We must have a serious discussion over the size and scope of government and how to pay for it. Economically, the answers are clear. We must cut spending, raise revenue and adjust Social Security to the demographic reality.
n First, we face an annual deficit the federal government cannot sustain. The economy cannot grow with government spending one out of every four dollars of income. The needed cuts will hurt: defense, Medicaid and the like will suffer.
We also have to make difficult decisions on the scope of government. The U.S. Department of Education is a perfect example. The federal government has virtually no role in educating our children or young adults, yet the Education Department has about 5,000 employees and a nearly $70 billion budget. The organization collects federal tax dollars, filters the money through a bureaucracy, and sends it back to states—which in turn allocate it to the local school districts that actually train and hire the teachers who educate children.
Fixing this is not a philosophical matter. It is simply ending the absurd.
To be clear, I am no Libertarian. I deeply love my government and believe the men and women at the U.S. Department of Education are dedicated public servants. I would also like to see more spent on public education.
But here’s the rub: Indiana’s share of the U.S. Department of Education budget is about $1.4 billion. This translates into more than $1,200 per Hoosier student, or about one out of every four dollars the state spends on education. I am certain Indiana can spend half that money with twice the impact as the feds.
n Second, we need to raise tax revenue. The best way is to expand the economy, but even with growth we should eliminate nearly all industry-specific tax loopholes and subsidies. Likewise, we must eliminate tax deductions for households on all but a handful of politically necessary items: modest mortgages, some charitable deductions, some education expenses and some retirement savings. If we do this, we can lower both corporate and personal income tax rates and still collect more money.
n Finally, we have to get right with Social Security and Medicare. Of course, some households (age 50 or older) need to stay in the current scheme. The rest of us need dramatically restructured retirement.
Payroll taxes should be collected on all income. Retirement age must be increased and benefits reduced so that Social Security is not a retirement plan, but a guard against poverty. The payoff for this sacrifice can be substantially lower payroll tax rates, and the survival of the Social Security system.
The earlier we face these reforms, the better our options.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at email@example.com.