Our only option is to cut spending

First, the Social Security tax is capped because the benefits are capped. That is, dollars earned above the cap do not increase a worker’s benefit, a point rarely mentioned by those who favor this particular tax increase.

Second, Social Security already has a very progressive benefit structure. A worker receives a monthly benefit of 90% of the first $749 of average indexed monthly earnings but only 15% of monthly earnings above $4,517.

Another reason to oppose any tax increase targeted towards higher-income households is that the top 1% of taxpayers already pays 29.5% of their comprehensive income in federal income, payroll and excise taxes, compared to 14.3% for the middle quintile and 4.0% for the bottom quintile, according to CBO data.

Those who advocate higher taxes to balance the budget point out that so-called tax expenditures, which are the various exclusions, deductions, and credits that have been carved out of the tax code, “cost” the federal government more than $1.1 trillion per year. Proponents of reducing or eliminating tax “expenditures” argue that these reductions in the tax base are no different than if government had spent these funds directly.

Of course, such arguments are fallacious. First, does anyone really believe that eliminating $1.1 trillion in tax expenditures is really a cut in government spending when in fact the result would be a whopping 50% increase in federal government revenues? Second, tax policy experts acknowledge that tax rates and tax bases are linked as was demonstrated in the 1986 Tax Reform Act which lowered rates and broadened bases. The converse is also true: as bases are reduced through tax expenditures, rates invariably are increased in the long run to make up the difference.

Finally, a primary argument against raising taxes to balance the budget is that Congress and the President will undoubtedly spend the increased revenues. Proponents of raising taxes to balance the budget can only be taken seriously when they stop supporting legislation to increase spending and begin supporting legislation to cut spending.

Clearly, our only option is to cut spending, and the cuts will have to be deep and broad. CBO is projecting spending to exceed 26.4% of GDP by 2021, a full 6 percentage points above the post-World War II average. Entitlements, particularly Social Security and Medicaid, are excellent places to start slowing the growth of government. Despite propaganda about a $2.6-trillion trust fund, Social Security expenditures will now permanently exceed Social Security tax revenues if the status quo is maintained.

The only way to redeem the $2.6 trillion intragovernmental IOUs in the trust fund is to either raise taxes, borrow even more money, allow the Federal Reserve to monetize the debt, or cut spending. Congress needs to implement several of the proposals to slow the growth in Social Security expenditures that reformers have presented in recent years.

To slow the growth in Medicaid expenditures, Congress must allow states more flexibility in delivering Medicaid services. Surely, one or more of the fifty states will figure out how to reform Medicaid, which will then allow the other states to follow.

Currently, most of the focus has been on non-defense discretionary spending, which is the easiest to cut, but these cuts are only the beginning.