federal budget options workbook 062510b

8/8/2019 Federal Budget Options Workbook 062510B

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Otons Worboowww.sabetscsson.or

What Are Or Otons?

June 26, 2010


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John Rother, AARP

Joseph Antos, American Enterprise Institute

Norman Ornstein, American Enterprise Institute

Henry Aaron, Brookings Institution

Thomas Mann, Brookings Institution

John Castellani, Business Roundtable

Neera Tanden, Center or American Progress

Robert Greenstein, Center on Budget and PolicyPriorities

Deborah Weinstein, Coalition on Human Needs

Maya MacGuineas, Committee or a ResponsibleFederal Budget

Jonathan Gruskin, Concerned Youth o America

Robert Bixby, Concord Coalition

Lawrence Mishel, Economic Policy Institute

Mark Zandi, Economy.com

Donna Butts, Generations United

Stuart Butler, Heritage Foundation

Diana Furchtgott-Roth, Hudson Institute

George Muoz, Muoz Group

Janice Gregory, National Academy o Social Insurance

Barbara Kennelly, National Committee to PreserveSocial Security and Medicare

Sarah Hicks, National Congress o American Indians

Linda Rosenberg, National Council o Community

Behavioral Health AssociationLeticia Miranda, National Council o La Raza

Duane Parde, National Tax Payers Union

Marc Morial, National Urban League

Mark Paul, New America Foundation

George C. Wu, OCA National

Scott Hodge, Tax Foundation

Rudolph Penner, Urban Institute

Margaret Simms, Urban Institute

R. Bruce Josten, US Chamber o Commerce

Or Bet, Or Economy

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1www.USAbudgetdiscussion.org Options Workbook

Table o ContentsThe 2025 Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Spending Options

Health Care. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

All Other Non-Defense Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Revenue Options

Raise Existing Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Reduce Deductions and Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Reform the Tax Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Establish New Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Abot ths Worboo

This workbook is designed to provide a wide array o revenue and spending options or reducingthe ederal budget decit. These options represent the types o decisions acing policy makersand their implications or the American people, although they surely do not encompass all othe options that policymakers could consider. Participants in the national discussion will havethe opportunity to add additional options as part o the process. The workbook is designed toaccompany an additional document that provides an introduction to the scal challenges acingthe country.

In order to ensure that the inormation in this workbook is as unbiased as possible, AmericaSpeakshas worked with a diverse National Advisory Committee (see inside cover) to solicit comments andeedback. We have made every eort to ensure that the presentation o inormation is as air aspossible and accurately reects the challenges acing the nation.

AmericaSpeaks takes pride in its reputation as an honest and neutral advocate or publicparticipation. We play a unique role in the policymaking process by serving as a non-partisanconvener o orums that give the public an opportunity to make decisions about important issueswithout ear o manipulation or bias.

AmericaSpeaks does not take positions on policy issues. AmericaSpeaks strives to ensure that only abalanced and neutral presentation o acts is used to inorm discussions on policy issues. We standby these basic principles that protect the integrity o our process and the aith that participantsand decision-makers place in our work.


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2 Options Workbook www.USAbudgetdiscussion.org

A Note to Economsts an Bet Eerts

For this guide, AmericaSpeaks used budget projections (or the baseline) o theCongressional Budget Ofce (CBO) while making the ollowing adjustments:

On the spending side, we incorporated President Obamas scal year 2011request or deense spending or the next ve years and extended it or later

years. On the tax side, we extended all o the 2001 and 2003 tax cuts as well asother expiring provisions o tax law (known as the extenders) all o whichis considered current policy. We assumed the temporary tax cuts o the 2009

American Recovery and Reinvestment Act are really temporary and, thus, willexpire as mandated by law. We extended the 2009 levels o the AlternativeMinimum Tax (AMT) and adjusted them or ination in later years.

Ater 2020, the last year or which CBO has yearly gures, we assume, as CBOdoes, that spending and revenues grow at the same rate as the economy. Weanticipate, however, that private health care costs will rise at the same rate asthe costs o Medicare and Medicaid, rather than slowing to below the growth oMedicare and Medicaid as CBO projects. That results in slightly lower revenue,as individual taxpayers deduct their higher medical costs.

All gures in this guide come rom CBOs projections, as adjusted per thedescription above, unless otherwise noted. The options described in thisdocument draw heavily rom Budget Options: Volume 2, Congressional BudgetOfce, August 2009. Other sources o inormation are noted elsewhere in thisdocument.

Projections o the savings that each spending and revenue option wouldgenerate are based on the best available inormation. They do not, however,account or the interactions between them that is, how one option (e.g.,raising income tax rates) might aect another option (e.g., how much taxpayerscan, or choose to, take certain deductions to reduce their tax obligations).


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The 2025 Challene

The Challene...Can yo rece the ect by$1.2 trllon n the year 2025?

Once the economy recovers and the annualbudget decit initially alls below its currentlevel, the decit will begin to rise again andeventually reach unsustainable levels, drivenlargely by rising health care costs and an agingpopulation. Presuming that current policies

continue, the annual decit will total 7% oour economy in 2020 (as measured by GrossDomestic Product, or GDP), 9% in 2025, and 22%in 2050.i

Each annual decit adds to the total nationaldebt, which by 2025 is projected to exceed thesize o our nations economy (114% o GDP)and to reach 316% o GDP by 2050. By way ocomparison, todays debt is about 60% o GDPand debt has averaged about 40% over the lastour decades.

Your challenge is to ocus on the year 2025,when the annual decit o 9% o GDP willtranslate into $2.46 trillion, and choosespending or revenue options, or both, to reduceit by $1.2 trillion. The year 2025 is a good one onwhich to ocus it is ar enough into the utureto show how much the gap between projectedrevenues and spending will widen, but not soar as to seem unthinkably ar away.

While there is no magic number or the needed

level o decit reduction by 2025, meeting thetarget described above would begin to put thenations budget on a sustainable course or theuture. The debt would no longer be growingaster than the economy, greatly reducing therisks o an economic crisis o soaring debt,rising interest rates and ination, and a collapseo the dollar on world markets (or more onthe economic risks o our rising debt, see theaccompanying workbook on the nations scalchallenges).

A Lon-Term ChalleneReducing our decit to a sustainable level is along-term challenge that will not take place all atonce. When our nation last eliminated its annualdecits in the late 1990s (smaller than the decitso today), our leaders had to repeatedly cutspending and raise taxes in order to turn thoselarge decits into record surpluses.

In that spirit, we will ask you to choose a series

o policy changes that begin to take eect in aew years ater the economy has ully recoveredrom the recent recession and that willsignicantly reduce the decit by the year 2025.

Keep in mind that 2025 is a step along the road not the end o the journey. The goal is not just tomeet that target, but to do it in a way that ensuresthat we continue to reduce the decit in the yearsater that. Some options that you will considerwill make a big dierence in the short term tohelp meet the 2025 goal. Others will reap larger

savings in the years that ollow. We encourageyou to consider them both and make choices thatreect your values and the long-term interests oour nation.

An Ae BonsPresuming that the decit-reduction optionsthat you choose on the spending side, therevenue side, or both begin to take eect inthe next ew years, lower decits each year willmean lower interest payments on the debt each

year. So, by adopting policy changes to save $1.2trillion in the year 2025, you will actually reducethe decit that year by ar more. Depending onthe particular spending or tax options that youchoose, you could potentially reap total savingsin the neighborhood o about $1.6 trillion.

Savings o $1.6 trillion would reduce theprojected budget decit o 2025 $2.46 trillion,or 9% o GDP to $860 billion, or 3.2% o GDP.


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In crating a plan to reach your target, you will consider our categories o spendingoptions and our categories o revenue options ii :

Senn Otons:

Health Care (Medicare and Medicaid)

Social Security

All Other Non-Deense Programs

Deense

Reene Otons:

Raise Existing Taxes

Reduce Deductions and Credits

Reorm the Tax Code

Establish New Taxes

The chart below shows how much each o those categories will represent in 2025i current policies continue.

SpENdiNg ANd REvENuE, 2025ii i

Medicare and Medicaid: $2.0 trillion

Social Security: $1.48 trillion

All Other Non-Deense: $1.36 trillion

Deense: $0.88 trillion

Interest on the Debt: $1.49 trillion

Total Spending: $7.22 trillion

Total Revenues: $4.76 trillion

Decit: $2.46 trillion

The Otons


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Health

Care

Mecare an Meca: $2.0 trllon





Total Spending: $7.22 trillionTotal Revenues: $4.76 trillion


Americans get their health care in a variety o ways. About 61% o the non-elderly who have healthinsurance receive it rom their employer as a ringe benet. Many other Americans receive healthcoverage through Medicare, Medicaid, and other ederal insurance programs or veterans andcivilian and military personnel. Other Americans buy insurance or themselves, are insured throughanother entity like a union, or are uninsured.

Medicare is a ederal program that provides health insurance to 46 million Americans, most othem elderly. Medicaid is a ederal-state program that provides health insurance or 58 millionelderly and low-income Americans. They are two o the largest ederal programs and, together, willrepresent $2 trillion in spending 35% o ederal program-related (that is, non-interest) spending in 2025.

How oes Mecare wor?

Mecare has or arts:

The Part A Hospital Insurance program, which is nanced through Medicare

payroll taxes on employers and employees, helps cover inpatient care inhospitals, skilled nursing care, hospice care, and some home health care.

The Part B Medical Insurance program, nanced mostly by general revenuesbut also by a monthly premium that beneciaries pay, helps cover doctorservices and outpatient care and also covers some services that Part A doesnot.

The Part C (Medicare Advantage) program enables beneciaries to receiveall o their health care through private insurance, which provides required

services and may oer extra services or a monthly ee.

The Prescription Drug program, or which most beneciaries pay a monthlypremium, is an insurance program through which beneciaries choose a drugplan and private companies provide the coverage.

Medicare covers about 65% o the health care costs o its beneciaries. It provides good coveragein some ways, but its deductibles are larger than those common to good private insurance and itsco-payments can prove costly over time. In addition, it lacks a eature thats increasingly ound in


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private coverage a dollar limit (say, $5,000) beyond which insurance ully covers a beneciaryscosts. It also imposes limits on services, such as total days in a hospital or nursing care acility, sothat people may be on their own to pay or truly catastrophic events. As a result, most beneciariesbuy or receive supplementary coverage. That coverage, however, is becoming less available.

Health care spending has been rising aster than income or a long time and will continue to doso or the oreseeable uture. Out-o-pocket costs or Medicare beneciaries will grow aster than

their incomes or two reasons: (1) those out-o-pocket costs will grow as total health care costsgrow, and (2) supplementary insurance that is provided by ormer employers is shrinking.

The new health reorm law nanced its coverage expansions by reducing payments to health careproviders who treat Medicare patients, such as doctors and hospitals, and raising Medicare payrolltaxes on individuals making over $200,000 a year (and couples over $250,000) to 3.8%, up rom the2.9% that everyone else pays.

How oes Meca wor?

The ederal government shares the costs o Medicaid with the states; the ederal share rangesrom 50% to nearly 75%. Each state sets its own guidelines or eligibility and services, subject tominimum standards that are set by the ederal government.

The new health reorm law will extend Medicaid coverage to about 15 million more people startingin 2014, and the ederal government will assume almost all o the costs o doing so. There are nolimits on ederal payments or Medicaid once the state sets its rules or eligibility and services,the ederal government pays all o its costs based on the ederal share with that state.

Medicaid will grow more slowly than Medicare because most o its spending does not go or acutecare or rapidly growing populations, like the disabled or those with low incomes.

In most states, Medicaid pays much less to providers than Medicare (and Medicare usually paysless than private insurers). In act, Medicaid payments are so low in some states that somebeneciaries nd it increasingly hard to nd providers to serve them. This problem will likelyget worse in 2014 when, as noted above, health reorm makes 15 million more people eligible orMedicaid.


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Rsn Health Care Costs

Medicare and Medicaid provide health insurance coverage or an estimated 104 million people oralmost a third o the population. Federal spending or the two programs represents about 32%o national health care spending. Because the programs are so large, ederal policies towardsMedicare and Medicaid can have a signicant impact on the overall health care payment and

delivery system.

Health care costs across society private and public have risen ar aster than the economyor many years, and they are expected to continue doing so. Meanwhile, Americans are growingproportionately older and are living longer, which increases ederal spending on health carebecause more people receive ederal health benets over a longer period o time. Taken together,rising health care costs and the aging o the population will greatly drive up ederal spending onMedicare and, to a lesser extent, on Medicaid. Under current projections, these programs, whichtogether measure about 5.1% o the economy today, could rise to 7.5% by 2025 and nearly 13% by2050.iv

Federal health care costs are closely tied to cost trends in the overall health system, so the keyto controlling ederal health care spending over the long term is to bring overall health carecosts under control. The new health care reorm law includes measures that could help movein the direction. In this exercise, however, we are not asking that you reopen or revise that law.Instead, we ask that you ocus on how to reduce Medicare and Medicaid spending. Some o theoptions outlined below hold the promise o encouraging wider reorms across the health caresystem that could help to tame overall health spending. Others may reduce ederal costs butincrease private costs.

Health Reorm

The new health reorm law will extend health coverage to a projected 34 million Americans by2019 through premium subsidies, new health insurance exchanges, and expanded eligibility orMedicaid; reorm the private insurance market to make coverage more accessible; take steps thatits proponents believe will begin to slow the rate o growth in costs throughout the health caresystem (in both private insurance and public programs); and i implemented and maintainedover time as designed generate budget savings that reduce decits more and more over time.viThe Congressional Budget Ofce estimates that the law will save about $140 billion over the next 10

years, and as much as about $1.3 trillion over the ollowing decade.

Experts disagree on whether the law will generate the estimated savings. Some think the savingswill be smaller or that the law might actually increase uture decits because policymakers will

not enorce its cost-saving measures. Others think that the savings will be larger than estimatedbecause provisions in the law to make the delivery o health care more efcient will spread asteracross the health care system than assumed.

Nevertheless, even i health reorm produces the estimated savings, most experts believethat overall health care spending will continue to rise aster than the economy. As a result,policymakers will need to take additional steps in the uture either to urther slow the growth ohealth care spending or to raise revenues to pay or added services. Those steps may prove verylarge, signicantly changing the quality and accessibility o health services, the costs o obtainingthose services, or both.


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Aroaches to Chann the Health Care System

Generally, the nation could undamentally change the health care system in at least three basicways. Each o them could slow the growth o health care spending, but none o them is guaranteedto do so. First, we could replace the current system o employer-provided coverage and publicprograms with one known as premium support in which the ederal government gives Americans

a certain amount o money each year to cover their health care costs, but allows them to choosetheir insurance coverage rom carriers that meet minimum ederal requirements. Second, we couldreplace the current system with one known as single payer in which the ederal government paysor health care in a similar ashion to which it currently runs Medicare. Third, we could maintainthe current system but achieve savings through more regulation relying on policymakers toachieve savings by regulating the system more heavily.

premm Sort (proresse vocher or Consmer Choce)

This option would replace the current system o employer-provided health care and ederaland state programs with a new system in which the ederal government would give all

Americans, including Medicare and Medicaid recipients, a certain amount o money each

year to shop among private insurance or managed care plans. This new system wouldeliminate current public programs like Medicare and Medicaid. Rather than provide thesame amount o money to every American, policymakers presumably would adjust theamounts provided based on peoples income or health needs. Also presumably, beneciariescould supplement what they receive rom the government with their own money i theyare able to buy better coverage in the private insurance market.

Snle payer

This option would replace the current system with one thats paid or entirely by theederal government, similar to how government runs Medicare today. This system would

replace private insurance plans with public plans. Federal policymakers would make themajor decisions about the health care services that Americas would receive and how thoseservices are distributed among people o dierent ages, incomes, and so on.

More Relaton uner the Crrent System

This option would retain the structure o Americas current health care system with manyAmericans receiving health care through their employer, many others through Medicareand Medicaid, and still others through other means. Policymakers would regulate thesystem much more, with government boards providing stricter rules on the service doctors,hospitals, and drug companies must deliver and how much they can charge.

The three approaches outlined above would dier somewhat in terms o how the cuts in ederalhealth care spending aected them. The impacts are impossible to predict with any real precision.Under any approach, however, increases in out-o-pocket spending, waiting times, and otherlimits would depend largely on the severity o the cuts imposed. The eects rom imposing moreregulations under the current system would depend on the nature o those regulations.

At the moment, the nation does not seem prepared to consider undamental reorm o the kindsuggested in the rst two approaches above premium support or single payer. As a result, the optionsoutlined below would enable you to achieve savings through changes within the existing system.


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Men to Achee Sans n Crrent SystemBelow is a list o reorms that could help achieve major reductions in Medicare and Medicaidspending within the current system and the kinds o reorms in ederal health spending thatcould help generate the savings required by the options on the next two pages.

Rase the Mecare remm or hher-ncome benecares.1.The standard premium in 2010 is $104 per month or beneciaries withincomes below $85,000 (or single lers) or $170,000 (or couples ling

jointly). Beneciaries with higher incomes pay as much as $333 permonth. To achieve savings, you could increase the standard premium,the maximum premium, or both.

Rase ectbles, or consrance, or both or Mecare benecares.2.

Medicare beneciaries in 2010 pay a deductible or admission to ahospital o $1,112 or a spell o illness. They also pay a Part B deductibleo $146 or outpatient services, as well as various other copayments or

covered services. To achieve savings, you could raise the deductibles, thecoinsurance, or both.

increase the Mecare elblty ae.3.

Most beneciaries become eligible or Medicare at age 65. You couldraise that age to, say, 67 over the next decade, and even increase it moreas average lie expectancy improves.

Relace the Mecare roram wth a ocher or benecares4.to by nsrance.

A voucher would allow Medicare beneciaries to buy a basic benet planand would limit ederal spending. Individuals could use their own moneyto pay higher premiums or better coverage. Anyone wishing to enroll intraditional Medicare could do so, but would ace very high premiums.

Lmt elblty or Meca.5.

The ederal government shares the costs o Medicaid with the states.Health reorm expands Medicaid eligibility to anyone with incomes upto 133% o poverty (or about $14,000 or an individual and $30,000 or aamily o our in 2010). You could guarantee ederal support to the statesonly or Medicaid recipients with incomes up to the poverty line. States

would pay the ull cost o Medicaid or anyone above that level, or theycould reduce eligibility to 100% o poverty.

Feeral bloc rants to states or Meca.6.

The ederal government provides matching money to states or Medicaid,which reduces the incentive or states to control program costs. Youcould provide the states with xed payments that are lower than currentederal subsidies to Medicaid.


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Otons

You may choose to reduce Medicare and Medicaid spending by 5%, 10%, or 15% or not at all. The

menu o reorms on the previous page illustrates the kinds o changes required to meet these

targets. The higher your target, the more you would have to do among and within these particular

options to achieve those savings. So, or instance, you would have to raise Medicare premiumsmore to help achieve savings o 10% than to achieve savings o 5%.

Those changes would aect all Americans not just those on Medicare or Medicaid although we

cannot predict with any precision what those eects would be. Inevitably, lower spending means

ewer health care procedures and services. Americans could have less access to doctors and more

to less-highly-trained personnel, longer waits or non-emergency appointments, less intensive

care or routine colds and minor evers, and ewer tests and procedures. Health care costs could

be much more visible to consumers. Americans could ace higher premiums and have to pay out-

o-pocket costs or routine visits and services. Across the system, there may be ewer doctors

and nurses, ewer health acilities, and as demand or expensive services alls less medical

innovation.

Most developed nations spend much less o their national income on health care than the United

States and achieve better outcomes. Whether we can allocate ewer resources on health care and

achieve better outcomes, however, is an open question. But i we cannot do so, the continued

rise in health care costs will depress the growth o wages and salaries, will leave ewer resources

or the nations non-health needs (including education, transportation, and deense) and could

ultimately impair our overall economic perormance and competitiveness.


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OpTiON 1 Rece eeral health senn by 5%

Savings in 2025: $100 billion

OpTiON 2 Rece eeral health senn by 10%


OpTiON 3 Rece eeral health senn by 15%Savings in 2025: $301 billion

OpTiON 4 Mae no chanes

Savings in 2025: $0


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Arments For an Aanst Rectons n Senn

ARguMENTS AgAiNST:

Many Americans, especially the elderly,

would pay more or their health care

coverage and they would receive less

in services. This could lead to poorer

health outcomes, a sicker population,

and more preventable deaths.

The visible costs o health care could

increase as Americans pay more in

health insurance premiums and out-o-

pocket or routine visits and services,

while having less access to doctors and

more to less-highly-trained personnelor routine care, longer waits or non-

emergency appointments, less reliance

on expensive treatments or common

colds and minor evers, ewer tests

and procedures, and longer waits or

elective surgery.

With lower reimbursements or their

services, doctors, hospitals, and other

providers may nd it harder to makea prot, leading to ewer doctors and

nurses, ewer health acilities, and,

thereore, more limited patient choice

and less medical innovation as the

demand or more new technology

alls.

Rising health care costs may be a price

that Americans are willing to pay in

order to have access to the newesttechnologies and latest treatments.

ARguMENTS FOR:

Rising health care costs are the most

important actor in the projected rise

in decits and debt, with Medicare

and Medicaid alone projected to rise

as a share o our economy rom about

5.1% today to 7.5% by 2025 and nearly

13% by 2050. The more constraint in

the growth in Medicare and Medicaid

costs, the better the outlook or the

budget and the economy.

Letting health care costs rise as

projected will greatly increase theburden o decit reduction on all

other ederal spending and revenues

threatening our ability to invest

in education, science, and other

priorities, provide services or the

disadvantaged, and nd the needed

unds or deense. Rising health care

costs also harm the economy, orcing

businesses and amilies to devote

more resources to health care andewer to other purposes.

Most developed nations spend much

less o their national income on

health care than the United States

and achieve better outcomes by using

dierent structures or delivering

health care (see the discussion o

dierent approaches, above). We

should seek to reduce health carespending while maintaining or even

improving health care.


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Socal

Secrty


Socal Secrty: $1.48 trllon






What s Socal Secrty?

Social Security, which President Franklin Roosevelt and Congress created in 1935, currently providesretirement, survivor, and disability benets this year to about 53 million Americans one out oevery six o us. Social Security beneciaries include about 37 million Americans aged 65 or older,

nine million below that age who are disabled, and more than seven million others, such as earlyretirees or children whose parents are deceased, disabled, or retired.

The program is nanced largely through payroll taxes on employers and employees. Currently, anemployer and employee each pay hal, or 6.2%, o the 12.4% Social Security tax on the wages othat employee up to $106,800 o income (with wages above that level ree rom payroll taxes). Thatwage limit rises each year to keep pace with average earnings.

The payroll taxes o todays workers largely go to pay the benets o todays retirees. Currently,there are three workers to each retiree. By 2025, that ratio is projected to all to 2.3 to one. As thepopulation ages, the share o workers will all while the share o retirees grows, creating larger and

larger imbalances in the programs nancing.

Who Recees Benets rom Socal Secrty?

The government distributes benets under a ormula that ties benets to a recipients lietimeearnings, pays proportionately larger benets to low earners than high earners, and increasesstarting benets or successive groups o new beneciaries to keep pace with increases in averagewages across society. Ater a beneciary claims his or her benets, those benets are adjustedannually to keep pace with ination.

Social Security, which provides average retirement benets o about $14,000 a year, is an extremelyimportant source o income or many Americans. It provides at least hal o total income or justover hal o Americans 65 or older in the amilies that receive benets. It is especially importantto women and minorities. In amilies that received benets in 2007, Social Security provided atleast 90% o total income or 47% o elderly unmarried women, 57% o unmarried elderly Arican

Americans, and 63% o elderly unmarried Hispanics.v Some 6.5 million children live in amilieswhich rely on Social Security or part o their income.vi


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How Has Socal Secrty Chane Oer Tme?

Social Securitys spending has grown over the years partly as the population has grown andaged and more Americans became eligible or it, partly due to the increases in earnings on whichbenets are based, and partly due to program expansions, notably the creation o DisabilityInsurance in 1957.

In 1983, with Social Security acing a nancial crisis in which it would soon lack the unds to ullypay benets, President Reagan and Congress raised payroll taxes, subjected more Social Securitybenets to taxation, gradually raised the age at which recipients could receive ull benets, andtook other steps to strengthen the system nancially.

Socal Secrty Solency

The surpluses that Social Security has been generating over the past two decades have beeninvested in Special Issue Treasury Bonds. The bonds represent the debt that the United Statesowes to its citizens and which it must pay back, with interest, when the unds are needed to pay

benets. Although the bonds cannot be sold on the open market, they are backed by the ull aithand credit o the United States, just like bonds sold to private investors.

As the baby boom generation begins to retire, Social Security will need to redeem the bonds inorder to pay benets. Because the government is spending more than it brings in rom revenue,policymakers will need to nd the money by raising new revenue, reducing benets, or borrowingmore, which will add to the decit. Ensuring the solvency o the system is the core challenge oSocial Security reorm.

Otons

Our options are to reduce spending on Social Security benets, increase revenues, or do both.Spending options include reducing benets by urther raising the age or receiving ull benets orin other ways, or by reducing the annual benet increases that beneciaries get to oset ination.Revenue options include raising the payroll taxes that workers pay to nance Social Securityand raising the amount o a workers earnings subject to that tax. Another option would be torestructure the program through private accounts.

Oton 5 For tre benecares, raally rase theae or recen ll benets to 69 by 2028


Currently, workers can elect to start receiving benets at any age between 62 and 70. I workersstart receiving benets beore age 66, the benets they receive are reduced. I they retire ater 66,the benets they receive are increased. Social Security recipients can receive ull benets at age66. Between 2017 and 2022, the age or ull benets will rise gradually to 67. This option would gourther by gradually raising the age o ull benets, at the same pace, to the age o 69.


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ARguMENTS FOR:

Although the savings under this optionwould start slowly, they would growrapidly in the decades ater 2025 helping to strengthen Social Security

and reduce decits in the ensuingdecades.

Recipients who become eligible orSocial Security today, on average, liveup to 5 years longer than those whobecame eligible in 1940. From thatalone, todays new recipients get upto 40% more rom Social Securityover their lietimes. As lie expectancycontinues rising, uture retirees will

receive even more.

Raising the age or receiving ullbenets would entice some elderly

Americans to remain in the work orcelonger, during which they will paymore income as well as payroll taxes.Because this option would phase inover time, uture retirees would havetime to adjust their retirement plansand savings behavior.

ARguMENTS AgAiNST:

Social Security today provides averageretirement benets o $14,000 a year,and those benets provide at leasthal o the income or just over hal

o Americans 65 or older in amiliesthat receive benets (and some getalmost all o their income rom SocialSecurity) so, delaying benets cansignicantly aect the well-being omillions o Americans.

Lower-income senior citizens maynd it harder to work longer. Theymay have worked in more physicallydemanding or stressul jobs, making

it difcult or them to work anotheryear. Due to their job skills andqualications, they also may nd itharder to stay employed or nd newwork in their mid-to-late 60s. Further,lower-income seniors and someminority groups are not living muchlonger than they did 35 years ago, sothey would lose the most rom thischange.

Lie expectancy at 65 has risen by justtwo years since 1983, and the gradualincrease in the retirement age rom 65to 67 under current law will more thanoset this increase because it reezesthe number o years that a personreceives Social Security benets whileincreasing that persons working years.


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Oton 6 For tre benecares, lmt ncreases nstartn benets or all bt the lowest earners


The starting benet or a new Social Security recipient rises each year based on increases in

average wages across society. That is, the starting benet or someone who begins receiving SocialSecurity this year is higher, based on the increase in average wages, than someone who beganreceiving it last year.

Average wages tend to rise aster than ination. So, to generate savings, this option would limitincreases in starting benets to increases in ination. To ensure that low-income retirees are notadversely aected by this option, new beneciaries in the bottom 30% o wage earners would beexempted, allowing their starting benets to continue rising with average wages.

ARguMENTS FOR:This option would generate savingsor the ederal government while stillprotecting the value o Social Securitybenets or lower-income workersagainst the eects o ination.

The real value o benets wouldstill increase or all but the highest-earning beneciaries, and it is those

beneciaries who should contributemore to ensuring the solvency oSocial Security than those who havebeen less ortunate.

Recipients who become eligible orSocial Security today, on average, liveup to 5 years longer than those whobecame eligible in 1940. That aloneprovides todays new recipients up to40% more rom Social Security over

their lietimes and, as lie expectancycontinues rising, uture retirees willreceive even more.

ARguMENTS AgAiNST:Today, Social Security provides averageretirement benets o $14,000 a year,and those benets provide at leasthal o the income or just over halo Americans 65 or older in amiliesthat receive benets (and some getalmost all o their income rom SocialSecurity) so, any drop in benets cansignicantly aect the well-being o

millions o Americans.

Over time, Social Security wouldbecome signicantly less meaningulto aected workers because startingbenets would replace an increasinglysmaller portion o pre-retirementwages.

Only workers with incomes lessthan about $25,000 a year would be

protected rom the lower benetormula. Yet retirees with incomes omore than $25,000 also rely heavily onSocial Security.


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Oton 7 For crrent benecares, chane the ormla orrasn benets each year to refect a lowermeasrement o nfaton


Social Security recipients receive whats known as cost-o-living adjustments, or COLAs, each yearto oset the eects o ination. Some experts believe the ormula or increasing benets each yearoverstates the actual rate o ination, giving recipients more than necessary to oset ination.Other experts believe the current ormula understates the rate o ination because seniors spendhigher proportions o their income on health care, giving recipients less than necessary to keeppace with the rising cost o health care. This option would reduce spending and limit benetincreases by changing the ormula.

ARguMENTS FOR:

This option would maintain the cost-o-living adjustment but would reectwhat some experts believe is a moreaccurate measurement o actualincreases in ination.

These experts believe that currentination estimates overstate the trueincrease in the cost o living because

households oten react to increasedprices by shiting to cheaper products.Such behavior is not captured ingovernment ination statistics.

This option would contribute tomaking the Social Security systemsolvent by reducing spending onbenets.

ARguMENTS AgAiNST:

Senior citizens spend more o theirincome on health care costs, whichtend to rise aster than overallination, so the argument or asmaller (or more accurate) measureo ination is irrelevant in this case.

Today, Social Security provides averageretirement benets o $14,000 a year,

and those benets provide at leasthal o the income or just over halo Americans 65 or older in amiliesthat receive benets (and three out oevery ten seniors get almost all o theirincome rom Social Security) so,any drop in benets can signicantlyaect the well-being o millions o

Americans.

The impact o this change would grow

over time, alling most heavily onsenior citizens who live the longestand, over time, are likelier to exhaustall o their nancial assets other thanSocial Security. This is particularlytrue in the case o women, who arelikely to outlive their husbands andalso less likely to have other sources oretirement income to rely on.


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Oton 8 Rase the 12.4% ayroll ta raallyto 13.4% by 2025

Revenue increase in 2025: $100 billion

Oton 9 Rase the 12.4% ayroll ta raallyto 14.4% by 2025


Social Security is nanced through payroll taxes on employers and employees. Currently, anemployer and employee each pay hal, or 6.2%, o the 12.4% Social Security tax on the wages othat employee up to $106,800 o income. Either o these options would raise signicant revenues byraising the tax rate to 13.4% or 14.4% with employer and employee each continuing to pay hal.

ARguMENTS FOR:

Todays workers, who pay the payrolltax, should help strengthen SocialSecurity because they will benet romthe program when they retire.

Projected increases in lie expectanciesand average wage growth mean thatcurrent workers will enjoy greater

lietime benets than todays retirees.

ARguMENTS AgAiNST:

Middle- and lower-income Americanshave experienced stagnant livingstandards in recent decades, and anincrease in payroll taxes will urtherconstrain their amily budgets.

Higher payroll taxes also could reducethe number o jobs that employers can

oer to prospective workers.


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Oton 10 Rase the lmt on taable earnns, so tcoers 90% o total earnns n Amerca


When Social Security was established, about 92% o all earnings were subject to the payroll tax. As

incomes rose over time, that gure gradually ell until, in 1977, Congress changed the law in orderto restore taxable earnings back to about 90%. More recently, as incomes or those at the top haverisen rapidly, the share o total earnings subject to the payroll tax had allen to about 80% by 2007.vii

ARguMENTS FOR:

The share o total income subject topayroll taxes has shrunk in recent

years because earnings or those at

the top are rising aster than the limiton taxable earnings has been rising.Raising the taxable limit will helpensure that those at the top contributemore to the system.

Currently, people with incomes abovethe taxable limit pay no taxes on someor most o their income, which meansthat lower income workers pay a greatershare o their income in payroll taxes

than those with higher incomes.

Lie expectancy has been rising muchaster or high-income workers than orlow-income workers, so tax increasesto strengthen the Social Security systemshould ocus on these workers.

ARguMENTS AgAiNST:

The higher income earners who wouldpay more in payroll taxes would beeligible or higher retirement benets,

thus reducing the saving under thisoption over the long term.

Those who earn higher incomes arethe most likely to make investmentsthat will create jobs. Increasing taxeson these individuals will reduce theirability to make these investments andhurt job growth.

The option would reduce incentives

or work, and increase incentives toreplace higher wages with tax-ree ringebenets, or those with earnings abovethe current limit that would be subjectto payroll taxes or the rst time.


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Oton 11 Create ersonal sans accontswthn the system

Revenues in 2025: -$61 billion (Will increase decit in 2025)

Rather than require workers to contribute the ull 6.2% payroll tax to Social Security, this option

would allow but not orce them to put a share o their payroll taxes into a personal retirementaccount whose balances could be invested in a limited number o government-approved unds. Abeneciarys uture Social Security benets would be reduced in proportion to the reduction in hisor her payroll taxes into the Social Security system, protecting the solvency o Social Security overtime.

Under one current proposal by a member o Congress,viii workers under age 55 could invest 2% o theirrst $10,000 o earnings into such an account, and another 1% o the amount between $10,000 and theirtotal earnings subject to payroll taxes. The $10,000 level would rise each year with ination. The initialrates o 2% and 1% would rise to 4% and 2% ater 10 years, 6% and 3% ater 10 more years, and to 8%and 4% by 2042.

The proposal, however, carries signicant up-ront costs because payroll tax payments o currentworkers into the system are reduced at the same time that current beneciaries are still receivingull benets.

ARguMENTS FOR:

Workers would have the option to gainmore control over their investments,and they could potentially enjoy areturn on their personal accounts that

would exceed the benets they wouldreceive rom Social Security.

This option is designed to makethe Social Security system solventby gradually reducing payments tobeneciaries who choose to put someo their payroll taxes into privateaccounts.

Proponents argue that this is likepaying extra points now to renance

your mortgage at a lower rate in theshort run, you pay more up ront; butin the long run, you pay less in nancecharges.

ARguMENTS AgAiNST:

Workers would lose the certaintyo monthly benets that they couldcount on and plan around and thatoset the eects o ination.

Workers would ace the risk o earningless rom these accounts than theyhave received rom traditional benets depending on the perormance otheir investments at any one time.

Rather than producing savings by2025, this option would make thedecit worse in the coming decadesbecause some current workers couldopt to reduce their level o payroll

taxes that are going into the systemwhile all current beneciaries are stillreceiving ull benets.

Oton 12 Mae no chanes

Savings in 2025: $0


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What s n the Bet Beyon Mecare, Meca,Socal Secrty an deense?

The ederal budget includes a wide range o programs outside o Medicare, Medicaid, SocialSecurity and deense. Some o them, like Supplemental Security Income, unemploymentcompensation, child nutrition, and the Supplemental Nutrition Assistance Program (ormerly calledood stamps), provide income and other support or low-income and unemployed Americans.Others und core operations o government such as education, transportation, housing, science,space, natural resources programs, and oreign aid.

The President and Congress und some o these programs each year through annual bills, whileothers continue rom year to year under the law unless policymakers pass subsequent laws tochange them.

The cateores o rorams ncle the ollown: ix

Administration o Justice.

This area includes ederal law enorcement programs, litigation and judicial activities,ederal prison operations, and state and local justice assistance. Agencies that are undedinclude the FBI, Drug Enorcement Administration, Bureau o Alcohol, Tobacco, Firearms andExplosives, U.S. Attorneys, Justice Departments legal divisions, Legal Services Corporation,ederal Judiciary, the Federal Bureau o Prisons, and several parts o the Department oHomeland Security, including border and transportation security.

2025 Bet: $71 bllon

Agriculture

This area includes arm commodity programs, crop insurance, and certain arm loans thatare designed to ensure armers incomes. It also includes research and education programs,economics and statistics services, meat and poultry inspection, and part o the internationalood aid program.

2025 Bet: $20 bllon

All OtherNon-deense

Senn



All Other Non-deense: $1.36 trllon






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Commerce and Housing Credit.

This area includes mortgage credit, the Postal Service, and ederal deposit insurance.Mortgage credit includes housing assistance through the Federal Housing Administration,the Federal National Mortgage Association (Fannie Mae), the Federal Home LoanMortgage Corporation (Freddie Mac), and the Government National Mortgage Association(Ginnie Mae), rural housing programs o the Agriculture Department, and oversight o

the Federal National Mortgage Association (Fannie Mae) and the Federal Home LoanMortgage Corporation (Freddie Mac). It also includes unding or most o the CommerceDepartment and unding or such independent agencies such as the Securities and ExchangeCommission, the Commodity Futures Trading Commission, the Federal Trade Commission,the Federal Communications Commission, and most o the Small Business Administration.

2025 Bet: $6 bllon

Community and Regional Development.

This area includes programs to improve community economic conditions, promote ruraldevelopment, and assist in ederal preparations or and response to disasters. It unds theCommunity Development Block Grant and community development-related programs, the

Agriculture Departments rural development programs, the Bureau o Indian Aairs, FederalEmergency Management Agency, other disaster mitigation and community development-related programs, and the ederal ood insurance program.

2025 Bet: $21 bllon

Education, Training, Employment, and Social Services

This area includes Education Department programs, the Health and Human ServicesDepartments social service programs or children, the aged, and amilies, and the LaborDepartments employment and training programs. Education Department programs includeeducation or the disadvantaged, special education or students with disabilities, schoolimprovement, vocational and adult education, higher education, and student nancialassistance. Also unded in this area are the Library o Congress and independent researchand art agencies.

2025 Bet: $159 bllon

Energy

This area includes the Energy Departments civilian energy and environmental programs,the Agriculture Departments Rural Utilities Service, the Tennessee Valley Authority, FederalEnergy Regulatory Commission, and Nuclear Regulatory Commission. Energy Departmentprograms support energy efciency and renewable energy, research and development onnuclear energy, and the supply o oil, gas and coal.

2025 Bet: $3 bllon


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General Government

This area unds the White House and Executive Ofce o the President, Congress, theTreasury Department, Internal Revenue Service, Ofce o Personnel Management, GeneralServices Administration, Government Printing Ofce, and other agencies that perorm thegovernments legislative and administrative responsibilities.

2025: $39 bllon

General Science, Space, and Technology.

This area unction includes space ight, research, and supporting activities largely at NASA,National Science Foundation programs, and the Energy Departments science programs.

2025: $42 bllon

Health (not including Medicare and Medicaid)

This area includes the Childrens Health Insurance Program (CHIP), ederal employeeand retiree health benets, health services or under-served populations (such as Native

Americans), disease control, anti-bioterrorism activities, national biomedical research,training or the health care workorce, substance abuse and mental health services, publichealth and social services, and ood saety and inspection. Funded agencies include theNational Institutes o Health (NIH), Centers or Disease Control and Prevention, HealthResources and Services Administration, and the Food and Drug Administration.

2025 Bet: $44 bllon

Income Security

This area includes a range o programs that provide cash or other assistance to low-income Americans, civilian and military retirees, persons with disabilities, and theunemployed. Programs specically or low-income or needy Americans include theSupplemental Nutrition Assistance Program (ormerly called ood stamps) or poor amilies,Unemployment Insurance or the jobless, Supplemental Security Income or poor elderly,blind, or disabled Americans, Temporary Assistance or Needy Families, oster care orchildren, housing assistance or low-income Americans, and trade adjustment assistance orworkers who have lost their jobs due to trade.



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International Aairs

This area includes unding or all U.S. international activities, including the operating o U.S.embassies and consulates around the world; military assistance to allies; aid or developingnations; economic assistance to edgling democracies; U.S. export promotion; U.S.payments to international organizations; international peacekeeping eorts; and programsin global health, agricultural and development assistance, reugee and other humanitarian

assistance, and international drug control and enorcement. The programs in this area arerun by the Departments o Agriculture, State, and the Treasury; the United States Agency orInternational Development; and the Millennium Challenge Corporation.

2025: $68 bllon

Natural Resources and Environment

This area includes programs to protect and enhance the environment as well as recreationand wildlie areas, and to develop and manage public land, water, and mineral resources.

The programs are run by the Environmental Protection Agency, Army Corps o Engineers,Bureau o Public Lands, Bureau o Reclamation, Fish and Wildlie Service, Forest Service,National Oceanic and Atmospheric Administration, United States Geological Service, andother agencies.

2025 Bet: $37 bllon

Transportation

This area includes programs or ground transportation (highways, mass transit, andrailroads), air transportation (airports, airways, and air saety), and water transportation(marine saety and ocean shipping). Although most o the programs are run by theTransportation Department, this area also includes programs o the Coast Guard,Transportation Security Administration, and several small transportation-related programso NASA.


Veterans Benefts and Services

This area includes such services or veterans as health care, compensation and pensions,

education and rehabilitation, and housing, all run by the Department o Veterans Aairs. Italso includes the Labor Departments Veterans Employment and Training Service, UnitedStates Court o Appeals or Veterans Claims, and American Battle Monuments Commission.



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Otons

The ollowing options include reductions in spending o 5%, 10%, or 15% or no reductions at all. Foreach o the rst three options, you could assume either across-the-board cuts (e.g., every programis cut by the same percentage) or that cuts will all primarily on a smaller number o programs.I the latter, spending on other programs could either stay the same or even increase (though, o

course, by smaller amounts than the overall cut). By targeting the reductions, policymakers couldpreserve unding or higher-priority programs. But they also would have to choose more careullywhere to spend ewer dollars and look or ways to meet their goals more efciently. The deeperthe cuts (5%, 10%, or 15%), the more likely that policymakers would have to eliminate some lower-priority programs altogether.

Oton 13 Rece oerall senn n thscateory by 5%


What Col a 5% Recton Loo Le?I imposed across a host o areas, reductions o this size could result in slower road constructionor ewer road projects, ewer inspections or environmental violations, growing backlogs inprocessing veterans benet claims, cuts in ederal aid to state and local governments, a smallerederal workorce, no extension o unemployment benets during periods o high unemployment,and ewer student loans.

To get a sense o the scale o cuts that would be made, the savings under this option equal aboutwhat the ederal government will spend on law enorcement and justice-related programs; orabout twice what it will spend to protect our natural resources and the environment; or nearlytwice what it will spend or space ight, science, and technology programs.

Oton 14 Rece oerall senn n ths cateoryby 10%


What Col a 10% Recton Loo Le?I imposed across a host o areas, reductions o this size could result in things like smallerunemployment payments; an end to ination-related increases in retirement and other benetprograms; cuts in the number o ood saety inspections; longer approval time or new drugs;cuts in research, student loans, and support or education; cuts in ederal aid to state and localgovernments; and a smaller ederal workorce.

To get a sense o the scale o cuts that would be made, the savings under this option equal about85% o what the ederal government will spend in 2025 or education, training, employment, and


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social services, or more than it will spend or ground, air, and water transportation, or about twicewhat it will spend on law enorcement and justice-related programs, or more than three timeswhat it will spend on space ight, science, and technology programs.

Oton 15 Rece oerall senn n thscateory by 15%


What Col a 15% Recton Loo Le?I imposed across a host o areas, reductions o this size could prompt cuts in things like benetpayments or low income people, retirees, and the unemployed; deep cuts in transportationimprovements and repairs; much longer lines at airports due to ewer airport security personneland slower modernization o the air trafc management system; a much smaller ederalworkorce; much less ederal research; less ederal aid to local school districts; less medical care

at VA acilities or all but low-income veterans; ewer law enorcement activities such as bordercontrol, drug enorcement, and support or local law enorcement; and less U.S. humanitarian andmilitary aid around the world.

To get a sense o the scale o cuts that would be made, the savings under this option equal aboutthree times what the ederal government will spend in 2025 or all o its international programs,or signicantly more than it will spend in 2025 or education, training, employment, and socialservices, or nearly three times what it will spend or law enorcement and justice-relatedprograms, or ve times what it will spend or space ight, science, and technology programs.


Savings in 2025: $0


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ARguMENTS FOR:

This category will represent nearly 19%o all ederal spending in 2025, and the

decit challenge is too big or sucha large category o spending not tocontribute savings to help address it.

Some o the programs in this categoryprovide benets to tens o millions o

Americans who are neither poor norotherwise disadvantaged, or provideservices that arguably could or shouldbe provided and nanced at the stateor local level, or represent lower

priorities given other pressing needs.

Policymakers have reduced spendingin this category as part o decit-reduction laws in the 1980s and1990s, and the savings played a keyrole in helping to move the budgetrom decits to surpluses during thatperiod. Policymakers were orced toset priorities and make trade-os.

ARguMENTS AgAiNST:

This category includes programs in keyinvestment areas that will strengthen

the economy in the uture such aseducation, transportation, science, andresearch leading to more jobs andhigher living standards.

This category has not been growingas a share o the economy, so it is notcontributing to the decit problem.

Some programs in this category,such as the Supplemental Nutrition

Assistance Program (ormerly calledood stamps), UnemploymentInsurance, and Supplemental SecurityIncome, provide essential supportsto some o the neediest Americans.

Across-the-board cuts in this categorywould disproportionately aect poorchildren and amilies, people withdisabilities, and the unemployed.



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What s deense Senn?

The deense budget is dominated by three categories: operating and maintaining the equipment;paying or the people; and buying the weapons. The rest goes or research and development,military construction and amily housing, atomic energy activities, and other deense-relatedprograms.

Deense spending has ebbed and owed dramatically over the years, largely due to whether thenation was at war, where deense ranked as a national priority, and other actors. Over the lasthal-century, deense spending has allen as a share o the budget more or less gradually romnearly 50% to todays 19%. As a share o the economy, it has ranged rom nearly 10% to 3% aroundthe year 2000. Today, boosted by the wars in Aghanistan and Iraq, deense stands just below 5% othe economy, although it will all in the coming years as those wars end.

Crrent Aroach to deense

The United States is by ar the worlds predominant military power. It plays the lead role inmaintaining global peace, ensuring commerce on the worlds waterways, protecting our allies, andconronting our adversaries when necessary. It leads an international alliance system o some 70countries. It also will likely ace a host o challenges in the coming years, which include possibleconicts in several parts o the world.

At the moment, however, some experts believe that deense spending suers rom a gap betweenwhat the nation must spend to maintain its capabilities and what President Obama proposes tospend in the coming years. The President proposed to maintain deense spending or the next ve

years at current levels. Some experts, however, believe that the nation must spend at least 2%more a year in ination-adjusted dollars in order to maintain our current approach and ensure

that our military personnel are skilled and trained, that they receive high-quality health care andother benets, that we purchase the most sophisticated equipment to meet our challenges, andthat we maintain our equipment. Other experts, however, believe that it is possible to cut billionso dollars rom military spending unrelated to our current wars without compromising nationalsecurity.

deense




deense: $0.88 trllon





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Otons

The ollowing options include reductions in deense spending in 2025 by 5%, 10% or 15% or none atall. By making no reduction, you would be adopting the Presidents deense spending path, which,as explained above, may all short o whats needed to maintain the nations deense posturearound the world.



What Col a 5% Recton Loo Le?These cuts would mean a reduced U.S. leadership role around the world, with the nationconcentrating more on deending the homeland and the nearby seas. We would ocus onmultilateralism, on sharing the burden o maintaining the peace with our allies, and on using non-military tools o oreign policy ar more and military tools ar less. We would also ocus sharply onreducing spending on weapons systems that are considered outmoded or ineective. Deense cutsalso would mean lower benets and less training or the troops and less eective weapons andother equipment with which to ght. That, in turn, could mean a reduced U.S. capacity to achieveits goals around the world, a less eective military orce, and a reduced appeal o military serviceas a career or young men and women.



What Col a 10% Recton Loo Le?Compared to a 5% cut, these cuts would mean an even more reduced U.S. leadership role aroundthe world, with the nation concentrating more on deending the homeland and the nearby seas.We would ocus on multilateralism, on sharing the burden o maintaining the peace with ourallies, and on using non-military tools o oreign policy ar more and military tools ar less. Wewould ocus ever-more sharply on reducing spending on weapons systems that are considered

outmoded or ineective. Deense cuts o this size also would mean even lower benets and lesstraining or the troops and less eective weapons and other equipment with which to ght. That,in turn, could mean a reduced U.S. capacity to achieve its goals around the world, a less eectivemilitary orce, and a reduced appeal o military service as a career or young men and women.


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What Col a 15% Recton Loo Le?

Compared to a 10% cut, these cuts would mean an even more reduced U.S. leadership role aroundthe world, with the nation concentrating more on deending the homeland and the nearby seas.We would ocus on multilateralism, on sharing the burden o maintaining the peace with ourallies, and on using non-military tools o oreign policy ar more and military tools ar less. Wewould ocus more sharply still on reducing spending on weapons systems that are consideredoutmoded or ineective. Deense cuts o this size also would mean even lower benets and lesstraining or the troops and less eective weapons and other equipment with which to ght. That,in turn, could mean a reduced U.S. capacity to achieve its goals around the world, a less eectivemilitary orce, and a reduced appeal o military service as a career or young men and women.


Savings in 2025: $0


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ARguMENTS FOR:

We can no longer aord to maintainour current military posture, andwe should rely more on multilateralapproaches to global problems.

Deense spending will be 12% o thebudget in 2025, and exempting deenserom spending cuts will increase thesize o the cuts we must make in otherprograms or the taxes that we mustraise.

Most major Western powers spendsignicantly less on their armed orces although many o them reside inmuch more unsettled parts o theworld and they should bear more othe burden o their own deense.

Thanks to our relative geographicisolation, a stable Canada to thenorth and a non-hostile Mexico to thesouth, the United States could achieve

signicant savings i it reduced itsglobal role.

Previous U.S. interventions aroundthe world have not always gone well,costing the United States dearly inmoney and lost lives and leavingbehind serious problems or the nationin which we intervened.

By cutting ineective or outmoded

weapons systems, we can save billionso dollars that would reduce our needto make cuts in other areas withoutcompromising our national security.

ARguMENTS AgAiNST:

Lower deense spending will meana lower U.S. capacity to achieve itsgoals around the world with a lessskilled and trained military orce andless eective weapons and otherequipment with which to ght.

The world remains a dangerous andunpredictable place, and the UnitedStates needs to maintain its militarydominance to protect its interests.

Previous eorts to convince our alliesto share the costs o maintainingglobal peace have proven unsuccessul,and we have no reason to believe thatwill change.

Earlier periods o U.S. disengagement,such as the 1920s and 1930s, haveprovided openings or our adversariesto exploit, orcing us to quickly rearmand to wage wars at great expense.

The United States aces a host ochallenges around the world or whichmultilateralism and burden sharingmay prove inadequate.



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Reenes






Total Spending: $7.22 trillionTotal Reenes: $4.76 trllon


The tax code is supposed to raise enough revenue to nance government spending in a way that issimple and air and that helps to promote economic growth or at least does as little as possibleto hinder it.

Many experts believe that the current tax code is seriously awed. Tax revenue as a share o GDPis about as low as it has ever been since World War II, due to both the economic recession and the

large tax cuts that President Bush and Congress enacted in 2001 and 2003. Even ater the economyully recovers rom the recession, revenues wont rise to a level anywhere near current spending.Given the governments rising uture obligations, policymakers may need to raise more revenues.The tax code also has grown increasingly complicated, with seemingly arbitrary rules or dierenttaxpayers, and many provisions detract rom economic growth.

The ederal government raises revenues rom a variety o sources. This year, o the estimated $2.17trillion in total revenues, the ederal government will collect 43.2% rom individual income taxes,40.4% rom payroll taxes, 7.2% rom corporate income taxes, 3.4% rom excise taxes, and 5.7% roma variety o other taxes.

The tax code also provides more than $1 trillion a year in deductions and credits, which aredesigned to provide incentives or individuals and businesses to undertake particular activities. Thetotal tax benets or individuals are ar larger than those or corporations. For instance, the taxcode encourages home ownership by allowing individuals to deduct the interest they pay on theirmortgages. It encourages charitable giving by allowing individuals who itemize their deductions todeduct contributions to charities, religious groups, and certain other non-prot institutions.

Taxpayers tend to ocus on income taxes, but most people pay more in payroll taxes than incometaxes. Thats especially true because most experts believe that, while employers and employeeseach pay hal o payroll taxes per employee, employees bear the burden o the entire tax becauseemployers make up the cost by paying lower wages and salaries or by limiting other employee

benets. While tens o millions o Americans earn too little to pay ederal income taxes, virtually allworkers pay payroll taxes.

There are at least our general approaches to raising revenues that are explored in the ollowingpages. First, policymakers could raise rates on existing taxes. Second, they could eliminate orreduce many current deductions and credits. Third, they could eliminate enough deductions,credits, and exclusions to generate enough revenue not only to reduce the decit, but also to lowerincome tax rates. Finally, they could establish new taxes.


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Otons

Tax increases within the existing tax structure are easy to implement, but they place a heavierburden on those who already pay such taxes. Options or raising taxes include across-the-boardincreases or all or most taxpayers and taxes targeted at specic groups like upper-incomeindividuals or corporations.

Oton 21 Rase ersonal ncome ta ratesby 10% or eeryone


This option would increase marginal tax rates by 10% or all taxpayers. Taxpayers now in the 10%tax bracket would pay a marginal tax rate o 11%, those now in the 15% bracket would pay 16.5%,those now in the 25% bracket would pay 27.5%, those now in the 28% bracket would pay 30.8%,those now in the 33% bracket would pay 36.3%, and those now in the 35% bracket would pay38.5%.

Oton 22 Rase ersonal ncome ta ratesby 20% or eeryone


This option would increase marginal tax rates by 20% or all taxpayers. Taxpayers now in the 10%tax bracket would pay a marginal tax rate o 12%, those now in the 15% bracket would pay 18%,those now in the 25% bracket would pay 30%, those now in the 28% bracket would pay 33.6%,those now in the 33% bracket would pay 39.6%, and those now in the 35% bracket would pay 42%.

Oton 23 Rase ersonal ncome ta ratesby 10% or taayers n theto two bracets


This option would increase marginal tax rates by 10% or all taxpayers in the top two tax brackets.Taxpayers now in the 33% tax bracket e.g., married couples who earn between $209,250 and$373,650 a year would pay a marginal tax rate o 36.3%. Those now in the 35% bracket e.g.,married couples who earn more than $373,650 a year would pay 38.5%.


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Oton 24 Rase ersonal ncome ta ratesby 20% or taayers n theto two bracets


This option would increase marginal tax rates by 20% or all taxpayers in the top two tax brackets.Taxpayers now in the 33% tax bracket e.g., married couples who earn between $209,250 and$373,650 a year would pay a marginal tax rate o 39.6%. Those now in the 35% bracket e.g.,married couples who earn more than $373,650 a year would pay 42%.

ARguMENTS FOROpTiONS 21 TO 24:

Raising income taxes across the boardis air because it is designed to help

address a problem rising decitsand debt that aects the nation as awhole.

Upper-income American areparticularly well-positioned topay higher taxes because theyhave done relatively well in recent

years, compared to middle-incomeAmericans whose living standardshave been stagnant or decades.

ARguMENTS AgAiNSTOpTiONS 21 TO 24:

Across-the-board tax increases will hurttens o millions o Americans whose

living standards have been stagnant ordecades.

Increases in marginal tax rates,particularly on upper-income

Americans, reduce incentives or workand saving.

Higher tax rates could lead to lowereconomic growth, which would lowerliving standards as compared to what

they otherwise would be.


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Oton 26 Rase the ta rate on catal ansan ens

Revenue increase in 2025: $19.6 billion

Currently, the tax code allows Americans to pay a lower tax rate on investments in things likestocks and bonds, which are also known as capital gains and dividends, than on ordinary income.Investors in these long-term assets pay no more than a 15% tax as compared to taxes on ordinary

income that range all the way up to 35%.

This option would raise the tax rate on long-term capital gains and on qualied dividends to 20%or married couples making more than $250,000 a year (and singles making more than $200,000).

Oton 25 Create an etra 5% ta or eole earnnmore than one mllon ollars a year


ARguMENTS FOR:

Upper-income Americans are particularlywell-positioned to pay higher taxes,certainly more so than other Americans.

Upper-income Americans have donerelatively well in recent years, comparedto middle-income Americans whose livingstandards have been stagnant or decades.

ARguMENTS FOR:

Income inequality is rising, and lowertax rates on capital gains and dividendstends to disproportionately help high-income Americans.

Lower rates on capital gains createsincentives or taxpayers to create taxshelters by converting their ordinaryincome to capital gains, makingthe tax code less air and morecomplicated.

ARguMENTS AgAiNST:

A lower capital gains tax rewards thoseAmericans who take a risk by investing in,or instance, start-up companies with norecord o success.

A lower capital gains rate also createsincentives or investing in activities thatspur economic growth and create jobs.

ARguMENTS AgAiNST:

Tax increases on upper-incomeAmericans, particularly an extra tax onmillionaires, will discourage work andpenalize success.

Those who will be taxed are the mostlikely Americans to make investmentsthat would create new jobs.


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Oton 27 Rase the to cororate ncome tarate to 40%, rom 35%


ARguMENTS FOR:

Corporations pay average (oreective) tax rates that arecomparable to those o corporations inother industrialized nations.

The corporate tax rate was as high as46% as recently as 1986 so a 40% ratewould still be only hal-way betweenthe current rate and the earlier higherrate.

ARguMENTS AgAiNST:

U.S. corporations already ace the secondhighest marginal tax rate the tax oneach additional dollar o earnings oncethey reach the 35% bracket in theindustrialized world.

Tax increases on corporations raise theircosts o doing business, hurting theircompetitiveness around the world andreducing the resources they could use toinvest and create jobs at home.


Revenue increases in 2025: $0


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The tax code provides deductions and credits or various purposes, such as health care, homeownership, savings, and investment.

Deductions and credits work dierently. Deductions reduce the amount o income subject totaxes. With deductions, the higher your tax rate, the greater is the value o your deductions. Onsomething eligible or a deduction (such as, interest payments on a mortgage), those who pay a35% tax rate can deduct 35 cents o every dollar, those who pay a 15% rate can deduct 15 cents oevery dollar, and those who claim the standard deduction or have no taxable income receive nobenet at all.

Credits, on the other hand, tend to be set at at rates, such as a 15% credit against expenses, ora at amount, such as a $1,000 credit against qualiying expenses. Tax credits oset the amounto taxes owed on a dollar or dollar basis. For example, i a taxpayer owes $1,000 in taxes beoretaking the credit into account and is eligible or a $1,000 tax credit, he or she would not owe anytaxes. Some credits are reundable, which means that people who qualiy or them receive a checkrom the government i their credit is greater than what they owe in income taxes or even i theyowe no income taxes at all.

Oton 29 Lmt the ale o temze ectonsto 28%


Taxpayers can deduct certain payments and contributions such as interest payments on theirmortgages, state and local income and property taxes, and contributions to charities rom theirederal taxes.

President Obama has proposed to limit the value o those deductions to 28% or upper-incomeAmericansx. That is, those in the 33 or 35% tax brackets e.g., married couples who earn at least$209,250 a year would deduct 28 cents o every dollar on those eligible items, rather than 33 or 35cents.

Recedectons

An Crets


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Oton 30 Conert the mortae nterestecton nto a cret


The tax code lets homeowners deduct the interest they pay on their home mortgage loans. Theyalso can deduct their property taxes and exclude up to $250,000 ($500,000 or couples) o theirprots rom selling their homes.

This option would raise signicant revenues by converting the mortgage interest deduction into aat credit o 15% against a taxpayers mortgage interest payments.

ARguMENTS FOR:

Limiting itemized deductions to 28%would generate signicant revenueswhile shrinking the gap between thevalue o deductions or high-income

taxpayers as opposed to low-incometaxpayers.

Upper-income Americans areparticularly well-positioned topay higher taxes because theyhave done relatively well in recent

years, compared to middle-incomeAmericans whose living standardshave been stagnant or decades.

ARguMENTS AgAiNST:

Limiting the value o itemizeddeductions to 28% would reduceincentives or people to buy homes,make charitable donations, and do the

other things that policymakers triedto encourage by establishing thesedeductions in the rst place.

It also would reduce those incentivesor the very people upper-income

Americans who are best-positionedto allocate their resources in thesedesired ways.

ARguMENTS FOR:

The mortgage interest deductionreduces the cost o nancing a homepurchase and thereby encouragespeople to invest more in home

ownership than they otherwise wouldor to borrow against their homes.

A credit would help low-incomehomeowners who do not take themortgage interest deduction on theirtaxes because they take whats knownas the standard deduction, whichdoes not provide an incentive orhomeownership.

ARguMENTS AgAiNST:

Converting the mortgage interestdeduction into a credit could lowerhome values or relatively high-pricedhomes and would reduce home

construction or those homes.

It also could reduce the rate ohomeownership, which, in turn,could hurt eorts to strengthenneighborhoods and communities.


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Oton 31 Lmt the ecton or state an localncome, real estate, an ersonal roertytaes to 2% o a ersons ajste ross ncome


The tax code lets taxpayers deduct their state and local income, real estate, and personal property taxes.

This option would limit those deductions to 2% o a taxpayers adjusted gross income.

ARguMENTS FOR:

Limiting the deduction or state andlocal taxes would reduce whatsnow an incentive or state and localgovernments to spend more and to

impose higher taxes to cover thatspending than they otherwise might(because they know many o theirconstituents can deduct those taxes).

It also would target a deductionthat largely benets wealthiercommunities where many upper-income Americans take the deductionand enjoy generous public services.

ARguMENTS AgAiNST:

The ederal government should retainthis deduction because when statesimposes taxes on income, that incomeis no longer available or amilies to

spend and they should get a deductionin return.

Limiting the deduction or state andlocal taxes would disproportionatelyaect taxpayers in high-tax statesand localities, and it increase the gapin ater-tax income between thesetaxpayers and those in low-tax statesand localities.

Oton 32 Lmt cororate erecaton or eqment


Currently, the tax code allows accelerated deductions that is, a aster tax write-o o the as

federal budget options workbook 062510b

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