1. SETTING THE STAGE: 2013 AND BEYOND
Dr. Jason J. Fichtner
Senior Research Fellow
Mercatus Center
November 2012

2. Total Outlays and Revenues
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3. Even with Sequester – Spending Goes Up
2

4. The Real Source of the Problem
3

5. Medicare/Medicaid and Social Security
4

6. Federal Debt Under CBO’s Budget Scenarios
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7. Defense and Non-Defense Spending Squeezed as
Autopilot Programs Explode
6

8. Growth in Entitlements Means Less $$$ to Budget
Source: Peter G. Peterson Foundation
http://www.pgpf.org/Special-Topics/Spending-primer.aspx
Constant 2009 Dollars based on OMB , GAO and OMB data
Author’s Calculations for FY2011
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9. Medicare Costs Over Time
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10. State and Federal Medicaid Spending
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11. Social Security Trust Funds Annual Cash Flows
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12. Social Security to Run Deficits Indefinitely
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13. Social Security Trust Fund Exhaustion
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14. U.S. Government Debt
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15. A Huge Deficit Would Remain, Even If Any One of
These Steps Were Taken in 2011:
Source: Office of Management and Budget, The New York Times
Based on fiscal year 2010 appropriations and disclosure reports from members
of Congress who received spending earmarks for special projects.
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16. Balancing the Budget with Spending Restraint
5,000
4,500
4,000 Revenues 19% GDP
Revenues 18% GDP
$ Billions
Revenues 17% GDP
3,500
Spending Freeze
1% Reduction
3,000 1% Spending
2% Spending
2,500
2,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Author's Calculations based on CBO August Update 2012. Revenues include the permanent extension of the 2001 and 2003 tax changes.
Revenue for 2010 and 2011 are Actual; 2012 is CBO estimate; 2013 and forward are Author's Calculations
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17. Share of Total Income Taxes Paid by Millionaires
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18. Reforms for 2013 and Beyond
o First principle for reform: We must cut spending
o Second Principle for reform: Everything must be on
the table (no sacred cows)
o Third Principle for reform: Reforms must address
our debt problem
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19. Tax Reform
o Lower Marginal Tax Rates – Broader Tax Base
o Incentives Matter
o Perceived unfairness promotes system abuse
o High tax rates encourage avoidance and
evasion.
o Bad tax systems chase investors away
o Good tax systems attract investors and jobs
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20. Tax Reform
o Tax reform should fix the problem!
o Policy positions should be based on clearly
articulated principles
o The validity of each decision should be checked
against these principles
o Long term solutions are superior to short term fixes
o The best results come from fixing everything at the
same time.
o Only People Can Pay Taxes
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21. Entitlement Reform – Social Security
o Raise eligibility age for both Social Security and
Medicare
o Tie cost of living increases to a better measure of
actual price inflation
o Provide incentives to encourage work in later years --
or at least don’t discourage work
o Improve the rate of return on trust fund assets
o Private accounts
o Change the benefit formula to make it more
progressive
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22. Entitlement Reform – Medicare / Medicaid
o Institute of Medicine estimates $750 billion annually
is wasted medical spending or 30 percent of the total
national health spending. To reduce this we need to
focus on the process and introduce market-based
reforms:
• Premium support
• Block grants
• Move from fee-for-service to capitation fee
structure
• Bundle payments
• Reduce administrative complexity
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