27 Apr Entitlements and Taxes

“Entitlement spending and tax cuts have fueled unaffordable deficits. To fund those deficits, America will have to reduce entitlements and increase taxes. Sorry!” – The Lonely Realist

America for decades has been spending more than it earns, far more …, a subject much-discussed in prior TLRs. What began as a “one-off” response to 9/11 became a pattern of U.S. spending on wars, benefit increases, pandemic subsidies, business incentives, and post-Great Recession money-printing-without-end. During the past 20+ years, tax reduction and IRS budget cuts have added to deficits. The combination of money-printing, excessive government spending and reduced tax collections funded unprecedented growth and prosperity for which each Political Party has claimed credit …, though each has denied responsibility for the increases in debt and deficits. Despite debt of >$34.5 TRILLION and ANNUAL BUDGET DEFICITS of >$1.5 trillion, candidate Joe Biden is proposing to increase government spending (and partially offset that increase by a tax on billionaires) and candidate Donald Trump is promising tax cuts (without comparable spending cuts) …, with neither having the good sense courage to honestly address the ticking Debt Bomb undermining America …, which is in addition to the approaching Social Security payments crisis.

As economist Herb Stein famously said, “If something cannot go on forever, it will stop.” America’s excessive spending, inadequate revenue and resulting trillion-dollar deficits cannot continue indefinitely. Something’s gotta break. The hope is that an awakening will be triggered by the December 31, 2025 sunset of the Trump Administration’s 2017 tax revisions which, if allowed to occur, will upend embedded interests (for example, those in the highest tax bracket will see their rates increased and those living in Blue States will see their SALT deductions restored, etc.). While debates about continuing the 2017 tax revisions are unlikely to create the impetus for a full fiscal review, they will present a newly-constituted Congress with the opportunity to begin such a process. If Congress instead kicks the fiscal can down the road (as its predecessors have done for decades), retirees who are due payments under Social Security and Federal retirement plans will find that the funds purportedly “set aside” for them will be gone by 2034, U.S. national debt by then will exceed $50 trillion, and annual interest on America’s debt will exceed 4% of GDP – an apocalyptic scenario.

Candidate Trump in 2016 railed against America’s tax system, labeling it “complex” and “unfair” …, as it was and still is. Unfortunately, like his predecessors (other than Ronald Reagan and Dwight Eisenhower), there was no subsequent move towards simplification or revenue-enhancement. Besides adding to complexity and America’s fiscal deficits, the Trump Administration’s 2017 tax revisions exacerbated the perception of unfairness by reducing taxes on the most affluent and doing nothing with respect to lower-income Americans (who pay no taxes at all). The sad fact is that both Political Parties are playing the “blame game.” Neither is serious about addressing fiscal realities or correcting the tax system’s acknowledged “complexities” and “unfairnesses.”

The reason is political expediency. The last time tax reform was seriously considered was in 1995-96 when Congress debated adopting a simplified flat tax that would have reduced tax preferences and taxed consumption (both of which are favored by TLR). Pushback from special interests led to exactly the opposite: the Taxpayer Relief Act of 1997 added new deductions and tax credits, made taxes more complicated, and paid for newly-enacted “tax expenditures” by selectively targeting small constituencies. That’s been the game for decades. America’s tax system is such a complicated mess that members of Congress refuse to seriously address reform. This argues for scrapping the current tax code through a healthy legislative-and-executive process …, as TLR frequently has advocated. A window of opportunity to do so will open in 2025 when the next President will be in his final term and a disproportionate number of Congress-members will be facing retirement – with neither threatened by the loss of their political sinecure and both having the opportunity to secure a lasting legacy.

TLR recently addressed the entitlement side of America’s debt and deficit problem by advocating measures to pare entitlements. Ongoing and ever-increasing expenditures include Social Security, Medicare, Medicaid, Veterans’ Administration programs, Federal employee and military retirement plans, unemployment compensation, welfare programs (including food stamps), agricultural price supports, national defense spending, the interest expense on Federal debt, etc., etc., etc. Each entitlement is politically fraught, having its own powerful constituency. For example, past proposals to means-test for Social Security and Medicare, raise the retirement age and/or increase taxes to pay for entitlement programs have gone nowhere. From an electoral perspective, they are the “third rail” of American politics, not to be touched by politicians without electoral electrocution. Unfortunately, passage of even these simple proposals would have little effect on today’s deficits without being coupled with broader deficit reduction and tax reform. As TLR first suggested more than 5 years ago, Congress should be focusing on entitlement simplification (another electoral “third rail”) by collapsing the existing spiderweb of entitlement programs to cast the broadest possible safety net for the greatest number of Americans at the lowest affordable cost, perhaps via a universal basic income.

If tax and entitlement simplification is fanciful or implausible …, then readers should anticipate a future featuring a Debt Bomb explosion of historic proportions. Trillion dollar budget deficits and the interest expense on tens of trillions of debt dollars cannot continue forever. The solution is cutting entitlements and increasing taxes …, and neither step alone is sufficient. With a Debt Bomb detonation in America’s foreseeable future, entitlements and tax reform should be serious 2024 campaign issues. If elections truly are about “the economy stupid,” then why aren’t politicians of all hues beating the deficit drum? After all, 2025 is a year in which compromise should be possible …, and America’s politicians should be making that clear.

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Finally (from a good friend)