Economists at the Penn Wharton Budget Model have constructed a package of 13 major tax and spending reforms that they say can grow the U.S. economy while also reducing federal debt and enhancing the social safety net.
In what they describe as “arguably one of the most ambitious computational public finance experiments performed to date,” the team of economists proposed wide-ranging changes that they say would reduce projected federal deficits by 38% over the next 30 years while also growing GDP by 21%, lowering health insurance premiums by 27% and reducing old-age poverty. After-tax incomes would rise for the bottom 20% of earners as of 2054 and climb for the top 1% of households but fall for those in the middle.
“A common misunderstanding is that serious debt reduction must come at the expense of economic growth or the social safety net,” the report says. “We show that this is incorrect. The reforms herein produce sustained debt reduction, grow the economy, reduce carbon emissions, almost fully close current gaps in working-age health-care coverage, and reduce poverty among retirees.”
The proposed changes include a simplified tax code that would lower the top individual tax rate to 28% while also taxing capital gains and dividends as ordinary income, expanding the payroll tax base to cover all pass-through income, eliminating “stepped-up basis” for inherited assets and taxing employer-sponsored health insurance premiums as income. The plan would also disallow itemized deductions, except for charitable contributions, and replace the standard deduction with a partially refundable tax credit.
The Penn Wharton team also float some major changes to shore up the long-term finances of entitlement programs. Their reforms would raise the Social Security retirement age from 67 to 70 in phases between 2037 and 2056 and lifting the Medicare eligibility age from 65 to 67 by 2036. The plan would also include a new minimum Social Security benefit at the federal poverty line and new maximum benefits. For people born in 1994 or after, Social Security would convert to a “retiree poverty-relief program.”
“The minimum benefit would ensure that retirees remain above the federal poverty line, reducing the retiree poverty rate from 11.3% in 2023 to zero,” their plan says. “Meanwhile, the new maximum benefit, significantly lower than under current law, would help secure Social Security’s long-term solvency. By flattening benefits across income levels, this policy would largely decouple Social Security payments from individual earnings history.”
Medicare, meanwhile, would convert to a “premium support” model of the sort favored by some Republicans, in which the federal government shares the cost of insurance premiums.
The plan also calls for major immigration reform that doubles the number of legal immigrants allowed each year and requires all immigrants to buy health insurance without federal funding. And it would levy a tax of $50 per ton of carbon emitted starting in 2025 with the aim of cutting greenhouse gas emissions by about 16% by 2054.
The bottom line: “The ideas in the report could be a difficult sell to federal policymakers,” Julie Zauzmer Weil writes at The Washington Post. “But Kent Smetters, who led the project, said the analysis shows that deficit reduction can coexist with economic growth and preserving social safety-net programs.”
“I view it as sort of a proof of concept,” Alan Auerbach, an economist at the University of California at Berkeley, told the Post. “If you’re willing to implement policies that have political opposition, then you can get somewhere.”
