A right budget blueprint

The simultaneous starts of this year’s budget process and next year’s presidential race began a two-year discussion of federal fiscal priorities.

This isn’t pure coincidence, both presidential campaigns and budgets innately are exercises in prioritization. Yet any time politics entwines policy, the latter is the likely loser. Pander quickly overtakes candor, yielding liberal promises of liberal spending for which others pay. It is important therefore to outline six principles to guide a conservative through this extended exegesis of economic, fiscal, and political priorities.

First is a basic understanding: Aligning outlays with revenues is inherently conservative. Fundamental economics tell us wants are infinite, means are finite. The only solution is to limit our wants, and that means controlling spending. As to the coming growth in entitlement demands, the nonpartisan Congressional Budget Office (CBO) echoed this observation: “A policy that relied exclusively or perhaps even primarily on increased revenues to restore fiscal balance could significantly impair economic growth by distorting economic decisions and reducing incentives for people to work and save.”

This leads to the second principle: America needn’t tax more, it needs to tax smarter. CBO’s annual budget update noted that the federal tax burden’s 40-year average is 18.2 percent of the economy. Last year’s level was 18.4 percent, is projected to increase this year and grow even more if the 2001 tax cuts expire after 2010. Diverting private sector resources to the government means a weaker economy, long term… and therefore less revenue than otherwise.

The goal should be a tax system that maximizes economic growth, rather than the current one that impedes savings and investment. Repealing special tax provisions, which produce isolated benefits, in exchange for savings and investment incentives would grow the economy. This larger economy would produce more revenue — even at the same overall level of tax burden. It would also be more enforceable and help retrieve some of the so-called “tax gap,” (owed but uncollected taxes estimated at almost $300 billion annually).

As benchmarks, if the economy were only 1 percent larger and just 10 percent of the tax gap were collected, there would be more than $50 billion in additional annual revenue.

The third principle: federal spending at least must be slowed but need not be cut. Certainly, cutting spending would be welcome. To understand how little need be done, consider: During this fiscal year’s first seven months, the deficit was $83 billion and outlays were $1.589 trillion — just a 5 percent spending cut would have balanced the budget. However, simply holding government spending to less than the economy’s rate of growth means tax revenues — especially from a tax reform-strengthened economy — would quickly balance the budget without any cuts. Such an approach is the very definition of sustainability — and the very definition of a conservative approach.

Of course, the coming entitlement spending surge makes the task both more difficult and more pressing. So the fourth principle must be entitlement reform.

Social Security should be the first target: It is comparatively simple (converting past earnings into future benefits) and the lessons learned could be applied to other entitlement programs. CBO proposed several reforms to rationalize Social Security, including raising the retirement age to reflect longer life expectancy and more accurately calculating inflation adjustments. These changes alone would save almost $200 billion over the next 10 years and far more in the future.

However, the key measures are basing benefit amounts on need and allowing private investment to generate additional resources for seniors. Only the truly needy should get full subsidization and everyone should have the opportunity for personal accounts’ real and higher returns. The changed demographics (the 1950 ratio of workers to Social Security beneficiaries was 16-1, today it is 3-1) since the program’s inception underscore these are the only ways to make the program fiscally sustainable and intergenerationally fair.

The fifth principle should be to reduce regulation’s cost on America’s industry. Regulations impose a real, but unrecorded, economic cost on America’s businesses. Academics Tom Hopkins (Rochester Institute of Technology) and Mark Crain (Fordham) have developed models to estimate federal regulation’s annual cost to business. Mr. Crain’s latest estimates put the cost at $1.1 trillion — roughly half the total federal tax burden and triple the corporate tax burden.

Reducing and limiting this “hidden tax” burden would have the same positive effect as reducing monetary taxes. Impaneling a commission to reduce the burden by at least 10 percent and then limiting future growth to no more than the economy’s growth would deliver a tax cut equivalent of $100 billion annually — further spurring economic and revenue growth.

Lastly, abandon existing baselines for making new policy. The goal is to create a new coherent policy, so using baselines that work off phony assumptions of current convoluted policies simply tie the hands of progress. A case in point, and there are many, is the alternative minimum tax. The current baseline assumes the AMT will “raise” billions in revenue from millions of Americans, whom the provision was never intended to affect, and which Congress has prevented from being collected for the last several years.

Yet fixing or repealing the AMT is assumed to “cost” billions. Instead take a page from the 1986 tax reform and start with a clean slate to create the correct policies.

Such a six-point approach provides an excellent conservative blueprint for fixing America’s fiscal imbalances. It would at least freeze — if not reduce — the government’s impact on the economy. It therefore would produce more revenue without an increased tax burden. And it would amount to a comprehensive approach to the looming entitlement explosion. Before conservatives allow talk of new taxes or new spending, either in budget or presidential debates, they should insist on such an approach.

J.T. Young served in the Treasury and the Office of Management and Budget (2001-2004) and as a congressional staff member (1987-2000).