What does the Heritage Foundation have to say about the saving the American dream project released May 10, 2011? (Part 1)

Limiting Government …and Cutting What It Can’t Do Well — Saving the American Dream

“Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity,” Heritage Foundation, May 10, 2011 by  Stuart Butler, Ph.D. , Alison Acosta Fraser and William Beachis one of the finest papers I have ever read. Over the next few days I will post portions of this paper, and today are some of the conclusions of this study.

Economic and Fiscal Results

Scoring Fiscal Plans

The Heritage plan produces strong economic growth by reducing burdens on
taxpayers and businesses, reducing the government debt, increasing investment,
and encouraging competition. It also brings federal spending into balance and
maintains revenues over the next decade at the average historical level of 18.5
percent of GDP, which as noted earlier is the upper limit that Americans have
indicated a willingness to pay. The economy typically has grown quite well under
this average level of taxation. Taxes above this level often have had a negative
impact on the economy.

With the expansion of the federal government not just slowed but reversed,
the economy grows swiftly, creating new jobs and raising incomes for Americans.
A stronger economy strengthens the tax base and helps to achieve the plan’s
revenue targets. When combined with sharp reductions in spending, the Heritage
plan’s revenues are sufficient to reduce deficits and, thus, the debt.

As a part of its Solutions Initiative,[4] the Peter G.
Peterson Foundation asked Heritage and the five other organizations to prepare
their own solutions to the long-term budget crisis and to score their plans
using the same baseline. Thus, The Heritage Foundation’s Center for Data
Analysis (CDA) modeled the Heritage plan using a “static” scoring against a
close approximation of the Congressional Budget Office’s (CBO) extended baseline
that was developed by the Peterson Foundation.[5]

A static score assumes some behavioral changes by
individuals and markets, but leaves the overall economy unchanged. A dynamic
model assesses the economic effects of policy changes, and the CDA will
separately publish a dynamic scoring of the Heritage plan, using the CBO’s
alternative fiscal scenario as the baseline.[6] This alternative scenario, widely used in
budget discussions and comparisons, assumes that Congress will continue its
current policy and thus practices, such as adjusting the unindexed Alternative
Minimum Tax (AMT) threshold, suspending payment reductions to Medicare
physicians (the “doc fix”), and extending the 2001 and 2003 tax relief.

When available, the CDA used and updated reform proposals analyzed by the
CBO, such as the effect of some policy changes to Medicare. For analysis of the
impact of tax changes, the CDA used its tax and health care models.

A number of important insights into the fiscal effects of the Heritage plan
can be obtained by examining the static, or conventional, changes in federal
revenues and outlays resulting from fully implementing the Heritage plan under
this Peterson/CBO baseline. However, the methodology for static scoring does not
account for macroeconomic changes that result from changes such as higher tax
rates or lower spending. These economic changes can significantly affect fiscal
items, including revenue, because in reality more economic growth will increase
the tax base. Thus, policies that create more economic growth also generate more
tax revenue than a static model would indicate. To show the full benefits of the
Heritage plan, the CDA will publish a separate dynamic analysis of the plan to
supplement the static analysis presented in this report.

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