Panel, Conference Presentation
Investing in America: Transforming the Tax Code, Tackling the Debt
- The federal deficit is projected to return to one trillion dollars within six years if current policies persist, escalating to one trillion three hundred billion by year ten.
- Interest payments on the national debt are forecast to become the fastest-growing budget component, potentially reaching one trillion dollars if interest rates normalize to their historical average of 5.5%, a scenario that could crowd out all other expenditures.
- Over the next decade, mandatory spending is expected to rise by one and a half trillion dollars, reaching a total of four trillion dollars.
- The federal government is projected to borrow over 30% of its spending in the coming ten years, continuing a trend where 35% of spending was borrowed over the previous seven years.
- Without a structural "grand bargain" or specific reforms, the debt is projected to grow faster than the economy indefinitely, with the gap between revenue and spending widening if legislative action fails to materialize.
- International tax reform is expected to be a primary focus in the upcoming cycle, potentially leading to corporate tax rates in the 20% to 25% range to align with the 25% OECD average and prevent corporate inversions.
- Specific legislative hurdles include the inability to pass repatriation deals due to budget scoring rules that count them as tax increases, despite 90% potential agreement.
- The political landscape may see attempts to cut one trillion dollars in taxes or expand entitlements under potential Trump or Sanders administrations, creating risks of increased deficits or drained public investment resources.
- The demographic transition of baby boomers entering retirement is anticipated to intensify the political difficulty of addressing entitlements and expanding the "consumption budget" which currently comprises 84% of federal spending.
- A fiscal crisis involving rising interest rates may be required to force necessary changes, though there is hope that leadership can achieve reform through a "new social contract" or "capitalism 2.0" framing before such a cataclysm occurs.
- If the United States loses its status as the world's reserve currency, the current fiscal model relying on debt issuance will cease to function, and demand for dollar assets may diminish.
- The economy is expected to face a "rough ride" over the next four to eight years, with potential for increased underemployment, more business failures, and disinvestment in infrastructure unless the budget process and entitlement structures are reformed.
- Future revenue needs may require new sources such as a VAT, carbon tax, or debt reduction fee, as revenue-neutral tax reform without broadening the base to lower rates remains difficult.
- Models like New Zealand's, which place all entitlements on the budget to achieve long-term surpluses, are suggested as potential paths for the U.S. to manage the debt.
- Immediate progress on issues like the Trans-Pacific Partnership (TPP) is possible during a "lame duck" session, while a "new revenue source" or "clean page" approach like a BRAC commission may be needed to address tax code special interests.