SETTING THE STAGE: 2013 AND BEYOND

Dr. Jason J. FichtnerSenior Research FellowMercatus CenterNovember 2012

Total Outlays and Revenues

2

Even with Sequester – Spending Goes Up

3

The Real Source of the Problem

4

Medicare/Medicaid and Social Security

5

Federal Debt Under CBO’s Budget Scenarios

6

Defense and Non-Defense Spending Squeezed as Autopilot Programs Explode

7

Growth in Entitlements Means Less $$$ to Budget

Source: Peter G. Peterson Foundationhttp://www.pgpf.org/Special-Topics/Spending-primer.aspxConstant 2009 Dollars based on OMB , GAO and OMB dataAuthor’s Calculations for FY2011

8

9

Medicare Costs Over Time

State and Federal Medicaid Spending

10

Social Security Trust Funds Annual Cash Flows

11

Social Security to Run Deficits Indefinitely

12

Social Security Trust Fund Exhaustion

13

U.S. Government Debt

14

A Huge Deficit Would Remain, Even If Any One of These Steps Were Taken in 2011:

15

Source: Office of Management and Budget, The New York TimesBased on fiscal year 2010 appropriations and disclosure reports from members of Congress who received spending earmarks for special projects.

Balancing the Budget with Spending Restraint

16

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20222,000

2,500

3,000

3,500

4,000

4,500

5,000

Revenues 19% GDPRevenues 18% GDPRevenues 17% GDPSpending Freeze1% Reduction1% Spending2% Spending

$ Bi

llion

s

Author's Calculations based on CBO August Update 2012. Revenues include the permanent extension of the 2001 and 2003 tax changes.Revenue for 2010 and 2011 are Actual; 2012 is CBO estimate; 2013 and forward are Author's Calculations

Share of Total Income Taxes Paid by Millionaires

17

Reforms for 2013 and Beyond

18

o First principle for reform: We must cut spending

oSecond Principle for reform: Everything must be on the table (no sacred cows)

o Third Principle for reform: Reforms must address our debt problem

Tax Reform

19

o Lower Marginal Tax Rates – Broader Tax Baseo Incentives Mattero Perceived unfairness promotes system abuseo High tax rates encourage avoidance and

evasion.o Bad tax systems chase investors awayo Good tax systems attract investors and jobs

Tax Reform

20

o Tax reform should fix the problem!o Policy positions should be based on clearly

articulated principleso The validity of each decision should be checked

against these principleso Long term solutions are superior to short term fixeso The best results come from fixing everything at the

same time.o Only People Can Pay Taxes

Entitlement Reform – Social Security

o Raise eligibility age for both Social Security and Medicare

o Tie cost of living increases to a better measure of actual price inflation

o Provide incentives to encourage work in later years -- or at least don’t discourage work

o Improve the rate of return on trust fund assetso Private accountso Change the benefit formula to make it more

progressive

21

Entitlement Reform – Medicare / Medicaido Institute of Medicine estimates $750 billion annually is

wasted medical spending or 30 percent of the total national health spending. To reduce this we need to focus on the process and introduce market-based reforms:• Premium support• Block grants• Move from fee-for-service to capitation fee

structure• Bundle payments• Reduce administrative complexity

22