Debt Digest | Cato Tax Plan Would Lower Taxes Without Adding to Deficits

Links & Fiscal Facts

• Taxing the rich won’t save Social Security and Medicare. According to Manhattan Institute’s Brian Riedl, “Social Security and Medicare face a 30-year shortfall of $69 trillion - not counting $55 trillion more in resulting interest costs [see the figure below].” He argues that President Biden’s “tax the rich” solution is mathematically impossible, because even if “Congress let the Trump tax cuts expire, applied Social Security taxes to all wages, doubled the top two tax brackets to 70 and 74 percent, increased investment taxes, imposed Senator Bernie Sanders’s 8 percent wealth tax on assets over $10 billion and 77 percent estate tax on estates valued at more than $1 billion, and raised the corporate tax rate back to 35 percent [...] [T]otal new tax revenue — 4 percent of G.D.P. — would still fall short of Social Security and Medicare shortfalls that will grow to 6 percent of G.D.P. over the next three decades.” Furthermore, as Adam Michel and I have pointed out, raising taxes to chase ever-higher spending will dampen economic growth, negatively affecting Americans at all income levels.

  

• Immigration reduces deficits. Alex Nowrasteh, the vice president for economic and social policy studies at the Cato Institute, highlights the Congressional Budget Office (CBO) estimate of the fiscal impacts of the recent immigration surge. According to the CBO, “the increase in immigration lowers deficits, on net, by $0.9 trillion over [the 2024–2034] period.” This estimate is in line with the findings of a paper Nowrasteh co-authored with Sarah Eckhardt and Michael Howard, which concluded that “With some variation and exceptions, the net fiscal impact of immigrants is more positive than it is for native‐​born Americans and positive overall for the federal and state/​local governments.” The net fiscal impact is defined as “the difference between the taxes that person paid and the benefits that person received over a given period.”

• Cato Tax Plan calls for lower taxes without adding to deficits. In a new policy analysis, Cato’s Adam Michel proposes several significant changes, including cutting the top marginal income tax rate from 37 to 25 percent, lowering the corporate tax rate from 21 to 12 percent, reducing the capital gains tax rate from 20 to 15 percent, and introducing universal savings accounts (USAs). Such big tax cuts should be made deficit-neutral by pairing them with spending cuts that reduce unfunded obligations in Social Security and Medicare. As Michel explains, “Without spending cuts, lowering federal revenue is fiscally irresponsible, as current deficits are already economically unsustainable.” The plan also suggests future tax cuts—including extending the 2017 reforms—could be pursued in a revenue-neutral framework, if Congress is unwilling to enact spending cuts. Specifically, Michel would eliminate “$1.4 trillion worth of annual tax loopholes, corporate welfare, and other special-interest tax subsidies.”

• Growing debt poses a threat to national security. The Republican section of the 2024 Joint Economic Report states that growing public debt could lead to slower economic growth and erode investor confidence, making it harder to sell treasuries to further finance deficit spending. The report cites our blog “National Security Implications of Unsustainable Spending and Debt,” explaining: “These frictions in debt management would make it difficult to raise spending in response to a future global crisis, which has national security implications.” As Dominik Lett and I discuss in the blog, to avoid such dire outcomes, Congress should establish a BRAC-like fiscal commission made up of independent experts, aimed at overcoming barriers to entitlement reform to stabilize the federal debt.

• Reconciliation should focus on deficit reduction and allow changes to Social Security. Philip Joyce, a professor of public policy at the University of Maryland, discusses two changes to the reconciliation process in his paper “The Congressional Budget and Impoundment Control Act at 50.” Reconciliation circumvents a Senate filibuster by limiting debate on a bill to 20 hours. According to Joyce, for the first 25 years of its existence, it was understood as the process to fast-track legislation aimed at reducing deficits. “The past 25 years have seen a much different focus, with reconciliation primarily being used for deficit-increasing changes,” he explains. One suggested change in the paper is limiting reconciliation to deficit-reducing legislation. Additionally, Joyce suggests modifying the Byrd rule, which prohibits using the reconciliation process for Social Security changes. He argues that given the looming insolvency of Social Security, “it seems short-sighted to tie the hands of the Congress by prohibiting the use of reconciliation for changes in this program.”