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Study Weighs Combining Spending Cuts with Tax Hikes for Reducing National Debt

A new study finds that only drastic spending cuts or tax hikes would be able to put much of a dent in the federal debt.

The study, “No Silver Bullet: Paths for Reducing the Federal Debt,” by the Pew Fiscal Analysis Initiative, predicts that without significant revenue increases or spending reductions, the national debt will zoom to $54 trillion, or about 132 percent of annual gross domestic product, by the year 2035. But neither approach by itself would be enough unless draconian cuts or tax hikes were made. And we know that’s not going to happen.

Reaching a debt-to-GDP ratio of 60 percent by 2025, the level recommended by the International Monetary Fund, the European Union, and the Peterson-Pew Commission, with tax hikes alone would translate into a 32 percent increase in individual tax revenues. That means the average income tax liability for every man, woman and child in the country would have to increase from $4,955 to $6,520 in 2015.

While some in Congress advocate cutting discretionary spending to reduce the federal budget deficit, that’s not going to work very well either with the national debt. The U.S. would need to cut discretionary spending by 43 percent, or approximately $590 billion in 2015, which is roughly equal to eliminating the Department of Defense.

Taking a chainsaw to entitlement programs is not going to work either. The federal government would have to cut Medicare, Social Security, Medicaid and certain veterans’ benefits by 22 percent. That would reduce the average Social Security check from $1,255 per month to $895 per month in 2015. Try explaining that to grandpa and grandma.

Some have called for an across-the-board cut in federal spending. The Pew report said a 14 percent across-the-board cut would be needed to achieve the target. Imagine how that would go down with not only federal bureaucrats, but with a whole range of programs like school lunches and the National Parks.

However, a combination of these different approaches might do the job. An across-the-board tax increase and spending cut of about 7.5 percent each in 2015 would achieve the target debt-to-GDP ratio by 2025.  The national deficit commission has been working on its own recommendations for cutting the federal budget deficit, and is expected to deliver its report by December 1. Hopefully by then, Congress will have decided what to do about the Bush tax cuts extension.

For the complete Pew report, visit www.pewtrusts.org.

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