April 16, 2014

Washington Budget Report: March 6, 2012

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Tax Reform Can Meet Multiple Goals

Could the tax code be changed in ways that could simultaneously reduce the deficit, encourage economic growth and promote fairness? Diane Lim Rogers, chief economist for The Concord Coalition, assured the Senate Budget Committee last week that these goals are not mutually exclusive.

She urged lawmakers to broaden the tax base by reducing or eliminating many so-called tax expenditures, which she described as “upside-down subsidies” that tend to favor people with higher incomes.

“I’ve recently heard the three tax reform goals in the title of this hearing – encouraging growth, reducing the deficit, and promoting fairness – referred to as a ‘fiscal trilemma,’ suggesting it might not be possible to achieve all three,” Rogers told the committee. “The good news is that it really is possible to find tax policy changes that would do well for all three goals.”

She cautioned, however, that difficult policy choices would still be required.

Rogers also challenged the idea that deficit-financed tax cuts can pay for themselves. Such cuts, she said, have generally reduced national savings and consequently can harm long-term economic growth. She suggested that Congress either let the 2001 and 2003 tax cuts expire this year or at least offset the cost of whatever cuts are extended.

Other witnesses at the hearing were Leonard E. Burman, a Syracuse University professor, and Daniel J. Mitchell, a senior fellow at the Cato Institute.

In opening the hearing, Committee Chairman Kent Conrad called the tax code “indefensible” and said he thought tax reform “has to be part of the solution to the nation’s long-term budget crisis.” Other members of the committee indicated strong interest in reducing tax expenditures.

Read more with Concord Coalition Economist Urges Congress to Reform U.S. Tax Code

Actuaries Explain Challenges for Medicare, Social Security

At a House Budget Committee hearing last week, the chief actuaries for Medicare and Social Security once again reminded lawmakers of the serious demographic and fiscal challenges lying ahead for both programs and the federal budget.

Richard Foster, chief actuary of the Centers for Medicare and Medicaid Services, told lawmakers that by 2030, when most baby boomers have enrolled in Medicare, there will be 65 percent more beneficiaries than there are today, but only 15 percent more covered workers.

Total health expenditures for Medicare, Medicaid and other programs are estimated to increase from 17.9 percent of GDP in 2010 to 19.8 percent by 2020.  If the growth rate over the last 20 years continues, Foster said,  “health care would represent an untenable proportion of total economic production.”

Stephen Goss, chief actuary for the Social Security Administration, testified that by 2040 there will be only two workers for every Social Security beneficiary, compared to three workers from 1975 through 2008.  The cost of Social Security will shift from 4.5 percent of GDP to 6 percent  by 2040 but revenues coming into the program will remain at only 4.5 percent of GDP. As a result, making Social Security sustainable will require an increase in revenues, a decrease in benefits, or some combination of both.

The Concord Coalition has long warned that structural reforms are needed to make entitlement programs fiscally sustainable over the long term.  The testimony of the actuaries is a reminder that until these difficult choices are made, the strain on the federal budget will only grow worse as the baby boomers continue to retire. 

GAO Spotlights Duplication

The federal government could save tens of billions of dollars a year by rooting out duplicative and inefficient programs, according to a new report from the Government Accountability Office (GAO).

The report recommends that Congress and the administration examine 51 areas -- 32 where duplication exists and 19 other opportunities to reduce wasteful spending or enhance revenue.

For example, four separate government agencies administered 53 different programs to assist budding entrepreneurs at a cost of $2.6 billion in Fiscal Year 2010. Other examples of duplication included 21 programs in five different agencies to prevent overseas nuclear smuggling.

The GAO said billions could also be saved by reducing agricultural payments and promoting competition when awarding federal contracts. Meanwhile, improving Internal Revenue Service enforcement and service capabilities could yield more revenue.

This is the second such report since a 2010 amendment sponsored by Sen. Tom Coburn (R-Okla.) required GAO to investigate ways to eliminate government duplication and waste.  Last year’s report identified 81 areas where the government could be more efficient.

The GAO says the government fully acted on only four of these areas. It partially addressed 60 and failed to tackle the rest.

While some of GAO’s recommendations are relatively small, it is important to root out waste and duplication whenever possible. Failure to do so lowers public trust in government and makes it harder to win public support for the more difficult decisions that must ultimately be made on spending and tax policies.