A recent report Washington could signal jolts of policy change — and it has nothing to do with abortion. The latest analysis from the Congressional Budget Office on what is needed to get America’s tax house in order makes a compelling case for getting back to sanity sooner rather than later.
The CBO looked at two scenarios for stabilizing federal debt (relative to gross domestic product) over 10 years. The first would gradually increase personal income tax rates in equal proportions for all incomes. The second would gradually reduce benefit payments for Social Security, Medicare, Medicaid and ObamaCare. The budget gnomes analyzed each scenario with three different starting dates, with fiscal tightening starting in 2026, 2031 or 2036.
Unsurprisingly, delaying the onset of fiscal responsibility requires larger tax increases or benefit cuts. Delaying action until 2036 means that debt would not stabilize as a percentage of the economy until the 2040s, and it would stabilize at levels 30 to 40 percentage points above current debt-to-GDP ratios. Delays are another obstacle to stabilizing debt through tax increases rather than benefit cuts. Waiting until 2036 to impose a tax increase regime would inflate the debt to 140% of GDP.
The CBO believes that stabilizing the debt through tax increases would permanently shrink the economy by discouraging work and crowding out private investment that would improve productivity. On the other hand, stabilizing the debt by lowering spending on social rights could encourage people to work longer and would increase private savings, which would accelerate economic growth.
The CBO report shows why Washington needs to rediscover its fiscal discipline. The dishonesty of ObamaCare, which used Medicare payment cuts to both fund new entitlements and improve Medicare’s fiscal position, helped create the current crisis. By extending Medicare solvency on paper, the law’s accounting gimmick allowed lawmakers on both sides to avoid substantive discussion of reform for a dozen years.
Those days of blissful tax ignorance will soon be over. Between now and the next presidential inauguration, in January 2025, Congress will face a toxic mix of long-delayed budget decisions. The Medicare trust fund will face impending insolvency, with ever-increasing losses projected at nearly $100 billion a year by the end of the decade. Many provisions of the 2017 tax reform will expire at the end of 2025. The military will need additional resources to respond to a more dangerous global environment. To top it off, the economy could face a recession, as the Federal Reserve’s inability to rein in rising inflation could lead to an overcorrection in coming years.
The American people know little about the magnitude of this impending crisis, in large part because a generation of politicians has shown itself to be singularly indifferent to educating the public about these inconvenient truths. The CBO report illustrates how a continued failure by our elected leaders to lead a movement for fiscal responsibility will cause the American people to pay the price for generations to come.
Mr. Jacobs is founder and CEO of Juniper Research Group and author of “The Case Against Single Payer.”
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