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Washington Has a Spending Problem, Not a Revenue Problem

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It will be the end of the world as we know it if the federal government does not reform its fiscal ways, according to the Congressional Budget Office's recent Long-Term Budget Outlook...

The results from this year's report, particularly the extended alternative fiscal scenario, are even worse than last year's. The alternative fiscal scenario projects non-interest expenditures to reach 26.1% of GDP in 2037. This surpasses last year's gloomy outlook in which CBO projected expenditures to reach 25.0% of GDP in 2035. Historically, non-interest expenditures have averaged about 19%. Alarmingly, CBO projects debt held by the public, which excludes trust fund debt like Social Security, will be 199% of GDP in 2037, up from 69% in 2011.

The explosive increase in spending is driven primarily by growth in the Big Three entitlements: Social Security, Medicare, and Medicaid. In 2012, these three entitlement programs cost 10.4% of GDP. CBO projects these costs to increase to 12.9% of GDP in 2022 and 16.6% of GDP in 2037. CBO is actually projecting "other" spending -- which is everything but these three programs --to decrease from 11.6% of GDP in 2012 to 9.6% of GDP in 2037. In the alternative fiscal scenario, CBO assumes that budget caps from last year's Budget Control Act, which largely exempted entitlements, will be enforced but sequestration will not.

Clearly, we need to focus on entitlements. Currently, Social Security is the largest single government program, but Medicare will be the single biggest budget buster by 2037. Even though Medicare is the single biggest long-term threat to our fiscal situation, we need to focus on Medicaid and Social Security as well. Of these three programs, Social Security is the easiest to reform, and I've introduced a Social Security reform proposal that slows the growth in Social Security spending while protecting seniors and avoiding tax increases.

Of course, the reaction from the Left has been predictable: we need more revenue from rich people and oil companies. As a percent of GDP, federal government revenues are at historic lows, but not because our tax-rate-and-base structure is too generous to taxpayers. In 2012, CBO projects revenues to equal 15.7% of GDP which is lower than the 18% historical average, but this is attributable to high unemployment and low workforce participation rates. By 2017, CBO projects the economy will have recovered (apparently they are assuming Romney will get elected) and revenue will reach 18% of GDP under the existing tax structure.

Balancing the revenues and non-interest expenditures in 2037 with tax increases would require raising taxes from 18% of GDP to 26% of GDP, nearly a 50% increase. In a letter to Budget Committee Chairman Paul Ryan, CBO projects that ALL individual income tax rates would have to be increased by 86% in 2050 to stabilize the debt in the extended baseline scenario. That means the lowest tax rate would be 19% and the top rate would be 65%.

Besides, raising taxes before spending is brought under control will result in even more spending than CBO is projecting. The data demonstrate that Washington has a spending problem, not a revenue problem.

The Left argues that we can balance the budget by eliminating loopholes and tax expenditures. In fact, some argue that loopholes are really the same as direct government expenditures and also argue that eliminating these loopholes is not really a tax increase even though our taxes would be increased. Currently, loopholes reduce revenues by about $1 trillion, which is about the same amount that the government collects in individual income taxes. According to their logic, eliminating these loopholes would "reduce" government spending by $1 trillion when in reality taxpayers would experience a 100% increase in their individual income tax burden. Only in Washington could such "logic" be taken seriously.

Instead of mistakenly labeling loopholes as government expenditures, Congress should recognize these tax breaks as the reason why our tax rates are so high. Determining which tax breaks should be reduced or simply eliminated will be difficult, perhaps as difficult as reforming entitlements, but time is running out. We need to start a serious discussion on entitlement reform and tax reform now.


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