Federal debt is rising fast compared to GDP, and growth at these rates seems unsustainable. In recent testimony before the Senate Budget Committee, Cato Institute scholar Chris Edwards explained some spending reforms America should make to prevent a debt crisis and restore fiscal responsibility. He said:
CBO projects that federal debt will rise continuously as a percentage of GDP in coming years, which could trigger a major economic crisis. Rising interest rates and new spending proposals are adding to federal budget pressures.
Congress should offset any new spending and pursue reforms to get deficits under control. Jacking up IRS enforcement may raise some revenue but would harm taxpayers and the economy. There are other ways to start reducing deficits, such as the following proposals.
Spending Reforms
- Social Security. CBO has proposed reform options to reduce retirement benefits for high earners. One option would phase in reductions for the top half of earners to save $184 billion over 10 years.
- Medicaid. The federal government should require states to take greater responsibility for funding federal‐state programs. CBO estimates that reducing the high matching rate for the Affordable Care Act’s Medicaid expansion to normal matching rates would save $604 billion over 10 years.
- Supplemental Nutrition Assistance Program. America is suffering from an obesity crisis, yet almost one‐quarter of SNAP spending—about $25 billion a year—goes toward junk food. Restricting purchases, or allowing states to make such reforms, could create substantial budget savings.
Revenue Reforms
- Energy tax breaks. The IRA’s energy tax breaks were originally expected to cost $391 billion over a decade. Experts now believe the breaks could cost $1 trillion or more. Congress should at least scale back the breaks to the originally proposed costs to save about $600 billion over 10 years.
- Municipal bond tax exemption. The interest on state and local government bonds is tax‐free under the income tax, which is a benefit heavily slanted toward high earners. Repealing the exemption would reduce deficits by about $400 billion over 10 years and improve investment efficiency.
- Low‐income housing tax break. The LIHTC is hugely complex and generates substantial fraud and abuse. Repealing the credit would reduce deficits by $77 billion over 10 years.
These sorts of tax‐code reforms would not only reduce deficits but also free IRS resources to handle its normal tax administration and enforcement activities.
Action Line: Without controlling spending, America will sacrifice its prosperity for future generations. They’ll be stuck with the bill for today’s bad decisions. That shouldn’t happen. You can prepare your family best by saving til it hurts and not making big mistakes with your money. To avoid some of the big mistakes, click here to download my free special report on the Top 10 Investing Mistakes to Avoid.
