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Americans for Tax Reform Center for Fiscal Accountability

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an effort to create searchable online databases for government expenditures

a tool to highlight the hypocrisy of tax hikers

Constitutional or statutory requirement to rein in growth of revenues end expenditures

a commitment made by elected officials and candidates for elected office never to raise taxes

Raising the bar for tax increases

Requiring a cool-off period for all bills with a fiscal impact

pork-barrel spending - the broken windows of the budget

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Cost of Government Day 2008

Special Focus: America’s Entitlement Crisis

Federal spending has hovered around 20 percent of GDP for over 50 years now, ever since it settled down after World War II. Despite all the battles over taxes and spending, the federal share of our economy has been fairly stable all of this time. However, this relative stability will change quite dramatically without fundamental reform of our nation’s entitlement programs. The latest long term projections of the Congressional Budget Office estimate that federal spending will soar to close to 40 percent of GDP over the next 30 years or so, primarily due to exploding costs for Social Security, Medicaid, and Medicare. Factoring in costs for state and local government, the explosion of entitlement programs will bring total government spending in America to well over 50 percent. If anything even close to this happens, the fundamental nature of the U.S. economy and government will have changed. We will have traded in our capitalist free market economy, the source of America’s historic prosperity, for Swedish socialism. The advocates of limited government will have been completely routed.

The Fallacy of the “Smart Surrender” Strategy

This looming disaster has rattled even some conservatives in Washington. Some of them want to negotiate a grand deal between conservatives and liberals, Republicans and Democrats, with huge tax increases in return for large entitlement benefit cuts. But if federal spending is at 20 percent of GDP now and rising to 40 percent, where will such a deal leave it in the future? Cutting such a deal would no doubt leave it somewhere in the middle. However, even an increase to 30 to 35 percent would still have disastrous consequences for the American taxpayer. The “smart surrender” strategists would offer to free market advocates of limited government a huge, unprecedented tax increase, hiking federal taxes by somewhere near 75 percent relative to GDP, and in return, Americans would see a huge, unprecedented increase in federal spending, also somewhere near 75 percent relative GDP. This is not inspired leadership. It is pedestrian thinking leading only to surrender and defeat. Taxpayer and free market advocates need to oppose any movement in this direction. This entire approach fundamentally misconceives the true nature of the problem. The problem is not the long term deficits, with the top priority being a deal to balance the long term budget. A deficit of 5 percent of GDP with federal spending at 20 percent is far preferable to a balanced budget with federal spending at 40 percent of GDP. The real problem is the total level of government spending. Reform needs to focus on reducing federal spending as a percent of GDP. Tax increases do not help to solve the problem. They just feed more federal spending, so they only compound the problem. On the other hand, this looming economic and fiscal catastrophe is never going to be avoided by simply trying to cut entitlement benefits. The gap is just too big. The political system will never allow for enough cuts to make much of a difference.

The Solution: Thinking Outside the Box

Politically successful entitlement reform requires reformers to think outside the box of current entitlement programs. Instead of focusing on packages of tax increases and benefit cuts, reformers need to focus on restructuring and modernizing these programs from the bottom up. The public is still going to insist on maintaining social safety nets that protect everyone.   But through fundamental, structural reforms, we can provide new entitlement frameworks that actually maintain the social safety net and, indeed, actually achieve the social goals of these programs far better than the current, outdated, 19th century entitlement structures. The key is to bring in much greater roles for highly productive modern capital and labor markets to serve the goals of these programs. At the same time, these reforms would leave the programs costing far less in terms of government spending. In fact, far more can be achieved in reducing Big Government and government spending through these positive structural reforms than through benefit cuts. This approach provides the prospect of actually making entitlement reform appealing to voters, and, indeed, even popular. Replace the Payroll Tax with Personal Accounts. One key concept for positive, structural entitlement reform is personal accounts for Social Security, where workers would be free to choose to substitute savings and investment accounts for at least part of the current system. These accounts involve expanding the overall Social Security framework to bring in a central role for modern capital markets in serving the goals of the program. Personal accounts are especially powerful in reducing government spending because they don’t just trim the growth of such spending. They would shift huge chunks of it from the public to the private sector, dramatically reducing federal spending over the long run. These accounts could start at any size, and then could be expanded over time until workers could choose to substitute the accounts for all of their Social Security retirement benefits. The accounts could be expanded further, eventually substituting private life insurance for Social Security survivor benefits, and private disability insurance for Social Security disability benefits. Ultimately, personal accounts could be expanded to cover the payroll taxes for Medicare, with the saved funds financing annual annuity benefits that would be used to purchase private health insurance in retirement. Such accounts would reduce federal spending by close to 10 percent of GDP, as they replace this spending with market financed benefits. Such spending reductions would involve an enormous, unprecedented, historic achievement. In the process, the payroll tax would ultimately be phased out completely, and replaced with an engine of personal family wealth in the personal accounts. Workers would get much better benefits through these accounts because market investment returns are so much higher than what the non-invested, purely redistributive, Social Security system can even promise, let alone what it can pay. Workers across the board would accumulate several hundred thousand dollars in real terms by the time they retire, directly owned by each worker, which could be left to the family at death. Average income families could expect to accumulate close to a million dollars and more in the accounts. This would do far more to reduce inequality than anything else, yet do so in a way that reinforces rather than undermines the economy. Indeed, done right, such reform would produce an historic breakthrough in the personal prosperity of working people. This is a dramatic, long term vision for reform for the taxpayer movement and free market advocates to work towards over time. A bill introduced in the last Congress by Rep. Paul Ryan (R-Wis.) and Senator John Sununu (R-N.H.) serves as a comprehensive model of how to structure such accounts, with substantial input from the Social Security Administration itself and from experienced Wall Street fund administrators on how to make the concept workable. That bill also maintained the current social safety net in full, by including a federal guarantee that if any retiree’s account cannot pay at least what Social Security would under current law, the federal government would pay the difference. This is feasible because capital market returns are so much higher than even what Social Security promises, let alone what it can pay. As a result, it is extremely unlikely that the fully invested personal accounts would not be able to pay at least what Social Security promises, especially when workers are investing through a structured framework where they are choosing among highly diversified, professionally managed, investment funds approved and regulated by the government for safety and soundness. These features follow exactly the model personal account reform adopted in the South American nation of Chile over 25 years ago, which has worked spectacularly well. Recent history confirmed the popularity of such personal account reforms as many candidates won elections campaigning on such accounts from 1998 through 2004, including President Bush. Indeed, voluminous polling conducted over the summer of 2007 by Newt Gingrich’s organization American Solutions found that two-thirds of Americans still support a personal account option for Social Security. This is the most popular reform alternative for Social Security by far. President Bush’s failure to enact reform should not be held as evidence of contrary public opinion. Despite his policy goals, President Bush allowed every ill-advised, unpopular idea to remain on the table as well, such as cutting the basic benefit formula, increasing taxes, delaying the retirement age, etc. This buried the positive, popular features of the personal accounts, discouraged the grassroots, and lost the appeal to the general public necessary to succeed in enacting the reform. Future leaders should and will take away the palatability of fundamental Social Security reform as initially advanced by President Bush, without falling into the same traps again when the opportunity arises to push for legislation. Block Grant Welfare to the States. A second key concept for positive, structural entitlement reform is block grants back to the states for the remaining federal welfare programs. Legislation enacted in 1996 block granted the old Aid to Families with Dependent Children (AFDC) program back to the states. The share of federal spending on this program was returned to each state in a block grant to be used in a new program designed by the state based on mandatory work for the able bodied. The key is that the block grant is finite, not matching, so it does not vary with the amount the state spends. If the state spends more, it must pay for the extra costs itself. If the state spends less, it can keep the savings. The reform was shockingly successful, with the old AFDC rolls reduced by close to 60 percent nationwide, and close to 80 percent in states that pushed work most aggressively. Requiring able bodied recipients to work for their benefits eliminates the old welfare work disincentives. But probably even more important are the reversed incentives for state administrators. Previously, the federal government matched increased state spending, so each new welfare dependant signed up brought more federal funds to the state. But with the state now paying all added costs, the focus has changed to getting recipients out to work. These reforms bring in modern labor markets to take over more of the role of providing for the poor, through wages earned in real private sector jobs. This again sharply reduces government spending over the long run. These same reforms should now be extended to the other federal welfare programs, particularly the budget-busting Medicaid program. Even if the reform allowed each state to keep all of its savings from greater flexibility, positive incentives, and reduced rolls, and federal spending on the block grants was just not increased, block granting Medicaid alone would save the federal government a trillion dollars over the first ten years. This would help greatly in financing the transition to personal accounts.   If federal spending growth on the block grants was limited to grow no faster after that than the rate of growth of GDP, then Medicaid would no longer contribute to increasing federal spending as a percent of GDP. Large personal accounts would contribute to reducing Medicaid spending over the long run, by providing a source of funding for nursing home care insurance for older retirees. If families reach retirement age with half a million to a million dollars in their accounts, they could use some of that money to buy such insurance to protect the rest of the family nest egg. Personal accounts and block grants for Medicaid consequently are quite complementary reforms. Such block grant reforms should also be expanded to Food Stamps, federal housing assistance programs, Supplemental Security Income (SSI), and other, smaller federal welfare programs as well. The new state programs created with these block grant funds can be focused on getting beneficiaries into real, private sector jobs, market health insurance, and ultimately even home ownership. The result would be a much better overall safety net system for the poor, and ultimately a transformation of the current “welfare system” into a “Prosperity System”. This would provide a new, historic opportunity to dramatically curtail poverty, and again greatly expand the prosperity of working people. Shifting all these welfare programs back to the states would produce enormous savings in federal spending. Indeed, it would probably reduce state spending sharply over time, as the current welfare population moves into work and up the ladder to the middle class. Such welfare reform has long been popular, which is why it passed in 1996 despite opposition from many liberals and President Clinton. Now that it has been proven a huge success, it should be even more popular. go to next page

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