Mid-Session Review by the Office of Management and Budget
underscores the facts that sensible tax reform stimulates the
economy and that faster growth swells revenue to the government as
a byproduct of new jobs and extra income for Americans. The review
also confirms the overall, disturbing long-term budget picture
indicated in the Congressional Budget Office's (CBO) long-term
forecast. Under current law, both taxes and spending will rise
rapidly during future decades towards European levels, with an
ever-growing government taking a larger and larger proportion of
the nation's income and threatening America's future economic
growth. Decisive action is needed.
But faced with
this threat, Washington is paralyzed. Rather than seriously
tackling the tsunami of entitlement spending that will hit the
budget after the baby boomers begin to retire, Congress actually
made the situation far worse by enacting the huge Medicare
prescription drug benefit. And while the Bush tax reforms have
significantly helped in the short term, even if made permanent they
would shave only about one percentage point from the future growth
in taxes. Absent any additional reforms, the CBO forecasts that,
with the Bush tax cuts extended, federal taxes will top 20 percent
of GDP by about 2025 and approach 23 percent of GDP by 2045. The
historical average, and today's level, is just over 18 percent of
polarized and paralyzed, some Members of Congress, along with
President Bush, are exploring the idea of a bipartisan commission
as a way to break away from the path of rapidly rising spending and
taxes. President Bush pressed for an entitlements commission in his
State of the Union address. Senator Judd Gregg (R-NH) has sponsored
3521) that includes a commission to review the long-term
solvency of Social Security and Medicare. Meanwhile, Representative
Frank Wolf (R-VA) has crafted a commission bill ("The SAFE
Commission Act," H.R.
5552) specifically intended to win bipartisan support for bold
action to secure the country's fiscal and economic future. Senator
George Voinovich (R-OH) has introduced that bill in the Senate (S.
help break a political logjam. They can also become vehicles for
action that achieves a short-tem political fix and yet does little
in the long term or even makes things worse. So the political
dynamics and mandate of a commission are critical. Fortunately, the
Wolf commission bill recognizes these facts of political life and
offers real hope for sensible action. A reason for this is that in
its instructions to the commission, the bill wisely combines reform
with fiscal changes in a manner that could achieve a
The core of the
fiscal problem is the sharp projected rise in future entitlement
spending, especially spending on programs for middle-class
retirees. Contrary to many people's perception, taxes are not
falling-as noted, taxes are projected to rise steadily to record
levels under current law, in real terms and as a percentage of GDP.
Still, in today's political deadlock many lawmakers maintain that
tax revenue must be part of the equation if they are to have the
political "cover" to accept curbs on popular entitlements.
But for good
reasons, conservatives strongly resist the idea of raising taxes.
For one thing, taxes are not the problem-spending is. Moreover,
raising tax rates or instituting new taxes would threaten economic
growth, compounding the economic harm associated with government
spending. Further, raising taxes likely would reduce the pressure
on Congress to curb spending or, worse still, encourage lawmakers
increase their spending promises.
The Wolf bill
seeks a solution to this political equation. It creates a
bipartisan commission intended to address the "unsustainable
imbalance" between federal commitments and revenues while
increasing national savings and making the budget process give
greater emphasis to long-term fiscal issues. While the commission
could consider a range of approaches, the bill places emphasis on
two: reforms that would limit the growth of entitlements while
strengthening the safety net and tax reforms that would make the
tax system more economically efficient and improve economic growth.
The commission would hold public hearings around the country to
discuss the long-term fiscal problem, and its recommendations would
receive "fast-track" consideration by Congress.
By combining a
slowdown in entitlement spending with reforms to strengthen
assistance to the needy, a commission proposal could win support of
liberals and others who worry that surging middle-class retiree
spending in the future will crowd out safety net spending. And by
placing an emphasis on pro-growth tax reform, a commission proposal
could also lead to some additional revenues not by raising taxes
but thanks instead to faster economic growth-just as the Bush tax
reforms produced the recent sharp increase in federal revenues.
Combining these features in a commission proposal could lead to a
package that conservatives, liberals, and moderates all believe
would advance their agendas-a necessary result for an economically
sound agreement to succeed in a polarized Congress.
Some might argue
that appointing a commission to address the long-term fiscal
situation is an abrogation of responsibility by Congress. In an
obvious sense, it is. But the Wolf bill also shows that lawmakers
recognize that America's budgeting system is broken and in the
current environment cannot lead to a responsible long-term federal
budget. Representative Wolf's commission proposal seeks to alter
those destructive dynamics in order to secure a sound economy for
M. Butler, Ph.D., is Vice President for Domestic and Economic
Policy Studies at The Heritage Foundation.