Beyond the Debt Limit, Saving the American Dream

by J. D. Foster

The fight over the debt limit, as important as it is, is only the first round of a more fundamental decision on the size and scope of government. For too long, Congress has been on an unsustainable binge of spending, taxing, and borrowing. Our nation is effectively going broke, and our children and their children will be stuck with the debt arising from these misguided policies.

America is on the verge of becoming a country in decline — economically stagnant and permanently debt-bound, less prosperous, and less free. But this fate does not have to be our future. We can get spending under control, balance the budget, and contain the debt. 

But we must start immediately. The time for delay and denial is passed. It is time for decision and action.

We can begin by forcing a course correction, as Speaker Boehner outlined in his speech to the New York Economic Club yesterday, making substantial cuts in spending now in exchange for raising the debt limit. But, even if this strategy succeeds, it can only be the beginning.

The Heritage Foundation today released Saving the American Dream, a comprehensive plan to finish the job by shrinking government, holding the line on spending, reforming the tax code, slaying the beast of rising national debt, and, above all, restoring prosperity. It balances the budget within a decade — and keeps it balanced. It cuts government in half by focusing spending on where it is most important and eliminating everything else. 

The Heritage plan addresses a simple underlying problem: The government is doing things it should not be doing and spending far more than we can afford to pay or should be paying. And the problem gets rapidly and substantially worse in the years ahead as the baby-boom generation reaches retirement. According to Congressional Budget Office estimates, federal spending has already jumped to about 23 percent of our economy from a historical average of around 20 percent, and is projected to hit 35.2 percent by 2035. It is time to move decisively toward a limited federal government that confidently ensures basic economic security for younger and older Americans alike

In the face of soaring spending, the nation faces three basic options. First, we can simply cross our fingers and hope for the best. Of course, this is not a real option. Global capital markets have limited tolerance for fiscal fantasy, as some in Europe are learning to their dismay. 

The second option is to raise taxes. And who would pay the bulk of these taxes? Not those in or near retirement. The lion’s share of the higher taxes would inevitably be paid by those just starting out in life. Indeed, this second choice would simply substitute taxes on young Americans for borrowing serviced by the same young Americans. To make matters worse, higher taxes would also mean less economic growth, and so lower wages, fewer opportunities, and less prosperity.  This is not what I envision leaving my children.

The third solution is to fix the spending and debt problem by restoring the federal government to its proper functions. This will mean deep and sustained reductions in federal spending. The root of the spending problem is entitlements, and so that is where the bulk of the reductions should fall. The good news is that we can do this and still assure economic security to middle-aged and older Americans. 

Specifically, the Heritage plan:

— Balances the federal budget within a decade and keeps it balanced.

— Holds the level of federal taxes at no more than 18.5 percent of our economy, the historical average under normal economic circumstances.

— Cuts the size of government by about half within 25 years.

— Reforms the federal tax system so that it is simpler, fairer, and more consistent with a growing economy.

— Protects America and its interests around the globe by ensuring full funding for national defense.

— Protects the young and old alike against poverty while giving everyone greater opportunities to prosper.

The Heritage plan includes fundamental reforms to Social Security, Medicare, health care broadly, most other federal spending, and to the tax system. In many respects, each of these reforms follows well trod, well understood paths, but simply does so in a more determined, more rational way that saves the American dream for future generations. 

For example, the Heritage plan would reform Social Security by moving the program — over 25 years — to a flat benefit amount that is more generous than today’s average benefit, but then explicitly reducing the amount of benefits for affluent seniors above certain income thresholds.  This is less novel than it may appear: Today the formula determining a senior’s benefits is highly progressive. The taxation of those benefits is also highly progressive, though the progressivity is largely hidden in the current tax code. Under the Heritage plan, Social Security is transformed into a program to insure against poverty, not merely a vast tax and transfer system with hidden progressivity and the federal government as middleman. 

At the end of the day, Saving the American Dream, while economic in nature, has a higher moral purpose. It encourages saving and wealth creation, so families can be more independent, more economically secure, and more able to pass that security on to their children. And it erases the threat from government entitlement programs that would force the next and future generations to pay punitive taxes. The Heritage plan aims to preserve America’s promise bequeathed to us by past generations, and honors that promise by passing it on to future generations.

J.D. Foster is The Heritage Foundation’s Norman B. Ture Senior Fellow in the Economics of Fiscal Policy.

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