UPDATE: In response to several comments and questions, it should be noted that ATR has endorsed the Social Security and Medicare reforms contained in Congressman Paul Ryan's "American Roadmap" plan.  Because those programs are long-term problems, they are outside the scope of this short-term balanced budget plan. 
 

With the Simpson-Bowles “debt commission” chairman’s mark out recently, there have been lots of calls for balancing the budget on the backs of taxpayers.  That simply is not necessary.

The plan below has been designed by Americans for Tax Reform to balance the budget in the next five years without raising taxes and without cutting Social Security or Medicare (the things that conventional wisdom says you must do to balance the budget in the short term).  In fact, this plan cuts taxes to grow the economy.  It even does so using the dishonest “baseline budgeting” of CBO which assumes that government spending grows forever, and that spending less than this planned-outlay baseline is somehow a “cut” in spending.  After a 2011 cut, spending actually goes up every year.  Here’s how we do it:

Taxes

• All of the January 2011 tax hikes are avoided permanently.  This means that the top (small business) rate remains at 35 percent, the capital gains and dividends rate remains at 15 percent, the death tax remains expired, the marriage penalty is held at bay, and the child tax credit is not cut in half to $500.
• All of the other scheduled tax hikes on businesses and individuals are avoided permanently.  This preserves, for example, 50% “bonus depreciation,” small business expensing, and the R&D credit.
• The AMT is permanently patched.  No more families become AMT taxpayers than in 2009.
• The 2009 tobacco tax hike is repealed permanently
• Obamacare tax hikes are repealed permanently, de-funding that program
• The corporate income tax is revenue-neutrally reformed with a much lower rate and a broader base.  NIPA corporate profits would be the base goal with a target rate of 15 percent
• Some aspects of the personal income tax are simplified in a revenue-neutral way.  This has been discussed and largely agreed upon by both conservative and liberal tax experts and are not controversial.  The areas include: tax benefits for children, tax-free retirement savings, and tax breaks for higher education.  Other simplification reforms may also be possible.
• As a result of this pro-growth tax policy, real GDP growth is expanded by 0.5 to 1.0 percentage point annually, resulting in higher tax revenues.  These are determined using CBO’s rule of thumb that every 0.1 percentage point of higher real GDP growth raises tax revenues by about $25 billion per year
• By 2015, even with all these tax cuts and prevented tax hikes, federal tax revenues are still 17.6 percent of GDP, close to their historical average of 18 percent.  That historical average should be achieved several years beyond this five-year window.

Spending

• All discretionary spending (including defense) is rolled back and frozen at 2008 levels.  This can be achieved practically by measures such as freezing federal salaries and benefits, bureaucrat attrition, an earmark ban, and continuing the phased withdrawal of troops from Iraq and Afghanistan
• Social Security and Medicare are not touched relative to CBO’s baseline
• Medicaid and other entitlements are rolled back to 2008 funding levels, frozen, and block-granted to the states just like welfare was in the 1990s.  Obamacare is not implemented.
• The lower deficits result in much lower interest on the national debt
• By 2015, federal spending will decline from about 24 percent of GDP today to 17.6 percent.  This is close to the level of spending President Clinton had his last year in office (18.2 percent of GDP).

Deficits and Debt

• The over-spending amount (deficit) declines from over a trillion dollars in 2010 to full balance by 2015.  Compare that to deficits approaching $1 trillion dollars each and every year today.
• The publicly-held national debt peaks at just under 65 percent of the economy and dips to well below 60 percent in 2015.  Contrast this to the status quo level of 90 percent by the end of this decade.

(Amounts in billions of dollars)

Sources
CBO Budget Baseline and alternate policy scenarios

Tobacco tax hike score

Obamacare (both PPACA and the reconciliation bill)

CBO Historical Data

PDF Version

Posted by Ryan Ellis on Wednesday, November 17, 2010 12:50 PM EST

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