Here's How to Balance the Budget

Our nation’s financial position is perilous. We have neverin modern times faced such a dangerous, ongoing imbalance between the levels offederal spending and revenues. Our federal debt as a percentage of our economicoutput is greater than at any time since the end of World War II.

The Congressional Budget Office projects that in a decade our national debt willreach $20 trillion—90 percent of our economic output (GDP)—with more than halfowed to foreigners, many of whom we cannot count as friends. At that pace,interest on the federal debt will cost us a trillion dollars a year.

Our population is aging, with fewer workers funding SocialSecurity payments for each retiree. We have no proven plan to control excessiveand rapidly rising health care costs, so the nation’s financial situation willonly get gloomier. These are facts, not forecasts. We are heading toward a cliff,risking the economic well-being of our children and grandchildren.

We must curb our government’s spending. But we must not cutSocial Security or Medicare benefits for low- and middle-income retirees.Americans will have to work longer, retire older. And high-income retirees willno doubt see their benefits cut or taxed away.

Even with such changes, our nation’s taxes will surely haveto rise. We need a tax system that supports economic growth, not one thatstymies it—a system that fosters investment in America and is fair and simple.I have proposed such a system. It has four key pieces.

1. Enact a value-added tax (VAT)—a tax on sales of goodsand services. It exists in 150 countries worldwide.
2. Use some of itsrevenues to exempt $100,000 of family income and to lower tax rates on incomeabove that amount.
   
3. Lower the corporate income tax rate to 15 to 20percent.
   
4. Get rid of the earned-income tax credit and instead providelow- and middle-income families with tax relief from the VAT burden and payrolltax offsets.

This competitive tax plan has significant advantages.

• It would encourage saving and investment, stimulating economic growth andcreating new opportunities for American families.
• Iit would free 150 million American families with income below $100,000 from ever having to deal with the IRS.
• Our corporate income tax rate would be among the lowest in the world.
• With relatively few (mostly high-income) Americans filing tax returns, there would be much less temptation for politicians to promote incometax breaks as solutions to the nation’s most pressing social and economicproblems. These tax breaks don’t work. Finally, we would become a low-income-tax country.
  

This kind of reform would let us address our nation’sfinancial problems without hindering economic growth. People often tell me itis impossible politically. But given our nation’s dire financial difficulties,changes long thought impossible must become inevitable. Our challenge is toelect leaders with the political courage to seize this opportunity and averttrue disaster.

Michael J. Graetz, a Columbia Law School professor, wrote 100 Million Unnecessary Returns, published by Yale University Press.