What does the Heritage Foundation have to say about the saving the American dream project released May 10, 2011? (Part 2)

Further Reforms to Modernize Social Security — 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.

The Bottom Line:
Static Analysis and CBO Current Law

On the revenue side,[7] the Heritage plan reforms the tax code as
described in the Tax Reform section by creating a new labor and business tax
system. The static estimates of tax changes were developed by introducing these
changes into the CDA tax models. The resulting estimates show revenues reaching
approximately 16.9 percent of GDP in 2013 and increasing to 18.5 percent in
2022, where they remain throughout the remaining forecast period. The
Peterson/CBO baseline, on the other hand, shows revenues rising from 18.8
percent of GDP in 2013 to 23.3 percent in 2035.

On the outlay side, changes to nearly every major spending category sharply
reduce the spending estimates under the Heritage plan. The plan starts with
spending at 22.1 percent of GDP in 2012—roughly $188 billion lower than the
baseline—by assuming some cuts in discretionary spending. Outlays drop
significantly thereafter. By 2021, spending stands at 18.1 percent of GDP and
ends the forecast period in 2035 at 17.7 percent of GDP. In contrast, the
baseline projects outlays at 24 percent of GDP in 2021 and 28.3 percent in

Given this much lower spending path and steady revenue growth, the Heritage
plan achieves low deficits and then fiscal balance during the forecast period. A
balanced budget appears in 2021 and 2022 and the budget remains balanced in each
subsequent year through the simulation. The baseline shows worsening deficits
throughout the forecast period. By 2035, the fiscal deficit stands at a 5
percent of GDP in the current law baseline.

Taxes. Under the Heritage plan, the tax system is reformed, and
revenue is capped at its historical level of 18.5 percent of GDP. The plan
replaces the current six tax brackets and payroll taxes with one simple flat
rate that applies to all corporate, small business, and personal income,
excluding savings and a few other deductions, and produces that needed level of
revenue (18.5 percent of GDP).

The Heritage tax model estimates that these reforms will save taxpayers an
average of almost $280 billion annually over the next 10 years compared with the
current law baseline. By 2021, total tax savings will exceed $3.1 trillion. Many
taxpayers will immediately see a significant reduction in their tax burden. For
example, those with small business income will see an average tax reduction of
about $8,000 in 2012, rising to $11,000 by 2014. By 2014, households filing
jointly will see an average tax reduction of about $4,000, while college
students will see an average reduction of about $3,000. In 2014, seniors with
Social Security income will on average owe about half what they currently owe
($5,500 down from $11,000).

Many tax provisions have strong effects on other
elements of the budget. For example, health care benefits are no longer excluded
from taxation, but are replaced by a health care tax credit. This change will
make total compensation more transparent and in most cases quickly lead
employers to provide more compensation in the form of cash, which will encourage
employees to make more efficient purchases of health insurance. The credit is
available to all taxpayers, regardless of insurance offering by their place of
work, therefore promoting tax equity and limiting “job lock.”[8]

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: