How to Balance the Budget Without Raising Taxes - An Intellectual Exercise

by: James Bacon

The libertarian-leaning Cato Institute argues in a new paper that it is possible to balance the United States budget without raising taxes within the next 10 years.

Now, I’m all in favor of balancing the budget without raising taxes. Spending cuts are far less deliterious to the economy than tax increases, and they take less out of my pocket. Furthermore, I’d say that author Chris Edwards, Cato’s director of tax policy studies, makes a number of excellent points, which I will get to in a moment.

But I have to take issue with his proposal on two grounds.

First, and this is really odd for a guy whose title is director of tax policies, Edwards doesn’t address tax reform. As argued by Martin Feldstein, among others, the tax code is riddled with some $1 trillion in tax expenditures - deductions, credits, exemptions and other loopholes - that create wide discrepencies in the taxes paid by people in similar economic circumstance. If these were eliminated, we could create greater tax justice, lower personal and corporate income tax rates, and have enough left over to reduce the deficit by two or three hundred billions dollars. Even though the tax take would be larger, such a restructuring of the tax code would have a net positive effect on economic activity.

Second, and this is the most important, Edwards takes a big swipe out of entitlements - not only Medicare but entitlements for the poor such as rental assistance, student aid and other programs deemed inviolable by Democrats. It’s an unfortunate fact, but an undeniable one, that Edwards’ plan, if submitted as a piece of legislation, would be considered Dead on Arrival in the Democratic-controlled Senate. Indeed, it would be so dead that it would be Cremated On Arrival. Thus, the Cato plan is more of an intellectual exercise than a practical proposal.

As an intellectual exercise, however, Edwards’ “Plan to Cut Spending and Balance the Federal Budget” makes a number of important observations. Here are some of the highlights:

On subsidies to individuals and businesses, Edwards notes, the federal government operates more than 2,000 separate subsidy programs, which have doubled in number since the mid-1980s.

The federal government subsidizes farm businesses, retirees, school lunches, the energy industry, rental housing, public broadcasting, job training, foreign purchases of weapons, urban transit services and many other types of activities and people.

Each subsidy program costs money, generates a bureaucracy, spawns lobby groups and encourages more people to demand freebies from the government. Government subsidies are like addictive drugs, undermining American’s traditions of individual reliance, voluntary charity and entrepreneurialism.

On aid to state and local governments: In fiscal 2011, federal aid to the states will total $646 billion, distributed through more than 800 separate programs.

Federal aid stimulates overspending by state governments and creates a web of complex federal regulations that destroy state innovation. At all levels of the aid system, the focus is on regulatory compliance and spending, not on delivering quality public services. The aid system destroys government accountability because each level of government can blame the other levels when programs fail. It is a “triumph of expenditure without responsibility.”

On Medicaid and Medicare: Medicaid, Edwards contends, should be converted from a matching grant program into a block grant that would provide state authorities more flexibility - the same approach used successfully with welfare reform in 1996. “Setting the Medicaid block grant at the 2011 level of Medicaid spending would save about $190 billion annually by 2020.”

Medicare should be transformed into a system of individual vouchers, eliminating much of the Medicare bureaucracy and stimulating consumer-driven health care.

Privatization: Other countries have sold off state-owned assets to private investors. These include airports, railroads, electric utilities and post offices. Edwards specifically recommends privatizing Amtrak, the Army Corps of Engineers and the air traffic control system. Basing the air traffic control system on Canada’s Nav Canada would save about $4 billion a year in taxpayer dollars.

Disclosure: No positions.