What the (Bleep) Just Happened? (49 page)

We can no longer tolerate a federal government that refuses to restrain even the
growth
of government, never mind refusing to actually
cut
it. We need a fundamental change in the budget’s engineering, something Representative Paul Ryan began to propose with the Republicans’ 2012 and 2013 budgets. Ryan, the chief conservative green-eyeshade guy, has been hip-deep in budget matters for years. His ideas represent a clear path forward to fiscal sanity and ultimately the economic health of the nation. Implementing even parts of his plan may be exceedingly difficult, but it has already accomplished two critical things: (a) It has gotten our leadership and the public focused on the reality that we cannot go on spending and amassing debt at these levels. And (b) it recognizes that we’re in an economic war—and its solutions embody the principles of the Happy Warrior. His program may or may not be the endgame, but it—like Obama’s blown-off bipartisan deficit reduction commission—truthfully acknowledges the seriousness of the economic battle and the weapons and will we’re going to need to fight it.

To start, we must aim to shrink spending by trillions of dollars over the next ten years. Ryan’s budget calls for $6.2 trillion in savings. Other plans offer similar spending reduction targets. We’ve got to reduce the percentage of debt to GDP and adjust the spending trajectory to bring down the debt. Ryan’s plan brings spending below 20 percent of GDP. Other recommendations go even further, aiming to push federal spending down to 18 percent. Getting federal spending down to those levels would reduce deficits by about $4.4 to $5 trillion. In the context of a national debt speeding toward $17 trillion, it’s not a cure-all, but it’s a start.

Several key reforms must be carried out to bring spending down. Spending on domestic government agencies should be kept at or below 2008 levels and frozen for five years, while unnecessary and redundant departments and bureaucracies should be eliminated entirely. EPA, I’m looking at you. If the government wants to study the mating habits of the North American egret, then they should get a private organization to fund it. Taxpayers don’t exist to pay for bird sex. In addition, permanently banning earmarks; getting rid of Fannie Mae, Freddie Mac, and other tax dollar–sucking government-sponsored enterprises; and eliminating “green” and farm subsidies such as ethanol would also cut federal outlays significantly. Numerous subsidies also should be terminated or reformed, the federal workforce cut through slashed budgets and attrition, and wasteful spending at the Pentagon eliminated rather than hitting Defense through the Obama cuts and the pell-mell reductions coming in 2013, thanks to the Super Committee mega-choke.

We’re in such a deep debt hole that if Ryan’s reform plans were put in place and kept “as is” (which never happens in Washington over any duration), it would still take us twenty-eight years to balance the budget. Senator Rob Portman, who served on the Super Committee, has suggested a “dollar-for-dollar rule” as a permanent debt-limit policy. He argues that if we match debt increases with spending cuts, we could cut over $5 trillion over the next decade and balance the budget without raising tax rates. Representative Connie Mack has advanced the “Mack-Penny” plan, which would cut federal spending by 1 percent each year over the next six years, cap spending at 18 percent of GDP by 2018, and reduce overall spending by $7.5 trillion over the next decade. The Ryan, Portman, and Mack plans are serious proposals that deserve serious attention. We can debate their individual merits, but we can’t stall deep spending cuts for much longer.

To spur economic growth, consequential tax reform is a critical companion element to spending cuts. Reform that would simplify the tax code and infuse it with pro-growth incentives would increase competitiveness and fire up job creation, consumer spending, and investment and other economic activity. Ryan suggested two rates: 25 percent and 10 percent. Steve Forbes has argued for years for a flat tax, in which all existing tax rates would be junked and replaced with a flat, across-the-board 17 percent rate and expanded exemptions for individuals and children so that a family of four would pay no income taxes on the first $36,000 of income. Furthermore, there would be no tax on Social Security, pensions, or personal savings, and his plan would zero out capital gains. Newt Gingrich proposed an optional 15 percent flat tax, and Herman Cain championed a 9 percent individual federal income tax rate, a 9 percent corporate tax rate, and a 9 percent national consumption tax. A flat federal income tax has the virtues of being simple and equitable; everyone would have to pay something, giving everyone a stake and a responsibility. Nations that currently have a flat tax include numerous former Soviet bloc states such as Hungary, the Czech Republic, Lithuania, Georgia, and my cabdriver’s place of birth, Bulgaria. Iraq has also instituted a flat tax.

Other tax reform advocates have suggested scrapping all federal taxes on personal and corporate income and replacing them with a Fair Tax, which would be a national consumption tax on all retail sales that would provide rebates to poorer Americans to offset its regressive nature. Various concerns about revenue neutrality (but not about spending!), the development of underground economies, and general workability come up in discussions about a flat or fair tax, but they deserve real attention.

More traditional approaches to tax reform involve lowering the top individual and corporate rates from 35 percent to about 25 percent or below. The Simpson-Bowles deficit commission recommended reducing and flattening individual income tax rates to 8 percent, 14 percent, and a top rate of about 24 percent depending on how many and which tax breaks were eliminated. Another bipartisan deficit commission, Rivlin-Domenici, advised reducing tax rates to 15 and 27 percent. Simpson-Bowles recommended cutting the corporate tax rate to 26 percent and Rivlin-Domenici suggested a corporate rate of 27 percent in exchange for jettisoning multitudes of corporate subsidies and tax breaks. Obama and most Democrats wouldn’t hear of it. Their mission is to soak the rich and hit their enemies, and that doesn’t involve cutting tax rates on them. That’s why we must insist on it, for the health of the economy as well as the body politic.

Of course, the Machiavellian Obama may pretend to move toward adopting some of the Simpson-Bowles recommendations before the 2012 election to appear newly “fiscally responsible.” If he does, be aware of the charade. As his long record of profligacy shows, he has no intention of seeing through major fiscal reforms. Tax increases of any kind would damage an already fragile economy by taking more money out of what’s left of the private economy. Besides, we hope that Republicans have finally learned their lesson about agreeing to Democrats’ tax increases in exchange for promised spending cuts. In 1982 President Reagan agreed to a budget deal in which the Democrats promised to cut $3 in spending for every $1 in tax hikes. They lied. The tax hikes arrived but the cuts never did. George H. W. Bush was duped in similar fashion when he agreed to tax increases in exchange for spending cuts, which of course never materialized. Most Republicans have finally tired of sprinting eagerly toward the spending-cut football while Lucy the Democrats constantly pull it away.

We need a flatter and broader tax base, which would force everyone to pay something to the federal government rather than exempt about half from paying anything at all. With everyone having at least some skin in the game, everyone would then have a stake in how their money is spent. Demands for accountability would rise, as would revenues. We also need
permanent
tax cuts and incentives, not gimmicky temporary ones that fail to stimulate growth because they do nothing to reduce uncertainty. The kooks’ goal is to institutionalize their new spending levels of 25 percent of GDP, which will then require ratcheting up tax rates forever. We cannot allow that spending level to become the “new normal.” Most reform advocates—and most of the American people—agree that the current labyrinthine tax code discourages the working, saving, investing, risk taking, and hiring necessary for growth and prosperity. Tax reform along any of the proposed lines would also raise revenues not by raising tax rates but by stimulating growth, jobs, and greater wealth creation.

Structural reform of the big-budget monsters of Medicare, Medicaid, and Social Security is also necessary to save those programs from complete collapse. Those who oppose major reforms of these programs argue that they would be imperiled by exposure to major cuts and the whims of the market. And yet, if nothing is done, the programs will buckle under the weight of their own unsustainability. All significant entitlement reform proposals take pains to ensure that those at or near retirement age would be grandfathered in to the existing programs and benefits. There must, however, be responsible changes for future program recipients. Ryan suggested replacing the giant, opaque, and fraud-ridden slush fund of Medicare with the same kind of health care plan enjoyed by members of Congress. Later gaining the bipartisan support of Democratic senator Ron Wyden, Ryan built reform around the concept of a “premium support” system where seniors, with federal financial help, could choose from a menu of private plans, each offering Medicare-equivalent benefits and with providers competing for their business. In a premium-support model, Medicare would make payments to the plan chosen by the patient, subsidizing its costs while giving the beneficiary more freedom to make decisions over his own health. Furthermore, the Ryan-Wyden plan would still offer the traditional fee-for-service option and provide more help for lower-income Americans and those who are sicker and at higher risk for getting ill. Medicaid would be converted into a blockgrant program to the states, in a way similar to the Clinton-GOP welfare reforms of the 1990s. This would allow the states to design a better range of options for their residents and increase the program’s efficiency. Ryan proposed similar reforms to the food stamp program in order to eliminate the perverse incentives that reward states for adding to their rolls. These proposals have provoked the ire of the leftists and others who refuse to acknowledge the dangers of the status quo. But we mustn’t get lost in the fog of political passions: these plans offer at least a meaningful starting point for reform, without which Medicare and Medicaid are going to end up in the emergency room, unable to be resuscitated.

On Social Security, Obama’s deficit reduction commission made important recommendations to ensure its future solvency: gradually raising the retirement age and slowing the growth of benefits, new formulations of cost-of-living adjustment (COLA) calculations, and raising the payroll tax (something the Republicans did not embrace). The Democrats flat-out lie when they say that such reforms are designed to destroy Social Security. To the contrary: a truly radical conservative plan would eliminate Social Security (as well as Medicare and Medicaid) altogether. That’s not what Ryan, the GOP, and the bipartisan Simpson-Bowles commission are suggesting. They are proposing practicable ways to get Social Security to sustainability so that it may continue for generations of seniors. The year 2011 was the first time the program paid out more than it took in, and with the repeated raiding of the “trust fund” for other spending and payroll tax holidays and the huge number of baby boomers now retiring, there’s no way that Social Security can withstand the strain without critical reforms.

When Standard & Poor’s downgraded the U.S. credit rating, it said that unless and until we pair entitlement reform with pro-growth policies in a coherent long-term plan to deal with our debt, our economy will continue to slide. And forget about ever seeing that AAA credit rating again.

No spending and deficit reform would be complete without addressing the Mother of All Entitlements, ObamaCare. We must pull the plug on that fiscal time bomb before it detonates. Until the entire law can be repealed, eliminating budgeting for ObamaCare is needed immediately in order to prevent it from squeezing the life out of our health care system like a hungry python. This would include eliminating budgeting for its unsustainable expansion of Medicaid and the new rationing board in charge of Medicare.

As critical as repealing ObamaCare is, however, reverting to the status quo ante isn’t acceptable either. The health care system needed reform; it didn’t need nationalization. Unless real market-based reform is undertaken, health care costs will consume 100 percent of our GDP within the next two decades, leaving no money for defense, Social Security, or anything else. ObamaCare will accelerate costs, not drive them down.

Market and patient-based health care reform proposals aim to truly lower costs by increasing competitiveness: allowing insurance to be sold across state lines, permitting insurance portability from job to job, enacting significant tort reform to lower malpractice costs, and empowering individuals by allowing them to control their own costs with personal health-savings accounts and other means. Real reform would also eliminate oppressive government mandates such as issue guarantee and other directives that force insurance companies to guarantee coverage and offer similar pricing to every person and family. Ryan’s plan in particular would change the way the tax code treats health insurance. Employer-based coverage isn’t taxed on par with wages, so the government encourages companies to offer coverage rather than provide higher wages and let employees buy their own insurance. When the value of the coverage goes up, so does the tax break to the company, resulting in inflationary incentives. Real reform would take the tax break and turn it into a tax credit for those who get their coverage from their employers as well as those who purchase it themselves. If you wanted to buy insurance that costs more than the credit, you’d pay the difference. The logical result would be that people would buy less expensive coverage and would be more likely to pay for regular medical expenses out-of-pocket, thus driving prices down. Individuals would have more control over their coverage, rather than having to rely on an employer, and because people wouldn’t have to switch insurance as often, the preexisting-conditions issue would eventually diminish.