3 views on best way to curb US debt
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3. Cut spending, raise taxes: Follow the bipartisan Bowles-Simpson formula and do both.
To reduce current deficits and slow the growth of debt so that it stabilizes and then shrinks, the United States will need both spending reductions and tax increases. The next Congress and president should quickly enact such measures, but phase them in to avoid undermining a fragile recovery.
The bipartisan plan spearheaded by Democrat Erskine Bowles and Republican Alan Simpson, who led President Obama’s debt commission, suggested roughly $2 in spending cuts for every $1 in tax increases. That’s a healthy ratio. Since Congress approved a spending cut of more than $1.5 trillion over the next decade as part of the Budget Control Act of 2011, the US only needs about $0.5 trillion in further spending cuts and $1 trillion in tax increases to be consistent with the Bowles-Simpson plan.
Over the longer term, spending cuts must include major reforms to entitlement programs such as Social Security and Medicare. This could include raising the retirement age, linking benefits to income, and raising the proportion of earnings covered by payroll taxes. It also means slowing the growth of health-care costs.
Defense spending can be lowered by reassessing threats and ending two wars.
Other domestic spending has already taken a big hit and can’t be reduced much, if any more, without curtailing growth-enhancing, high-priority areas such as education and infrastructure, veterans’ programs, or public safety.
Tax reform that broadens the base by eliminating or limiting many existing deductions and preferences is essential. Cutting out even half of these preferences along with the spending cuts identified above would put the US on a sustainable fiscal path as long as revenues raised are devoted primarily to reducing the deficit and only secondarily, if at all, to reducing tax rates.
Will the next president propose and the Congress enact such changes? Only if the public is ready to follow their lead.
Isabel Sawhill directs the Budgeting for National Priorities project at the Brookings Institution in Washington. She served as an associate director of the Office of Management and Budget from 1993 to 1995 during the Clinton administration.
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