US Taxing and Spending Policies:

The Lines Crossing Problem

Robert Dugger

Invest in Kids Working Group

Washington DCOctober 27, 2008

2

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

3

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)

0

5

10

15

20

25

30

35

1990 2000 2010 2020 2030 2040Calendar Years

Perc

en

tag

e o

f G

DP

0

5

10

15

20

25

30

35

Perc

en

tag

e o

f G

DP

Social Security

Medicare/Medicaid

National Debt Interest

Tax Expenditures

Federal Revenue Plus Tax Expenditures

Exhaustion Point

Other Mandatory Expenses

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.

6

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

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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.

• 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

8

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

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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.