Tax and Spending Reform for Fiscal Stability and Economic Growth

Abstract

Recognizing the unsustainable fiscal outlook facing the United States, the authors present a plan to constrain the growth of federal spending and reform the tax system to promote economic growth. The plan replaces the income tax system with a progressive consumption tax, eliminating the bias against savings and investment. The plan revamps Social Security to provide a flat, universal benefit that would virtually eliminate poverty in old age, making the program more effective in protecting low earners, more conducive to saving and longer work lives, and better aligned with the work and retirement conditions that will prevail in the coming decades. Additionally, the plan adopts health reforms that are intended to slow the growth of spending while maintaining access to high-quality health services, by shifting away from the defined-benefit approach that characterizes Medicare and Medicaid today to a defined-contribution philosophy. The plan also brings federal spending and revenue into closer alignment, sparing future generations from the explosive growth of federal debt.

Keywords: tax, budget, Social Security, Medicare, Medicaid, progressive consumption tax