A Balanced Plan for Fiscal Stability and Economic Growth

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Introduction

Our plan seeks to achieve long-term fiscal stability and promote economic growth by aligning federal spending and revenue and pursuing market-based policy reforms. The plan reduces the national debt by over $60 trillion in 2054. In that year, debt as a share of the economy would drop significantly, from 166 percent of GDP in the baseline to about 85 percent of GDP as a result of the proposed reforms. More stringent spending policies could cut the debt further, but there is no easy or quick solution to the country’s fiscal challenges.

The plan emphasizes savings in the major entitlement programs — Social Security, Medicare, Medicaid, and health insurance subsidies — while continuing to protect those less fortunate. The plan raises the same revenue (in present discounted value across the 30-year horizon) as the current law baseline, resulting in a revenue level above historical averages, as a share of GDP. The plan reforms the income tax by broadening the base and reducing statutory rates to promote economic growth.

Top Three
Policy
Recommendations

1. Make Healthcare Programs
More Efficient

Incentives, rather than controls, would be used to promote greater efficiency while allowing patients and their healthcare providers to make the best individual decisions within a responsible budget framework. All subsidies would be reformulated to provide greater support to those with greater financial need or higher health risks.

Medicare would be converted to a premium support plan, providing a subsidy to beneficiaries who would choose from among competing health plans. Those selecting more expensive plans (including traditional Medicare) would be responsible for any premium amount above the subsidy. The eligibility age would gradually increase to 67.

Federal matching payments for Medicaid would be replaced with per-capita allotments, enabling states to manage their Medicaid programs more efficiently and eliminating the incentive to draw more federal funds without necessarily providing more or better services. The tax exclusion for employer-provided health insurance would be capped and partially replaced by a refundable health insurance tax credit providing a fixed dollar subsidy.

2. Better Target Social Security

The current Social Security benefit formula would be replaced with a means-tested benefit for all retirees and widow(er)s, regardless of their earnings history or labor force attachment. The benefit would equal 28 percent of the national average wage for single retirees and 41 percent of the average wage for couples. To supplement this flat benefit, workers would be automatically enrolled in employer-sponsored retirement plans with a default contribution of 3 percent of earnings, split evenly between the worker and employer. Workers whose employers did not offer a retirement plan at work would be enrolled in a defined contribution retirement plan similar to the Thrift Savings Plan offered to federal employees.

“Experience rating” would be instituted for the employer share of the Disability Insurance payroll tax, which would give employers an incentive to provide accommodations to workers with disabilities to keep them on the job. To maintain Social Security solvency without increases in tax rates or additional reductions in Social Security benefits, we allow the trust funds to borrow from the general fund during years when they would otherwise be depleted, and then to repay the borrowed funds in future years when the reforms included in this plan produce more savings.

3. Reform the Tax System

The tax system would be reformed to promote economic growth. Over the 2025–2054 period, revenue would be the same (in present discounted value) as under the current-law baseline.

The individual income tax provisions of the Tax Cuts and Jobs Act slated to expire at the end of 2025 would be modified. Ordinary income tax rates would be lowered and the tax base broadened. The standard deduction would be replaced with a credit and most deductions would be limited or repealed.

The corporate income tax rate would be reduced to 20 percent. Deductibility of interest expense would be further limited and 50 percent expensing would be permanently extended.

The municipal bond interest exclusion, the mortgage deduction, the remaining state and local tax deduction, the medical expense deduction, the pass-through business income deduction, and a variety of business tax preferences would be repealed. The exclusion of employer provided health insurance would be significantly curtailed.

The estate and gift tax would be repealed, but unrealized capital gains (above a threshold amount) would be taxed at death. The 3.8 percent net investment income tax would be repealed. A carbon tax would be adopted. The gasoline tax would be increased.

Addressing Shorter-Term Issues

Our plan addresses the major long-term fiscal policy challenges facing the country. Other issues should also be addressed, including the following:

  • Discretionary caps. The 2023 Fiscal Responsibility Act established nominal dollar caps on discretionary spending for FY 2024 and FY 2025. Our plan assumes adherence to these caps. For years beyond 2025, most categories of discretionary spending are expected to increase at the same rate of inflation as the current-law baseline. However, given the increased global threat levels, defense discretionary spending is assumed to increase above baseline levels in the near term.
  • Debt ceiling. The debt ceiling has failed to constrain federal spending and would be repealed.
  • Expiration of tax cuts for individuals in the Tax Cuts and Jobs Act. As discussed above, the individual tax cuts would be permanently extended, with modifications that broaden the income tax base and reduce statutory rates.
  • Exhaustion of the Highway and Hospital Insurance Trust Funds. The gasoline tax would be increased, which would extend the life of the Highway Trust Fund. Similarly, our health proposal would set Medicare on a sustainable fiscal path.

Conclusion

The healthcare proposal caps federal subsidies for insurance and makes them more progressive, promotes effective competition and innovation in the health sector, reduces regulatory burden, and develops better consumer information. The Social Security proposal protects low earners, is more conducive to saving and longer work lives, and better aligns the work and retirement conditions that will prevail in the coming decades. The tax proposal broadens the base and lowers statutory tax rates to provide a more neutral and growth-friendly tax system and replaces inefficient regulations with a carbon tax.

Fiscally sound policy will require greater self-reliance but does not require us to turn our backs on the elderly and the less fortunate. Our proposal narrows the fiscal imbalance, limits the size of government, and adopts a more growth-friendly tax code. Although these policies require difficult choices, they will ensure a vibrant economy and fiscal stability, now and in the future.

Explore other plans

American Action Forum

AAF’s proposal contains sweeping changes to both spending and revenues to successfully reduce the debt relative to GDP.

Bipartisan Policy Center

BPC’s plan prioritizes reforms of key processes surrounding the most basic elements of governing, including proposals to address the debt limit, discourage government shutdowns, and ensure on time budgeting.

Center for American Progress

The CAP plan places America on a more stable fiscal trajectory while safeguarding commitments to seniors, investing in the American people, and preventing interest costs from crowding out private and public investments.