US Taxing and Spending Policies:

The Lines Crossing Problem

Robert Dugger Invest in Kids Working Group Washington DC October 27, 2008

The Federal Budget “Lines Crossing Problem”

Without massive tax or deficit increases (and even assuming complete elimination of the “Bush tax cuts” and no economic downturn), all federal revenues will be absorbed within 15 years by –  National debt interest payments  Federal “tax expenditures” – tax subsidies and loopholes  Social Security and Medicare and other entitlement payment 2

All US revenues will be exhausted by mandatory spending in 15 years absent very large tax or deficit increases Total Mandatory Spending Will Exhaust All Federal Revenue Resources by 2024 (Note: Tax expenditures are added back to federal revenue and shown separately as an expense to clarify their size and significance)

35 35 30

Exhaustion Point Federal Revenue Plus Tax Expenditures

30 25 25 20 15

Tax Expenditures

20 15 10

National Debt Interest Other Mandatory Expenses Medicare/Medicaid

10 5 5

Social Security

0 1990 2000 2010 2020 2030 2040 0

Calendar Years Source: Government Accountability Office, Long-Term Fiscal Simulation, January, 2008, alternative fiscal scenario, which assumes continuation of current policy. Other Mandatory spending, CBO March, 2008 baseline and 1.9% of GDP after 2018. Tax expenditures are assumed to be 8.0% of GDP throughout.

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When the “lines cross”, there will be no money for…

…early education, national parks, the Army or Navy, or the FHA to guide planes to safe landings. No money for hundreds of government services and functions.

No immigration control. No federal court system. No Homeland Security. No government scholarships. Nothing.

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Well before the lines cross, if nothing is done, the United States will become a different and unpleasant place

 In five years -- just 60 months absent massive tax and deficit increases -- there will be as much as 30% less money for much of what the government now does.

 In ten years, the figure will be nearly 60% less.

 As the fiscal oxygen diminishes, people and businesses will fight for air – they’re beginning to fight now. 5

Government budgets define civil relationships

• Government budgets are about money, but more importantly, they define rights and obligations among citizens • Budgets define a society’s civil relationships -- who gets what, who pays for what, and who owes what to whom 6

Out of balance budgets mean civil relationships are out of balance and unsustainable

•

The deeper the imbalances, the more serious the struggle for money will be.

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Americans will be pitted against each other. Citizens with budget advantages will resist giving them up. Some may even fight..!

•

The turmoil will affect financial and economic stability

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Unsustainable civil relationships will need to be replaced by new sustainable ones To establish new sustainable relationships To assure that investments in kids receive the resources required for the US to have a competitive future workforce and fiscal sustainability, We need to establish clear firm principles for federal and state budgeting

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New budget tax and spending principles have to meet several tests:

 Make solid economic sense for the next several generations  Make sense politically and are supported by voters at the most personal levels  Speak in terms of American ideals of equal opportunity and life success  Call for allocating resources on the basis of proven long term economic returns 9

Three principles that MAY meet the tests of what’s right, what makes economic sense, and what’s politically workable, are:

1. The highest priority of US budget policy is the lifetime wellbeing of every American, starting in the earliest years of life.

2. US budget resources go to policies and programs with the highest evidence-based economic returns over generations.

3. Funding decisions, from the outset, are based on measurable goals and continuous performance evaluation.

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