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  1. 1. SETTING THE STAGE: 2013 AND BEYOND Dr. Jason J. Fichtner Senior Research Fellow Mercatus Center November 2012
  2. 2. Total Outlays and Revenues1
  3. 3. Even with Sequester – Spending Goes Up2
  4. 4. The Real Source of the Problem3
  5. 5. Medicare/Medicaid and Social Security4
  6. 6. Federal Debt Under CBO’s Budget Scenarios5
  7. 7. Defense and Non-Defense Spending Squeezed as Autopilot Programs Explode6
  8. 8. Growth in Entitlements Means Less $$$ to Budget Source: Peter G. Peterson Foundation Constant 2009 Dollars based on OMB , GAO and OMB data Author’s Calculations for FY20117
  9. 9. Medicare Costs Over Time8
  10. 10. State and Federal Medicaid Spending9
  11. 11. Social Security Trust Funds Annual Cash Flows10
  12. 12. Social Security to Run Deficits Indefinitely11
  13. 13. Social Security Trust Fund Exhaustion12
  14. 14. U.S. Government Debt13
  15. 15. A Huge Deficit Would Remain, Even If Any One of These Steps Were Taken in 2011: Source: Office of Management and Budget, The New York Times Based on fiscal year 2010 appropriations and disclosure reports from members of Congress who received spending earmarks for special projects.14
  16. 16. Balancing the Budget with Spending Restraint 5,000 4,500 4,000 Revenues 19% GDP Revenues 18% GDP $ Billions Revenues 17% GDP 3,500 Spending Freeze 1% Reduction 3,000 1% Spending 2% Spending 2,500 2,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Authors Calculations based on CBO August Update 2012. Revenues include the permanent extension of the 2001 and 2003 tax changes. Revenue for 2010 and 2011 are Actual; 2012 is CBO estimate; 2013 and forward are Authors Calculations15
  17. 17. Share of Total Income Taxes Paid by Millionaires16
  18. 18. Reforms for 2013 and Beyond o First principle for reform: We must cut spending o Second Principle for reform: Everything must be on the table (no sacred cows) o Third Principle for reform: Reforms must address our debt problem17
  19. 19. Tax Reform o Lower Marginal Tax Rates – Broader Tax Base o Incentives Matter o Perceived unfairness promotes system abuse o High tax rates encourage avoidance and evasion. o Bad tax systems chase investors away o Good tax systems attract investors and jobs18
  20. 20. Tax Reform o Tax reform should fix the problem! o Policy positions should be based on clearly articulated principles o The validity of each decision should be checked against these principles o Long term solutions are superior to short term fixes o The best results come from fixing everything at the same time. o Only People Can Pay Taxes19
  21. 21. Entitlement Reform – Social Security o Raise eligibility age for both Social Security and Medicare o Tie cost of living increases to a better measure of actual price inflation o Provide incentives to encourage work in later years -- or at least don’t discourage work o Improve the rate of return on trust fund assets o Private accounts o Change the benefit formula to make it more progressive20
  22. 22. Entitlement Reform – Medicare / Medicaid o Institute of Medicine estimates $750 billion annually is wasted medical spending or 30 percent of the total national health spending. To reduce this we need to focus on the process and introduce market-based reforms: • Premium support • Block grants • Move from fee-for-service to capitation fee structure • Bundle payments • Reduce administrative complexity21