There are many ways to solve the budget deficit and reasonable people may disagree as to which method is the best. Revenues could be increased through some combination of higher levels of GDP, faster growth of GDP, and higher taxes as a percent of GDP through either higher tax rates or eliminating tax expenditures (such as home mortgage interest deductions). Realistically, there is some limit to the ability to raise revenues because higher tax rates may also limit the level and growth rate. I have posted on the Laffer Curve before as have others with opposing views.
The deficit could also be reduced through spending cuts. There is also a limit here as lower spending could lower the growth rate of GDP (higher spending may also reduce growth if the spending crowds out private investment with greater growth opportunities). For convenience, the US budget can be broken down into four broad areas: health care (Medicare and Medicaid), Social Security, Defense, and discretionary non-defense. Right now, health care, Social Security, and defense are all in the $700-$800 billion dollar range, but health care has the highest projected growth rates and is definitely the biggest threat to the deficit. However, today I would like to talk about Social Security.
Many people, including Nobel-prize winning economists, argue that Social Security does not contribute to the deficit because we have historically raised more in revenues into Social Security than we’ve spent resulting in a large surplus in the “trust fund” that won’t run out for many years. While this is technically true, it ignores the fact that by soaking up such a large portion of US tax revenues, there is less opportunity to raise additional revenue.
Imagine if there were a law that said that 50% of all tax revenues were dedicated to the Department of Defense. If the defense department only spent 20%, would that mean that they are saving us money or that we don’t spend enough on defense? Of course not, the problem would be that we are dedicating too much of our revenue on defense.
That is the problem with Social Security. By dedicating 12.6% of most workers paychecks (including the “employers” portion, another myth), we are crowding out revenues that could be used for better purposes. An individual with an income of $50,000 would pay 15.3% in Social Security and Medicare, another 15% in federal income taxes, and maybe 10% in state and local taxes, sales taxes, property taxes, … No wonder so many people feel that they are Taxed Enough Already.