True entitlement reform will hit upper and middle classes

  • Title:

    Progressive Consumption Taxation
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Article Highlights

  • The 1.8%-of-GDP expansion of Medicaid is overshadowed by the 4.3%-of-GDP expansion slated for Medicare and Social Security

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  • Any viable strategy to control federal spending must slow the growth of the two large middle-class entitlements

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  • Our fiscal gap won't close by undermining the safety net for the bottom 20% or by raising taxes on top earners:

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Two months ago, the House adopted a budget resolution that outlines the Republican majority's ambitious plans to slow the growth of federal entitlement spending. If implemented properly, entitlement spending restraint can address the long-term fiscal imbalance in a way that promotes economic growth and freedom. Unfortunately, House Republicans run the risk of succumbing to a morally and economically flawed approach that emphasizes cuts in low-income entitlements rather than reductions in the larger middle-class entitlements.

Entitlements - programs that automatically pay benefits to all eligible recipients - come in different forms. Some programs, such as food stamps, Supplemental Security Income, and Medicaid, are available only to low-income households. Others, such as Medicare and Social Security, provide benefits across the income spectrum, with the bulk of the payments going to the middle class.

"If implemented properly, entitlement spending restraint can address the long-term fiscal imbalance in a way that promotes economic growth and freedom." -- Alan ViardPolitically, low-income entitlements are the easiest to cut, at least for Republicans. Unfortunately, a focus on cutting low-income programs will undermine the safety net protecting the poorest Americans while failing to curb the middle-class programs that account for the largest share of long-run entitlement growth.

The Congressional Budget Office's latest long-run projection of current budget policy does show rapid growth for one low-income entitlement. Medicaid, together with related health subsidies, is slated to grow from 1.9 percent of GDP in 2011 to 3.7 percent in 2035. But, that 1.8-percent-of-GDP expansion is overshadowed by the 4.3-percent-of-GDP expansion - from 8.5 to 12.8 percent - slated for Medicare and Social Security. Meanwhile, all other federal programs are slated to shrink from 12.3 percent of GDP to 8.5 percent. Any viable strategy to control federal spending must slow the growth of the two large middle-class entitlements, Medicare and Social Security.

Following the lead of Budget Committee chairman Paul Ryan, House Republicans embraced some cutbacks in middle-class entitlements in their budget resolution. But, these measures are modest, relative to the cutbacks envisioned for low-income entitlements

The budget resolution punts on Social Security, making only vague calls for future reforms. On a brighter note, the resolution endorses Paul Ryan's bold call to restrain Medicare's future growth by transforming it into a premium-support program. But that change wouldn't take effect until 2022 and, even then, it would apply only to new Medicare beneficiaries. The budget resolution envisions much harsher treatment for the low-income population that relies on Medicaid, turning the program back to the states as a block grant, with a severe cap on funding growth. In contrast to the Medicare changes, the Medicaid changes would take effect almost immediately and would apply to both current and future beneficiaries.

The misdirected emphasis on low-income entitlements is becoming more pronounced as the budget process moves forward. Two weeks ago, the House began implementing the budget resolution, which is merely an outline of future legislative changes, by passing a bill to make specific entitlement cuts. Unfortunately, the bill emphasizes the parts of the resolution that target low-income entitlements while leaving the Medicare reforms for later. To be sure, some of the measures in the bill would correct genuine abuses, such as shutting down a gimmick that allows states to qualify people for food stamps by sending them a dollar of heating assistance payments. But, it's disturbing that the agriculture portion of the bill includes $36 billion of food stamp cuts while leaving subsidies for middle-income and upper-income farmers completely unscathed.

The long-term fiscal gap won't be closed by undermining the safety net for the bottom 20 percent, any more than it will be closed by merely raising taxes on the top 1 to 3 percent. To close the gap, those in between - the middle class, broadly defined - will have to bear much of the burden, through a mixture of entitlement cuts and tax increases.

House Republicans should be commended for trying to curtail entitlement spending. But, their efforts will founder if they pursue a morally and mathematically flawed approach that targets low-income programs. They should focus on the large middle-class entitlements, the real drivers of long-term spending growth.

Alan D. Viard is a resident scholar at the American Enterprise Institute.  He is the co-author of the just published Progressive Consumption Taxation: The X-Tax Revisited.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
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    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

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