax.
• Leaves fewer deductions and credits, but retains deduction for charity.
• Creates new tax deductions for college tuition and savings.

Spending. Federal spending would plunge to 17.7 percent of GDP in 2035, again dramatically below the CBO forecast of 28.3 percent.

• Maintains defense spending at 4 percent of GDP.
• Eliminates many programs, privatizes others, and shifts some (transportation) to states.
• Sets a budget process with enforceable caps to bring spending down.

Entitlements. Spending on health and Social Security programs would be held to just 9.2 percent of GDP in 2035, with the CBO forecast set at 16 percent.

Converts Medicare to premium-support program, with benefits adjusted by income.
• Raises eligibility age and links that age to changes in longevity.
• Shifts Social Security to a flat $1,200 monthly benefit (with income-based phaseout), indexed to wage growth.
• Eliminates payroll tax (finances Social Security from flat tax on income).

Deficit or surplus. Surplus of 0.8 percent of GDP in 2035, versus a 5 percent deficit in CBO baseline.

Debt. The plan brings public debt down to 30 percent of GDP by 2035 (and falling at a rapid clip).

Economic Policy Institute

The Economic Policy Institute suggests taxing sweetened beverages like soft drinks to help balance the budget. (Paul Sakuma/AP/File)

This plan is furthest left on the spectrum of the six plans. The EPI promotes government's role as an investor that can pave the way for job creation and economic growth. Its plan seeks to stabilize national debt "without demanding draconian cuts" to infrastructure or social programs.

Taxes. Overall federal tax revenue would rise to 24.1 percent of GDP by 2035.

• Repeals high-income tax cuts from Bush era. Adds a millionaire surcharge.
• Converts some deductions (mortgage interest, charity) into tax credits.
• Adds excise tax on sweetened beverages.
• Adds carbon tax and raises the gas tax.

Spending. Federal spending would fall to 27.8 percent of GDP in 2035, nearly as high as the current CBO baseline forecast.

• Cuts defense spending to 1.9 percent of GDP.
• Increases some spending (education, energy), while cutting other areas (farm subsidies).

Entitlements. Spending on health and Social Security programs would be restrained to 15.9 percent of GDP in 2035, essentially no change from the CBO outlook.

Reforms Medicare payment systems.
• Adds a "public option" health-insurance plan for those under retirement age.
• Raises cap on Social Security payroll tax, up to 90 percent of worker earnings.

Deficit or surplus. Deficit of 3.7 percent of GDP in 2035, versus a 5 percent deficit in CBO baseline.

Debt. The plan brings public debt down to about 82 percent of GDP by 2035. That leaves the debt very high, but the trajectory is flattened and a debt crisis might be avoided.

Roosevelt Institute Campus Network

Mortgage-interest deductions would end in the Roosevelt Institute Campus Network plan. (Gene J. Puskar/AP/File)

This group presents the perspective of college-age Americans, with input from more than 1,000 young people helping to set its priorities. The group says its plan reflects the Millennial Generation's "deep concern for America's fiscal future."

Taxes. Overall federal tax revenue would rise to 22.9 percent of GDP by 2035, similar to the CBO baseline.

• Adjusts income tax rates, resulting in modest tax cut most people, and a modest hike for high-income earners.
• Eliminates mortgage interest deduction, cuts many other deductions in half.
• Adds carbon tax, while repealing the gas tax.

Spending. Federal spending would fall to 24.8 percent of GDP in 2035 from the CBO baseline of 28.3 percent.

• Reduces defense spending to 2.9 percent of GDP.
• Increases spending in some areas (education, energy, anti-poverty) while cutting in others.

Entitlements. Spending on health and Social Security programs would be restrained to 13.5 percent of GDP in 2035, below the CBO baseline of 16 percent.

Reforms Medicare payment systems.
• Adds a "public option" health insurance plan for those under retirement age.
• Raises cap on Social Security payroll tax, up to 90 percent of worker earnings.

Deficit or surplus. Deficit of 1.8 percent of GDP in 2035, versus a 5 percent deficit in CBO baseline.

Debt. The plan brings public debt down to about 64 percent of GDP by 2035. That's big progress, but not as big as some of the other plans.