Research by Author & Topic

Publications by Rudolph G. Penner on Tax Policy

The U.S. budget is on an unsustainable path. That is because Social Security, Medicare, and Medicaid, which together constituted almost one half of noninterest spending before the recent stimulus plan, are all growing faster than tax revenues. If these programs are not reformed, tax burdens raised, or other spending decimated, deficits and the national debt will explode. It is difficult to imagine solving the entire budget problem by slowing spending growth, because benefits would then be far below those previously promised. It is equally unlikely that tax increases could solve the whole problem because the tax burden would then be so far above any ever experienced by Americans. To the extent that tax burdens are to be increased, there are three options. Tax rates could be raised in the existing system, but that would be extremely inefficient. Tax reform might raise revenues more efficiently, but that is excruciatingly difficult politically. That leaves the possibility of a brand new tax and a VAT is a very likely candidate.

The article considers special federal tax provisions affecting the elderly. It examines the taxation of Social Security, private retirement accounts, estate taxation and other provisions of the law that mention age. It also analyzes how the elderly might be affected by tax increases necessitated by the dismal long-run budget outlook. In particular, it looks at the possibility that we shall become more reliant on consumption taxes.

Two former directors of the Congressional Budget Office now at the Urban Institute join scholars from other organizations in a memo advising President Obama on how to balance the nation’s short- and long-term economic needs. To reduce escalating future deficits without endangering near-term recovery, the authors’ recommendations include action to stem the growth of Social Security and Medicare.

The prevalent theme in recent discussions of stimulus is that the risk of doing too little exceeds the risk that we shall do too much. But we must ask how much of too much we can tolerate. The risks of overdoing it are severe and are not emphasized enough in the current discussion. The main worries are that the speed with which the national debt is being increased could eventually cause a very rapid rise in interest rates on Treasuries and that federal, state and local bureaucracies may not be able to manage the proposed huge increase in spending. Turning to the long run, the testimony discusses the need to address short- and long-term budget problems simultaneously and the prospects for using the Conrad-Gregg commission to do so.

The new president will inherit a terrible economic and budget situation. It is uncertain exactly how much government debt will be issued in fiscal 2009, but it is certain that the amount relative to GDP will break the post World War II record by a large margin. The amount could exceed $1.4 trillion or 10 percent of GDP. The previous record was 5 percent of GDP in 1983. Financial markets will absorb this debt more easily if President Obama combines his short-run initiatives with a long-term plan to deal with the rapid growth of Social Security, Medicare, and Medicaid. It is more likely, however, that he will proceed cautiously, saying a few things about the long run, but focusing more intently on a short-run stimulus.

Pittsburgh Post-Gazette op-ed, September 28, 2008. The current financial crisis poses a severe threat to the economy, but it also creates a tremendous opportunity, writes Rudolph Penner in the Pittsburgh Post-Gazette. It gives politicians cover for undertaking painful actions to get the long-run deficit under control-actions that should have been taken long ago.

Senior Fellow Rudolph Penner, former director of the Congressional Budget Office, sizes up the problems ahead and argues for fiscal reform. As baby boomers retire and health care costs keep rising, spending for Medicare, Medicaid, and Social Security will grow faster than federal revenues, pushing the deficit to an unmanageable size. The solutions—changes in spending and tax policy—are politically charged, but crucial and unavoidable.

The price for presidential campaign promises is adding up, but where will the money come from to pay for these plans? New spending or deep tax cuts could increase the federal deficit and add to the national debt, topics largely missing from election coverage. Fiscal discipline may not be as exciting as flubs and gaffes on the campaign trail, but it's crucial to our economic future and unwise to ignore.

The authors of this paper—longtime federal budget and policy experts—were drawn together by a deep concern about the nation's long-term fiscal outlook. Despite diverse philosophies and political leanings, they found solid common ground and agree that unsustainable deficits in the federal budget threaten the health and vigor of the American economy and the first step toward establishing budget responsibility is to reform the budget decision process so that the major drivers of escalating deficits—Social Security, Medicare, and Medicaid—are no longer on autopilot. The paper provides specific policy recommendations and outlines the reasons action is critical.

President Bush's 2008 budget is more interesting than most, especially with regard to health policy, but the Democratically controlled Congress shows little interest. The President will not have all his tax cuts extended, although the extension of those for the middle class and poor seem almost certain. The promise of a balanced budget in 2012 is unlikely to be achieved, but the ratio of the deficit and the public debt to gross domestic product is likely to decline. Because of foreign debt purchases, the debt available to U.S. private investors will be no higher absolutely than it was in the mid-1990s. Thus, fiscal policy will impose little upward pressure on interest rates. Read BCA Publication's Global Fixed Income Strategy Special Report.