Debt Digest | Erosion of Fiscal Principles

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• End the Employee Retention Tax Credit. “A whistleblower estimated that 95% of claims now being made by businesses for a COVID-era tax break were fraudulent,” report Kevin Freking and Fatima Hussein of the Associated Press. When IRS Commissioner Danny Werfel was asked in a private meeting with senators about his assessment of the fraud report, “He looked at his shoes and he basically said, ‘Yeah,’” recalled Sen. Wyden [D-OR]. As Cato’s Adam Michel argues, “The core lesson policymakers should learn from the mistakes of the ERTC is that the tax code and the IRS are not well-equipped to distribute targeted subsidies. […] Tax credits for every social and economic ill is a recipe for fiscal ruin and economic malaise.”

• Lower health care prices would reduce the deficit. CBO’s Director of Health Analysis Chapin White writes, “Policies that would lower the prices that commercial insurers pay providers would reduce the federal budget deficit. And because subsidies for commercial insurance represent a significant portion of federal spending, even small reductions in commercial insurers’ prices would result in sizable deficit reduction. […] CBO expects that reductions in prices for hospitals’ and physicians’ services would reduce premiums for employment-based plans, which in turn would increase employees’ taxable wages and federal revenues.” Cato’s Michael Cannon argues that eliminating counterproductive health care regulations could lower health care prices while improving the quality of care and access.

• Designing an effective fiscal commission. On BP50, Leo Plumer provides a timely explainer of the Fiscal Commission Act, lessons learned from previous commissions, and responses to a few common criticisms. He spotlights Boccia’s fail-safe commission approach, whereby Congress establishes two commissions working side-by-side: one composed of members of Congress and another composed entirely of independent experts. If the congressional committee fails, the independent commission will act as a fail-safe with its proposal advancing through silent approval. America cannot afford for Congress to fail at stabilizing the debt. “As rock climbers know, redundancy is key,” notes Plumer.

Boccia climbing the Telluride Via Ferrata last September

• Unfunded obligations grow. Kevin Williamson writes, “Unfunded obligations for Social Security and Medicare alone now exceed $600,000 per household. What that means, in a practical sense, is that these obligations are unlikely to be met. And that’s fine—the whole idea of entitlement reform is coming up with a plan to go about not meeting those obligations but doing so in an orderly way. The average net worth of a U.S. household is just over $1 million (the median is just under $200,000), and there isn’t an economically or politically practical way to seize 60 percent of Americans’ net worth to fund two programs.” Rather than raid Americans’ savings, Congress should work towards commonsense entitlement reforms. An effective fiscal commission can help see this through.

• Erosion of fiscal principles. National debt exceeds $34 trillion, threatening our economic future (see the Peterson Foundation’s graphic below). As William W. Beach explains for EPIC, “Public finance crises are rarely predictable, but, when at last they become visible, damage already has been done to economic activity, national defense, financial markets, and an untold number of life’s other departments where one rarely expects to find the effects of severe public finance problems. Indeed, substantial public finance imbalances, like those we are experiencing currently, trigger strategic actions by individuals and organizations exposed to significant losses from dislocations in government and economic activity. From Main Street to Wall Street, the breakdown of federal budgeting and the explosion of federal debt have effects far beyond talking heads in the national media and high-stakes budget negotiations in the White House.” For more on the consequences of high debt, see here, here, and here.