A credible plan to cut the budget deficit

The plan, which includes a spending cap and carbon tax, would cut the budget deficit to less than 1 percent of GDP by 2020.

Jonathan Ernst/Reuters/File
The cover of President Obama's 2011 budget is seen as copies are delivered for distribution to Senate staff on Capitol Hill in Washington Feb. 1. Under Mr. Obama's plan, the budget deficit would be more than 5 percent of gross domestic product by 2020. A new proposal by two economists would cut the budget deficit to less than 1 percent in that time.

Kudos to Bill Galston at the Brookings Institution and Maya MacGuineas at the New America Foundation for putting on the table a credible plan to get the federal budget under control. I don’t agree with each and every one of their proposals—no one would—but their plan is both specific and sensible. It sets out an achievable goal and has the potential to reach it. And while it gores just about every ox in the budget, it equitably distributes the necessary pain.

Bill and Maya aim to reduce the deficit to below 1 percent of Gross Domestic Product by the end of the decade, well below the Congressional Budget Office's estimate of 5.6 percent if nothing is done (my colleague Bill Gale thinks the likely deficit would be even higher). Galston and MacGuineas figure this would require about $1.1 trillion in budget savings in their target year of 2020, and they’d get there with gradual steps starting in 2012. By 2020, they estimate their plan would result in about $400 billion in annual tax hikes and $400 billion in program cuts. The remaining $300 billion would come from lower interest costs on the accumulated budget savings through the decade.

Overall, a Galston-MacGuineas government would spend about 22 percent of GDP and raise about 21.4 percent in 2020. Under President Obama’s budget, we’d spend about 25 percent of GDP and collect just 19.6 percent.

To raise revenue, they have two big proposals: They’d enact a broad-based carbon tax and cut and cap tax expenditures—those special interest tax subsidies that function much like spending programs. Revenue from the carbon levy would be used to both cut the deficit and trim payroll taxes. Bill and Maya would cut tax expenditures by 10 percent and freeze the total amount of these subsidies thereafter.

Some examples of how they’d trim tax expenditures: They’d lower the maximum mortgage interest deduction from $1 million to $500,000, phase out the deduction for state and local taxes, and replace the exclusion for employer-provided health insurance with a credit.

In addition, Bill and Maya would eliminate special interest business subsidies and cut the corporate tax rate. They’d also add an income surtax to cover war costs after 2015.

On the spending side, they would cut throughout the budget.

They’d trim defense spending by $80 billion through both cuts in weapons systems and reductions in future military pay and benefits.

They would freeze all domestic discretionary spending for three years and cap future increases at the rate of inflation through the rest of the decade. Unlike the freezes proposed by both Obama and the House Republicans, Bill and Maya include all domestic spending, including homeland security and the VA. Importantly, they propose an overall spending cap, not an across-the-board freeze. Thus, Congress could boost spending for some programs while cutting others.

They’d reform Social Security by accelerating the increase in the normal retirement age and gradually boosting the early eligibility age, now 62. They’d slow the growth of benefits for higher-income retirees but create a new minimum benefit for poor seniors. Their plan would also provide a one-time benefit hike at age 85, a time when many of the old-old run out of money. Finally, they’d require workers to save two percent of their wages in a mandatory retirement account. The government would partially match those contributions for low- and moderate-income workers.

For Medicare, they’d increase cost-sharing for most seniors and expand the authority of the newly created Independent Payment Advisory Board to adjust benefits as needed. But their most provocative proposal would gradually raise the Medicare eligibility age from 65 to 67. Those who temporarily lose access to Medicare could buy insurance through the exchanges that are included in the new health law.

I wish Bill and Maya had proposed broader-based tax reform. I’m skeptical that a cap on tax expenditures would hold. And I’d save tens of billions by turning Medicaid long-term care (which currently costs more than $100 billion-a-year) into a self-funded insurance program.

Still, they have laid out one of the first specific and credible deficit reduction plans in our current budget debate. Others, including the White House's own fiscal commission, will soon follow. Bill and Maya have set a good benchmark against which we can judge those plans to come.

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