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Control the U.S. Debt!

You need to cut this much
to control the U.S. Debt!

CONTROL THE U.S. DEBT!

In its 2009 report, “Red Ink Rising,” the Peterson-Pew Commission on Budget Reform recommends we stabilize the U.S. Debt at 60% of GDP by 2018. Use this exercise to explore ways you can accomplish this goal.

Background

The U.S. is currently over $14 trillion in debt. To provide some perspective on just how immense this figure is, the U.S. Gross Domestic Product (GDP) was $14.7 trillion in Fiscal Year (FY) 2010. This means that the overall gross U.S. debt equals about 95% of U.S. GDP.

A “deficit” is defined by the Peterson-Pew Commission as “the difference in a given fiscal year between federal revenue and spending,” and “debt” is defined as “the amount owed to creditors who have financed the government’s borrowing.”

Each year that the United States suffers a deficit in relation to GDP, the debt grows. Thanks to deficits in FY 2009 and FY 2010, the public debt alone has risen from 41% to 69% of the GDP. The “public” debt (as opposed to “gross” debt) is defined by the Peterson-Pew Commission as “a measure of the total debt held by individuals, corporations, and governments, domestic and foreign.” Gross debt includes all of that, plus what it has borrowed from its various trusts (such as Social Security).

This exercise will focus exclusively on public debt, which is measured as a ratio to overall GDP. Such a calculation allows for the ability to measure yearly economic growth while still keeping track of debt, thereby providing a lens through which one can see just how much debt we can afford to carry. Hypothetically, if debt exceeds GDP, then the debt has become completely unsustainable by all interpretations. In order to eventually balance its debt, the U.S. will have to drastically cut back on expenses and increase revenue if only to bring it back down to manageable levels, so that we can begin to pay it off at a more leisurely pace in future years. Ideally, and for the purposes of this exercise, we would like for our debt to be even lower than GDP; in this case, 60%.

Attributions

Done

Budget Backdrop

Broad policy backdrops set the stage for refined budget choices.
The starting path you choose will have an impact on the budget and, in turn, on society. For this activity, broad policy comprises three sections: Major Foreign Wars; Tax Cuts of 2001/2003; and Discretionary Spending Growth.

A choice must be made for each of these three categories in order to advance, and only one choice may be made per category.

Major foreign wars

The U.S. has been embroiled in major foreign wars since the early 2000s. Currently, the U.S. has a little over 100,000 troops deployed in Afghanistan and 47,000 troops deployed in Iraq.

Troop reduction—60,000 by 2015

A gradual decline of troops over five years.

Troop reduction—30,000 by 2013

A sharp decline of troops over three years.

Stick to current funding levels

Continuation of funding, currently at $130 billion, plus inflation adjustments for the next two decades.

Tax Cuts of 2001/2003

When tax cuts occur, government sacrifices revenue. However, historically, tax cuts have encouraged spending and general economic growth. The level of growth, of course, depends on the circumstances. Proponents of the 2001/2003 tax cuts predicted that the National Debt would balance out by 2010.

Comprehensive tax cut renewal

Lower tax rates across the board (tax effects include, but are not limited to: reduced capital gains and dividend rates; fewer marriage penalties; doubling of the child tax credit; permanent indexing of the Alternative Minimum Tax [AMT]).

Tax cut renewal below $250K/200K bracket

No tax cuts for those making above $250,000 (joint filers) and $200,000 (individuals); raise income rates of two highest individual incomes to 36 percent from 33 percent and 39.6 percent from 35 percent; limit itemized deductions and personal exemptions for highest individual incomes; 20 percent tax rate on capital gains and dividends for highest individual incomes; permanently index the AMT.

Tax cut renewal available for lowest incomes while keeping AMT and Estate Tax at 2009 levels

Tax provisions expire for income above $70,000, but keeps the 10% bracket (currently affecting taxable income up to $16,750 for a married couple filing jointly, after accounting for deductions and exemptions) rather than letting it jump to 15%; continues the child tax credit at $1,000 per child; isolates the Alternative Minimum Tax; permanently sets the estate tax at a top rate of 45% with an exemption of $3.5 million.

Renew AMT patches, but allow expiration of all other tax cuts

Government would continue to isolate the Alternative Minimum Tax to high income earners. Other provisions would include: lower income tax rates; expanded child tax credit; a new 10 percent tax bracket, lower capital gains rates, and marriage penalty relief.

Discretionary Spending Growth

Discretionary spending, while not mandatory under law, is essential for the function and growth of agencies such as the Departments of Defense and Education. Discretionary spending for FY (Fiscal Year) 2010 was $1.3 trillion, or 38% of total spending.

Allow discretionary spending to grow with GDP

Discretionary spending continues to grow as a constant share of the economy. The more invested in discretionary spending, the greater the market-value of government programs.

Follow presidential proposal for discretionary spending growth rates

The president's budget would call for a halt to all spending unrelated to security for two to three years.

Align discretionary spending with inflation

Discretionary spending has, historically, grown faster than inflation, as the federal government has always spent money on programs. To parallel discretionary spending with standard inflation would remove those programs from a competitive market, as their value relies entirely on how much taxpayers, and thus the Federal government, are willing to invest in them.

Done
Done

Defense Spending and International Politics

Defense, security, and foreign relations made up about 66% of the U.S. Discretionary Budget in 2010. To take funding away from any of these programs is to (to some degree) compromise U.S. economic and military influence in global affairs. However, some argue that federal government could be more well-rounded (and thriftier) when it comes to discretionary spending. It is important to find a balance in accordance with domestic needs, while still accounting for international affairs.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Weapons system cuts

Would implement defense cuts recommended in the president's FY2011 budget. These would all be cancelled programs: C-17 Transport Aircraft Production; Joint Strike Fighter Alternate Engine; Navy's Next Generation Cruiser; EP-X Manned Airborne Intelligence, Surveillance, and Reconnaissance Aircraft; Net Enabled Command Capability; and Third Generation Infrared Surveillance.

Missile defense system cancellation

The national budget proposal for FY2012 is allotting over $10 billion for missile defense programs and personnel, as well as $780 million for defensive weapon enhancements. The rationale for spending on such an elaborate system is arguable: proponents find reason to be wary of burgeoning weapons programs in other nations, while critics see the system as technological chest-beating, and therefore potentially provocative of unnecessary hostilities.

Reduction in shipbuilding spending

A private naval vessel developed by a company like Northrop Grumman costs close to $2.7 billion when fully outfitted. The Navy wants to build 276 more of these within the next thirty years. Should this occur? Part of the U.S. air defense budget meshes with the naval defense budget, i.e., aircraft carriers. To some degree, cutting spending in one department will affect spending in other departments. On the other hand, it is wasteful to invest in extraneous shipbuilding.

Homeland Security spending increase

This option would increase funding for the Department of Homeland Security by 10%. The president's budget proposal for FY2012 is $43.2 billion in discretionary funding and $57 billion in total, i.e., a 1% increase from the previous year. Some say that additional funds are pointless, as measures such as the Border Patrol have proven ineffective so far. The opposite argument asserts that such an increase may not even be enough.

Aid to Foreign Countries

In 2010, the U.S. spent $220 billion on bilateral foreign aid arrangements (about 25% on Israel and Iraq alone). Some consider this to be too much spending, while others believe that it is healthy both politically and economically to continue to supply aid to developing countries. In reality, despite this seemingly high margin of spending, foreign aid is actually less than 1% of U.S. GDP.

Here, one must choose to cut foreign aid, increase it, or do neither.

Cut economic aid to foreign countries

Would gradually drop aid to half of current expenditures. Would this be a viable option, considering U.S. allegiances and investment in foreign infrastructure?

Increase economic aid to foreign countries

This increase would occur within the span of one year. Would this be a viable option, considering the looming deficit and myriad domestic programs the U.S. government is already having trouble paying for?

None of the above

Benefits for Veterans

The U.S. Department of Veterans Affairs worked off a total budget of $112.8 billion in 2010—$55.9 billion discretionary. These funds go toward the provision of educational, health, and housing benefits for military service members.

Here, one must choose to reduce veterans’ income security, expand it, or do neither.

Income security benefits reduction

Is this a viable option, considering the provisional expectations of veterans for enduring the stress associated with military service? Some see military service as a means to an end—an opportunity for a more stable economic future. This perception could narrow considerably with a reduction of benefits, thus potentially lowering the standards of military service.

Income security benefits expansion

Is this a viable option, considering that some veterans seek benefits despite not needing them? For instance, some veterans receive medical care benefits for disabilities unrelated to military service. Additionally, some veterans receive benefits regardless of socioeconomic status.

None of the above

Troop Levels

Costs involved in deploying and supporting troops include combat pay, upgrading overseas bases, and meals, as well as repairing, replacing, and occasionally upgrading equipment. Regular salaries are already accounted for in the Defense budget; however, there are additional costs in the forms of higher payments to military retirement and health care trust funds.

Here, one must choose to increase the number of troops, reverse the current policy, or do neither.

Troops increase by 46,000

Part of the “Grow the Army” initiative. Some have argued that the way to address the strain of a tightly stretched military is to increase the total number of new army troops over the next five years by 46,000. Funneling in reserve troops may allow for the withdrawal of other brigades later, which would help reduce costs. However, some have suggested that the U.S. must be wary of the “American footprint,” i.e., it is important to avoid looking like occupiers so as to avoid provoking conflict, which also affects costs.

“Grow the Army” initiative reversal

The “Grow the Army” initiative announced in 2007 would increase active personnel from 482,400 to 547,400, and reservists from 555,000 to 564,200 by 2011. Arguments in favor of "reversing" this initiative is that such large-scale national commitments are unnecessary, as the president has repeatedly stated a willingness to leave both Afghanistan and Iraq in the short term. Contrarily, other arguments emphasize the stresses placed on existing combat units. The current supply of U.S. ground forces in Iraq and Afghanistan does not meet the pace of operations in those countries.

None of the above

Done
Done

Domestic Spending

Programs under this category make up a little bit more than 20% of the president’s budget proposal for FY2012. In past years, funding has been even higher for such programs. Some economists believe that effective government programs can both enhance the productivity of the economy and open opportunities for those of lower socioeconomic status. By the same token, it is noted that funding for some programs significantly outweighs the social utility of those programs and must be adjusted to account for general waste in addition to the existing national debt.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Redirect unappropriated ARRA funds

The American Recovery and Reinvestment Act (ARRA, also known as the "Stimulus Plan") was enacted in February 2009 in order to bring stability to the national economy during a severe economic recession. The components of this plan included a combination of tax cuts, direct government investment, aid to states, and relief for lower-income individuals. So far, over $108 billion of "obligated" funds has been spent by the Department of Health and Human Services; over $78 billion by the Department of Education; and over $64 billion by the Department of Labor. Other departments have spent significantly less, and some funds have not yet been made available. Should the remaining "unobligated" funds be cancelled and used toward deficit recovery?

New Jobs Bill

Would a new stimulus bill help reduce unemployment? Following the ARRA, unemployment seems stagnant at just below 10%. A Republican-based Jobs Bill seeks to allow states greater discretion with their use of federal funds. However, critics see a Jobs Bill such as this as threatening to entitlement programs. These critics tend toward the opinion that an additional stimulus package is the only way to keep the social safety net while creating new jobs.

Benefits for unemployment freeze at 2009 levels

As of April 2011, 13.7 million people across the U.S. were unemployed. Average benefits are currently at about $300/week. The average unemployed family spends about $2,500 a month on necessities (residence, food, groceries). Benefits levels would freeze. However, the jobless would still be able to collect every week.

Cut Temporary Assistance to Needy Families (TANF) program

Just over $17 billion a year is spent on TANF (formerly known as "welfare"). The federal government supplies finances in the form of block grants to regional governments that implement the funds. Some advocates for cutting spending on TANF believe that the people who receive the money end up depending on those funds rather than looking for work. Those in favor of TANF view the program as necessary for providing the goods necessary to continue being productive in society. This option would cut TANF funds in half.

25% decrease in federal funds for K-12 education

States have the option of refusing federal funding for schools, but they often do not. Federal spending on K-12 education generally hovers around $38 billion. This would be a gradual cut, the full percentage of which would not be realized until 2015. It is worth noting here that while the U.S. is in the top five highest-spending countries when it comes to education, it significantly lags behind over twenty countries.

Abolish the New Markets Tax Credit

The New Markets Tax Credit (NMTC) allows taxpayers to use 39% of any qualified investment in Community Development Entities (CDEs) against their federal income tax over a seven-year period. CDEs, in turn, use that investment on low-income community projects.

Reduce funding for school breakfast programs

The federal government provides money to states so that they can operate nonprofit breakfast programs in schools and residential childcare. Funds are awarded on a per-breakfast basis. Meals must meet federal nutrition standards. Arguments for School Breakfast Programs (SBPs) revolve around statistics showing improved student performances in school. Arguments against are debt-centered, additionally stating that kids would only have to pay 30 cents a meal.

Increase funding for adoption and foster care programs

The federal government currently funds states to help them place children with families, with additional money going to states placing special-needs children. Funds are split roughly evenly between the foster and adoption programs. Arguments for assert that funding allows at-risk children more opportunities for cognitive, educational, and social development. In addition, there is a pervasive argument suggesting that without federal funding, adoption agencies might offer up children to the highest bidder. Given the alleged long-term benefits of a better foster care/adoption service system, should we invest more federal funding in the improvement of these services?

Increase education funds for disadvantaged and disabled children

The federal government provides grants to states for educating students with disabilities. In FY2010, those grants provided about $16 billion in funds, or about $1,370 per child (excluding additional stimulus funds). This option would increase that average to $4,200, or about $48 billion. Arguments for an increase mirror the concepts of development listed for the adoption and foster care programs.

Funding for Highways

The modern highway system has been the convenient network for intercontinental transportation since the 1920s. Delivery of commodity goods state-to-state, even town-to-town, is heavily dependent upon that system. Highway funding comprises highway construction and highway safety programs. The federally based Highway Trust Fund, which gives grants for surface-transportation projects, is primarily supported by a federal gas tax.

Here, one must choose to decrease highway funding, increase it, or do neither.

25% decrease in funding for highways

25% increase in funding for highways

None of the above

Done
Done

Social Security

Social Security weighs in at 20% of the federal budget; it is the largest federal government program. The “baby boomer” population is rapidly approaching retirement, and the costs well outweigh revenues. Reducing Social Security benefits would put a significant dent in the outstanding debt.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Increase retirement age from 66 to 68

The retirement age is set to increase from age 66 to 67 starting in 2017. Some argue to raise the age immediately, with incremental two-month increases every year until the retirement age reaches 68. This way, future retirees would stay employed, contributing to the Federal Insurance Contributions Act (FICA) for a longer period of time while allowing the federal government to postpone having to pay retirement benefits.

Provide a different method for measuring inflation for COLA

The “chained CPI,” an alternative to the Consumer Price Index, is believed to compute inflation more accurately. Measuring the COLA (Cost of Living Adjustment) this way would most likely save 0.3% per year for all benefits.

Lessen benefits for spouses

Under current law, retirees receive a higher level of benefits—calculated either from their own earnings or from 50% of their spouse's benefits. This can create inequities whereby a dual-earner family would receive lower benefits than a single-earner family making the same income. This option would aim to correct that inequity by reducing spousal benefits from 50% of the primary earner’s to 33%.

Increase number of years in benefits calculations

Using a fairly complex formula, a retiree's benefits are computed by averaging adjusted monthly earnings based on the earner's 35 highest years of earnings. Increasing the number of years to 40 would provide workers with a larger base to determine their benefits.

Include all new state and local workers

Local and state government employees hired in 2010 and after would be required to pay into Social Security. This would take a load off the federal budget but would detract from state and local government workers' net income.

Create a minimum benefit package

Wage earners content to live at the lowest earning percentile, i.e., the minimum wage amount, for thirty years would receive a minimum benefit of 120% of the poverty level. This policy would be gradually implemented.

Reduce Benefit Earnings over Time

Although this is not ideal, slowing the growth of benefit payments for Social Security is another way to save money. If one were to decide that this was a viable recourse, is it fair to reduce benefits for all wage earners or only those with the highest incomes?

Here, one may choose either gradual reduction, progressive reduction with low-earner protection, or progressive reduction with low- and medium-earner protection. Or choose “none of the above.”

Reduction (by 30% in 2080)

By 2080, Social Security benefits would be about 30% lower if the government were to “price index” them. Normally, Social Security benefits increase as economy-wide wages increase. “Price indexing” all benefits would gradually slow the growth of Social Security rewards, bringing it closer to the speed of price inflation (i.e., the speed of price growth).

Progressive reduction with low-earner protection

The lowest 30% of income earners would keep the price-inflation index using current settings while the better-off top percentile would have their benefits adjusted with prices. A combination formula would determine the benefit growth of middle earners.

Progressive reduction with low- and medium-earner protection

Would keep the growth of benefits of the lowest 60% at the speed of wage inflation, with the rest being the same as the above choice.

None of the above

Done
Done

Health Care

Both Medicare and Medicaid are expensive. In fact, they sap more out of the federal budget than any other programs. Private health care is growing exponentially. With so many uninsured despite recent reform, health care is far from perfect. Cutting out unnecessary expenditures and investing in productive aspects of health care would help keep the U.S. from succumbing to a large deficit.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Enhance cost-sharing Medicare measures

Patients would be responsible for higher co-payments, and services covered by Medicare Parts A and B would be uniform cost-sharing. To prevent patients from seeking unnecessary care, this option would restrict Medigap policies from covering cost-sharing.

Increase Medicare premiums to 35% of costs by 2014

Standard Medicare Part B premiums run about $115.40 a month, covering about 25% of program costs. Raising to 35% of costs would increase premiums to about $161.56 a month.

Give the Health Exchange a Public Option by 2014

The Congressional Budget Office estimates that a public health insurance exchange option would cut roughly $68 billion out of the deficit by 2020. Reduced exchange subsidies offered by the public plan would lower premiums and increase tax revenues due to more employers reducing or eliminating employment-based insurance. Wages and salaries to employees would increase and thus become more taxable.

Undergo medical malpractice reform

Would reduce the cost of medical malpractice insurance, and thus the practice of performing therapeutic or "safe" diagnostic practices (also known as "defensive medicine") because of less liability involved. It would place a $250,000 cap on non-economic damages, a $500,000 cap on awards of punitive damages, and a statute of limitations of one year for claims brought by adults and three years for children's claims.

Raise the Medicare retirement age to 67

Would increase the retirement age by two months every year until it reaches 67 by the year 2025. Life expectancy has increased since 1965 so why shouldn't the retirement age?

Insurance vouchers instead of traditional Medicare

Would require insurance companies to provide an affordable subsidy to give to seniors to buy health insurance. The average per-person cost of Medicare in that person's region of the country would be the value of the voucher; the voucher system would grow more slowly than Medicare and thus save money.

“Alter” Health Care Reform Law

Care to change health care legislation? If so, some choices broaden or narrow the scope of health care.

Here, one may choose to either expand coverage, reduce insurance subsidies, repeal the legislation with exceptions, or do none of the above.

Add 5 million people to current coverage

This option would increase the number of additional people covered by the recent passage of the health care reform bill from 32 million at a cost of $940 billion over ten years to 37 million for an additional $147 billion.

Insurance subsidy reduction

Subsidies for certain incomes are available via the health care legislation of 2010. Between 133% and 400% of the poverty level is the income level ripe for insurance subsidies, the merits of which operate on a sliding scale. The more one earns (as long as it is not above the poverty level), the higher percentage of income one has to pay for health insurance. Available subsides would be cut by 20% under this option.

Repeal legislation except for Medicare/Medicaid cuts

Would preserve health care spending cuts, but knock off the coverage provisions and tax increases, steering those toward the deficit instead.

None of the above

Manipulate Federally-Funded State Medicaid

Here, one may choose to reduce funding, increase average matches, or do neither.

Impose higher costs on states for Medicaid

Federal government currently pays 57% of Medicaid costs. According to law, the highest percentage states pay for Medicaid is 50%. By requiring states to pay more, federal government will not have to pay nearly as much.

Raise federal Medicaid funds for states to 60%

State governments are facing serious fiscal problems, so increasing federal Medicaid payments by 3% is another option.

None of the above

Done
Done

Miscellaneous Spending

Our debt is so massive. Some spending programs appear as luxuries. As of 2011, we are faced with the trial of discerning necessary spending (programs that better our global economic position and keep us domestically healthy) from spending that does not fulfill our national agenda. Some examples of “miscellaneous” spending are: NASA missions, farm subsidies, and earmarks. What spending should we reduce, increase, or not change at all?

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Eliminate certain outdated programs

There is a “Terminations, Reductions, and Savings” section of the president’s FY2012 budget. (The list is at http://www.whitehouse.gov.) Some—or ALL—program cuts may seem disagreeable but are perhaps necessary: you make the choice. If you want, you may choose to skip this option.

Two-year freeze on federal civilian pay

The military is off-limits here, but all other federal employees are due for some pay cuts. Should anyone else be off-limits? Congressmen? Judges? Postal workers? Choosing this option will save $50 billion over the next five years.

Reduce TRICARE benefits

TRICARE For Life (TFL) is the military's TRICARE/Medicare-wraparound coverage available to all Medicare-eligible beneficiaries. This includes those on active duty, reservists, and retirees. This option would implement cost-sharing for military retirees who are not yet eligible for Medicare by raising enrollment fees, copayments, and deductibles under TFL, as well as provide minimum fees for beneficiaries already under TRICARE.

Modify federal retiree benefits

Modeling the nonfederal SSA retirement benefits, this option would make use of the "chained CPI-U" in an effort to measure COLAs more accurately. In computing pension amounts, it would also take the normal three-year average for income and extend it to five years, as well as allowing federal employees to increase personal contributions to their pension plans. This could also reduce benefits under the Federal Employee Compensation Act.

Shut down some NASA activity

There are certain benefits to space exploration not related to ancillary economic gain. However, measuring those gains as part of national progress is questionable.

Decrease federal spending for farms

The U.S. Department of Agriculture distributes between $10 billion and $30 billion in cash each year to farmers and farmland owners, including subsidized crop insurance, market support, and other services. They also perform extensive agricultural research. This option would significantly reduce these supports and limit awards/grants given to programs such as the Conservation Stewardship Program, a voluntary conservation program that encourages producers to address resource concerns.

Spend more on federal research and development

In 2010, the federal government spent an estimated $147 billion on research and development (R&D) across all agencies (not including spending under the American Recovery and Reinvestment Act). This option would increase R&D spending by $10 billion each year across all agencies. Obviously, increased spending in this case means increased productivity, but the question remains: how do we want to spend R&D funds?

Eliminate earmarks

“Earmarks” are generally referred to as spending going toward lawmakers’ “pet projects.” The common thread on earmarks is that they're $16 billion worth of spending that could and should go elsewhere. Not all “pet projects” are useless, though, which is why all spending cuts on earmarks would need to be carefully reviewed in the appropriations process.

Spend more on public transportation

Rather than spend the stimulus on highways, many public-policy lobbying groups lobbied for spending on public transportation. Mass transit is arguably the most cost-efficient way to reduce congestion, which also increases productivity. However, most of the benefits flow to people who live and work in cities. New bus and rail projects would cost about $51 billion over ten years, including $500 million worth of Amtrak subsidies.

Done
Done

Revenue

Taxes strengthen our nation's economy by providing essential public goods and services. Ideally, they contribute to national saving while funding programs. However, the U.S. has a history of spending faster than its ability to raise taxes.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Raise user fees universally

User fees are defined as amounts levied on consumers of government goods or services in relation to their consumption. The federal government charges user fees for many things to help defray the costs of things like increased security at airports or access to national parks. This option would increase overall fees up to $5 billion per year.

Place certain government assets on the market

The government currently owns over 12,000 buildings and structures across the nation that are designated as "excess," totaling over $2.7 trillion in assets. Even a relatively small portion could be sold for an amount viable for making a small dent in the debt. Assets that could be especially valuable are the Tennessee Valley Authority, the Southeastern Power Administration, excess operating inventory and materials, and about a third of the oil in the strategic petroleum reserve.

Institute a flat fee on TARP usage for corporations

This option would require the largest financial firms (over $50 billion in assets) to pay a fee to compensate taxpayers for the use of the Troubled Asset Relief Program (TARP). The amount of the fee would be based on the firm's size and its debt. Estimated to bring in over $10 billion over 5 years and $30 billion over 10 years.

Change LIFO accounting to FIFO accounting and take away tax breaks for oil and gas expenditures

Last-in, first-out (LIFO) is a recording tactic measuring the value of inventory for tax purposes. A company records the last units purchased as the first units sold, whether these units are sold or not. These units are generally more expensive because of price inflation. In this manner, the taxpayer is taxed according to the most expensive inventory sold. The proposal on the table is the repeal of LIFO after December 31, 2012, effective that first year. If repealed, a taxpayer would be required to write up the value of its LIFO inventory to its FIFO value. This should draw approximately $52.9 billion of revenue in 10 years. This measure would also take away tax breaks from the fossil fuel industry, excluding some domestic deductions: intangible drilling expenditures, tertiary injectants, passive investments, and geological expenditures. Finally, it knocks out the percentage depletion allowance subsidy, but extends the amortization period for expenses involved with resource exploration to seven years.

Reintroduce cap-and-trade legislation, or institute a tax on carbon

A direct carbon tax would be derived by estimating the amount of emissions released into the air by fossil fuels like coal, oil, and gas. Cap-and-trade legislation would set limits on carbon emissions and also create permits that companies would need to possess in order to pollute at the legal limit. Profits accumulated from selling permits initially on the open market would be comparable to profits accumulated from a carbon tax. The Congressional Budget Office estimates that either version could raise over $100 billion a year.

Add 10 cents per gallon to the gas tax

Some allege this tax is already too high (18.4 cents a gallon), while proponents of an increase (up to 28.4 cents a gallon) extol its benefits. On one hand, continued gas purchasing would direct additional revenue to the Highway Transportation Fund. On the other hand, less gas purchased means fewer gas emissions. It's a win-win for proponents. However, to reduce consumption of gas in order to curb emissions is to reduce personal transportation overall. The car has become the standard for personal transportation enjoyment; without a substitute system of personal transportation in place (that is not necessarily public transportation), the effect on working-class Americans—and, thus, the economy—would be substantial.

Insert into the federal tax structure a 5% VAT with partial rebate

This option would create a 5% federal tax on all goods and services based on the cost of each component that goes into making a product. This is called a Value-Added Tax (VAT). For example, the manufacturer charges the retailer 5% plus the cost of making the product, and the retailer charges the end consumer 5% plus the cost of purchasing the product AND additional retail costs. Then, the federal government collects the fees from both. This tax would not affect spending on education, housing, or charitable services. Upon initial inception into the federal tax structure (and through several years of slowly phasing in this tax), a plan to rebate taxpayers would be determined. Overall, it is estimated that a broad-based VAT tax plan would yield $277.2 billion in revenue per year.

Gradual 100% increase of the dependent exemption

Personal tax exemptions depend on inflation. Currently, the personal exemption is around $3,700. For each dependent claimed (spouse, children, etc.), another $3,700 tax exemption is allowed. Doubling the exemption figure aligned with inflation would give families greater disposable income but initially at greater cost.

Tax per-person income above $1 million

Would impose a 5% surtax on income above $1 million, putting tax rates for America's wealthiest above 40%. Estimated to provide additional revenue of $50 billion.

1% increase to the payroll tax

Would gradually increase the Social Security payroll tax from its current rate of 12.4% (6.2% employer, 6.2% employee) to 13.4%. By doing so, there would be less of a need to cut benefits from Social Security. However, any change to payroll might have an impact on workforce performance.

Lower tax rates on corporations to 30%

Currently, the highest corporate tax affecting "C" corporations is 35%. Reducing the corporate tax rate to 30% would also lower the effective tax rate (constant, not progressive). In order to pay for this, several exemptions would need to be eliminated: the tax deduction for domestic manufacturing and the accelerated depreciation for capital equipment.

Align tax code with “chained CPI”

Would use the chained measure of inflation instead of the standard measure to alternate parts of the tax code from the current indexed measurement. Applying the chained measure would slow growth 0.3%, thus increasing the amount of income subject to taxation over time, resulting in greater revenue.

Reduce the tax collection gap

Would seek to implement a number of proposals in the president's FY2012 budget so as to improve tax collection methods, generating (according to some estimates) between $350 and $400 billion more a year. This would involve, primarily, tougher enforcement against tax avoidance.

Extend the Social Security Payroll Tax Cap

One may choose to raise the cap, impose a 2% surtax on the current cap, or do neither. Both options would extend cap levels, increasing Social Security revenues.

Extend cap to cover 90% of life earnings

In 2010, earnings up to $106,800 were subject to the Social Security payroll tax, and that amount increases annually by the average wage growth. In 1937, about 92% of all earnings were subject to that tax. By 2007, it was only 80%. This option would raise the percentage up to 90%, or $200,000 in today's terms.

Impose 2% surtax on earnings above payroll tax cap

Would go on top of the current cap of earnings above $106,800.

None of the above

Done
Done

Tax Expenditures

Tax expenditures are revenue losses attributable to tax provisions that often result from the use of the tax system to promote social goals without incurring direct expenditures. The government spends (or "loses," depending on one's perception) almost $900 billion on deductions, credits, exclusions, exemptions, and other forms of tax-code expenditures. Some of these expenditures have a greater utility than others, and (according to proponents) some simply cost too much to maintain.

Disparate Decisions

One may choose any and/or all options listed here, or skip this section.

Tax job benefits as income

Would tax certain employee “benefits” (meals, vacations, other free services) as if they were wage income.

Curtail the mortgage interest deduction (and others) for high earners

The mortgage deduction costs the Treasury Department an estimated $131 billion a year. Some opponents wish to cut it significantly, or at least turn the itemized deduction into a 12% nonrefundable tax credit available to everyone. A huge part of the argument against tax deductions is that they go largely to higher earners. This option would limit the amount that upper-income earners would be able to deduct from the total amount of itemized deductions to 28% (for single-person incomes of $200,000 and family incomes of $250,000).

Limit state and local tax deduction

Deductions from sales tax payments from income tax would be reduced significantly. Some supporters of elimination or reduction claim that the deduction mainly serves to benefit the wealthiest areas that are responsible for more services and therefore pay more taxes.

Tax life insurance

Would make life insurance—benefits received in the course of a death—taxable under the law.

Drop biofuel expenditures

Would eliminate subsidies for biofuel production. Biofuel production is partially subsidized by the federal government to ensure that production costs are competitive with those of fossil fuels. The cost of this credit has now reached close to $6 billion, and recent legislation is set to increase these expenditures.

Embed the R&D tax credit into the tax code

Currently, businesses can take a nonrefundable tax credit for 20% of research expenses above a certain amount. The credit has been extended several times in its thirty-year history. This choice would legislate it into permanence.

Make permanent the $400/person Making Work Pay Credit

This is another choice seeking to permanently imprint a piece of legislation onto the tax code: the Making Work Pay Credit. Originally introduced as temporary legislation as part of the ARRA, it provides $400 in credit for single workers and $800 for married couples.

Broaden the American Opportunity Tax Credit for college expenses

Would make permanent the American Opportunity Tax Credit (AOTC), which was created by the ARRA as a way to offset college expenses. It was a modification of the Hope Credit, made available to a larger audience of taxpayers including those with higher incomes and those who pay no tax. Under AOTC guidelines, one may receive a tax credit of up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year, or one may claim a $4,000 tuition-and-fees tax deduction in exchange for 100 hours of community service at a nonprofit organization.

Children and Families

The Earned Income Tax Credit (EITC) goes only to families with incomes below $40,000 a year. The Child Tax Credit (CTC) is for anyone with a child, but begins to phase out for: 1) married taxpayers filing joint returns at $110,000; 2) married taxpayers filing separate returns at $55,000; and 3) all other taxpayers filing at $75,000.

Here, one may choose to either cut or expand tax credits that primarily benefit lower-income families, or do neither.

Reduce the Earned Income Tax Credit (EITC)

The EITC delivers over $40 billion a year to families. Created in 1975 to provide an incentive for low-wage and moderate-wage workers, it is currently one of the largest refundable tax credits in the tax code and is hailed as one of the largest "antipoverty" tools in the United States for taxpayers with children. For those without children, the EITC awards only $473 per family and begins to phase out after an earned income of just over $7,000 a year.

Broaden the EITC and Child Tax Credit

This option would raise the maximum income bracket for married couples who could receive the credit. It would also heighten the benefit levels for families with three or more children. Changes in the CTC presented in this option are the permanence of the $3,000 refund bracket and the abolishment of benefit indexing.

None of the above

Employer-Sponsored Health Insurance

All three of the choices below give a tax credit to employers for providing employees with health benefits. Two of these choices would raise revenue, and one would cost revenue.

Here, one may choose to initiate an excise tax, repeal an excise tax, replace the employer health care exclusion, or do none of these.

Switch initiation of excise tax on high-cost plans from 2018 to 2013

Originally, an excise tax on high-cost insurance plans was supposed to begin in 2013. Supporters say that this tax would steer employees toward less-expensive health insurance plans, thus reducing health care spending overall. Opponents argue that an excise tax would give reason for employers to choose the lowest-quality health insurance possible.

Forget excise tax on high-cost plans

Would remove the excise tax from the equation.

Flat credit instead of excise tax

This would substitute a flat tax credit for the excise tax; the flat credit would be indexed to normal wage growth.

None of the above

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Your Results

Source of savings

Budget Backdrop
Defense Spending & Int‘l Politics
Domestic Spending
Social Security
Health Care
Miscellaneous Spending
Revenue
Tax Expenditures

-5000

0

5000

(in billions)

Spending
Revenue

-5000

0

5000

(in billions)

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