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December 4, 2024 Principles-Based Illustrative Reforms of Federal Tax and Spending Programs

Principles-Based Illustrative Reforms of Federal Tax and Spending Programs A package of 13 major tax and spending reforms, based on standard public economics design principles, is shown to reduce federal debt, increase social insurance, and expand the economy more than any previously analyzed policies by PWBM.A package of 13 major tax and spending reforms, based on standard public economics design principles, is shown to reduce federal debt, increase social insurance, and expand the economy more than any previously analyzed policies by PWBM.2024-12-04T00:00:00.000Z Principles-Based Illustrative Reforms of Federal Tax and Spending Programs A package of 13 major tax and spending reforms, based on standard public economics design principles, is shown to reduce federal debt, increase social insurance, and expand the economy more than any previously analyzed policies by PWBM.

Key Points

Expanding federal debt presents an opportunity to rethink U.S. federal fiscal policy while growing the economy and enhancing social insurance. We present illustrative fundamental reforms of federal tax and spending programs consistent with standard design principles that have emerged over time in the field of public economics.

Specifically, we analyze 13 major tax and spending reforms that include a full accounting of their budgetary and economic interactions, arguably one of the most ambitious computational public finance experiments performed to date.

Over the next 30 years, relative to current law, these reforms: (i) reduce federal budget deficits by 38 percent; (ii) grow the capital stock by 31 percent, GDP by 21 percent, and wages by almost 7 percent; (iii) reduce health insurance premiums by 27 percent; (iv) produce almost universal health insurance enrollment along with improvements in average health and productivity; (v) reduce old-age poverty; and (vi) reduce carbon emissions, relative to current law. These changes improve the welfare of many current and all future generations, especially future lower-income households who gain the equivalent of $300,000 in lifetime value from the reforms.

Introduction

In April 2024, we analyzed three illustrative policy bundles that reduced U.S. federal debt relative to current law while increasing economic growth over the long term. Each bundle reflected conversations with experts across the political spectrum with minimal adjustments by us.

In this brief, we analyze an additional policy bundle that includes thirteen major policy proposals chosen independently of any political point of view. Instead, we start with policy design principles that have become generally accepted in the field of public economics over the past several decades. These policy design principles include:

Government spending focused on the provision of public goods, addressing market failures, and risk pooling.

The use of corrective taxes to internalize externalities.

Tax simplification broadens tax bases with lower rates to reduce economic distortions.

Progressive taxation implemented with the lowest possible rates to raise necessary revenue while minimizing inefficiencies.

Mandatory savings for a portion of future health care expenses to reduce moral hazard (“the Samaritan’s Dilemma”).

Consideration of the full incidence of taxes and spending in general equilibrium, recognizing that the true economic burden is independent of the entity legally responsible for paying the tax.

Relative to our previous analyses, the extra degree of freedom to illustrate a plan design without political consideration affords much larger reductions in debt while increasing economic growth and enhancing social insurance. The long-run increases in investment capital (31 percent larger), hours worked (13.5 percent larger), and wages (6.8 percent larger) are bigger than any set of reforms previously analyzed by PWBM.

As with all our analyses, PWBM does not recommend or advocate for the illustrative policy reforms analyzed herein. Instead, our main goal is both theoretical and practical. A common misunderstanding is that serious debt reduction must come at the expense of economic growth or the social safety net. 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 Policy Bundle

The policy bundle consists of four broad categories: simplifying the tax code, reducing tax-induced distortions, implementing corrective taxes to address negative externalities, and reinforcing the long-term solvency of Social Security and Medicare while fostering economic growth.

Simplifying the tax code:...