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What Solution Should the Deficit Commission Promote to Cut Americas Deficit?

The Presidents deficit commission met last week to begin its task to address the mounting fiscal crisis facing the nation. As Heritage shows in the 2010 Budget Chart Book, the estimated federal deficit in 2010 will be $1.54 trillion, and spending on entitlement programs (Medicare, Medicaid, and Social Security) and interest on the federal debt is slowly squeezing out other programs. And while many liberals are calling for new taxes to pay for the spending, the value-added tax is not the solution. The only way to fix a spending problem is by cutting spending.

The Call for a Value-Added Tax (VAT)

Many prominent liberals have mentioned a value-added tax as a possible solution to Americas fiscal woes.

  • On April 21, President Obama said he was open to a VAT once he sees the recommendations his Debt Commission makes.
  • On April 25, Erskine Bowles, Co-Chairman of the National Commission on Fiscal Reform, was quoted as saying: I think there are many good arguments that you can make for a value added tax or a consumption tax, as opposed to a tax on wages during an appearance on Fox News.
  • On April 6, Paul Volcker, former Chairman of the Federal Reserve and a senior economic advisor to President Obama, said that a VAT should be on the table for fixing Americas deficit problem. Only after 85 United States Senators voted in opposition to a VAT did Volcker say that an European-style VAT would be a good idea for the United States, but is too unpopular to be under consideration now or for the indefinite future.

Value-Added Tax is Not the Solution

A popular rumor in Washington is that the Presidents so-called debt commission is supposed to find the formula for dressing up the value-added tax to make it acceptable to the American people. The President was even careful to ensure that the commission issue their report after the mid-term elections in case such a recommendation was unpopular. But the only reason to consider the VAT is because the current tax system cannot support the massive spending surge the President has already pushed through let alone the additional spending he envisions or the entitlements wave to follow. Either he finds a way to finagle the VAT or he will be forced to pare spending back to previous levels. Either Washington puts a much bigger squeeze on the taxpayers, or Washington must go on a crash diet. Its time to send the federal government to a fat farm.

A Real Solution: Entitlement Reform and Reduced Spending

The real way to curb the growing deficit is simple cut spending. Quick-acting budget cuts would involve canceling TARP, capping discretionary spending growth (which has increased by 25% over the last three years), and returning to federal spending levels of just a decade ago. Then, Congress must own up to the governments long-term obligations for Social Security, Medicare, and Medicaid benefits, which total $45 trillion. Currently these programs are permitted to grow on auto-pilot without any consideration for the threat they pose to our nations financial future. Instead, these programs should be put on long-term budgets that would be re-assessed regularly so that changes in program spending can be made when needed.

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