- The Washington Times - Thursday, July 15, 2010

The deficit commission and its 18 members have the historic opportunity to correct many years of irresponsible fiscal policy and set us on a path to sustainability. As they form their recommendations over the next few months, they will consider many solutions. In order to help them evaluate those ideas, I suggest three criteria that they can apply to the proposals and to their final recommendations, criteria that will tell them whether those recommendations will be the solution to our fiscal woes.

With a $1.5 trillion deficit and more than $8 trillion of debt held by the public, our county is in the red. But as baby boomers start retiring, spending will explode on programs like Medicare, Medicaid and Social Security. Along with that, the interest we pay on our debt are about to get out of control and reach $840 billion in 2020.

The following criteria should provide some guidance to the National Commission on Fiscal Responsibility and Reform in assessing the quality of the solutions it puts forward.

These criteria are simple: 1. Do the recommendations really cut spending rather than focus on cutting the deficit? 2. Do the recommendations allow for political carve-outs? 3. Do the recommendations fix the budget gimmicks?

These criteria address the three major issues that put us in our current state of fiscal irresponsibility. We have overspent; we have made excuses for our overspending; and we have lied about our overspending.

First, the commission must recommend that the government get to the root of our deficit problem and cut spending. Increasing revenue alone will not reduce the deficit. The Congressional Budget Office looked into this issue and concluded that the federal government would need to raise tax rates by “substantial” amounts to finance projected spending (up to 25/63/88 percent). The CBO concluded that those tax rates would significantly reduce economic activity and create serious problems with tax evasion and that revenues would fall significantly short of the amount needed to finance the growth of spending.

How about a value-added tax (VAT) then? A recent study by Florida State University’s Randall G. Holcombe finds that a VAT would slow economic growth, and the net effect on taxes would be almost no additional revenue. While a VAT is a powerful source of government revenue initially, as it sets in, gross-domestic-product growth slows and income- and sales-tax revenues slow as well. In the end, the reduced revenue collection from other taxes offsets much of the VAT revenue.

Tax reform is needed, but the fact that we have overspent remains the main problem.

Second, for years, lawmakers have claimed to “cut” spending, but we have spared “favored” programs. For change to occur in this area, all areas of spending must be on the table - defense, entitlements, Medicare, Medicaid, everything. For the past 15 years, the federal government has sheltered about 80 percent of the budget from cuts. This trend cannot continue.

Recall the Balanced Budget and Emergency Deficit Control Act of 1985, commonly referred to as the Gramm-Rudman-Hollings Act after the authors of the original bill. The act was meant as a fiscal-responsibility tool and set maximum amounts for the federal deficit. If the deficit exceeded a preset limit, the president would cut spending by a uniform percentage across the board to bring the budget back into balance, a process called “sequestration.”

However, Congress put into place so many loopholes and exempted so much spending from sequestration that the entire Gramm-Rudman-Hollings framework fell apart. In 1990, the budget exceeded the deficit limit by nearly $100 billion, and the deficit targets would have required that the few programs still on the chopping block be cut by about one-third. So no spending was cut.

Finally, the government has used budget tricks and gimmicks to put off real fiscal reform and hide the actual costs of out-of-control spending. The outcome is that we end up with more spending, more deficits and more debt.

Budget gimmicks, however, have consequences beyond letting lawmakers get away with spending money. With a limited budget, policymakers - like nearly everyone else in the world - must prioritize spending. They must choose the best policies to adopt based on available funds and forgo other projects. When legislators manipulate numbers in order to fund programs that otherwise might not pass muster, they are not obligated to show that the programs serve genuine social or financial policy objectives.

Some of these gimmicks include pretending the spending does not exist, pretending the spending is smaller than it is, pretending that spending is really an investment, pretending the tax revenues will be bigger than should reasonably be expected and/or pretending future pension liabilities do not exist. It is time to put an end to them.

In the midst of this crisis, the American people have changed the way they address their fiscal situations. Today, they wonder when their governments will catch up. American people are counting on the commission to find real solutions. I hope it does not disappoint them. They’ve been disappointed enough.

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