First, we shouldn't balance the budget most years. During recessions we almost have to run a deficit due to higher unemployment benefits and lower income taxes, plus we need someone to borrow the money that households and businesses save (otherwise the economy continues to shrink). In the boom times the government should run a surplus in order to pay down the debt from earlier recessions, slow down an overheating economy, and reduce competition with private investors for savings.
Our long term average deficit should be less than or equal to our economic growth rate, which includes increases in population, productivity, and inflation (though inflation growth is often consumed by higher interest rates on the debt). As long as our future tax base increases by as much as our deficit, we can pay off that deficit without raising tax rates. Ideally, our deficits are spent on investments that increase productivity (infrastructure, education, research) that make it easy to repay.
As US economic growth rate accelerates towards normal levels (3%?), the deficit will naturally shrink due to higher tax revenues and lower spending on unemployment benefits and SNAPS (food stamps). But there are two long term fiscal problems that won't easily be fixed with economic growth.
- Top tax rates on ordinary, capital gains, dividend, estate, and business income are all near post-WWII lows.
- Medicare and Medicaid spending is increasing much faster than reasonable economic growth.
We need to raise taxes back to something around what they were during the Clinton administration (when we ran a surplus, but before so many boomers retired). Everyone hates to pay higher taxes, and the ones with the most money are invariably the ones going to be tapped, yet they have the most lobbying power. Here are tit-for-tat tax ideas that may be more palatable:
- Tax capital gains as ordinary income, but allow capital gains to be reduced by an inflation index and eliminate the AMT.
- Tax dividends as ordinary income, but allow corporations to deduct dividend payments to US taxpayers as a business expense.
- Tax inheritance over 10 times the median income as ordinary income, but eliminate the estate tax.
- Implement a carbon tax and eliminate alternative energy credits, but reduce top corporate tax rate to 28% and make R&D tax credits permanent.
- Eliminate most itemized personal deductions, but replace them with non-refundable tax credits @ 15% of expense (regardless of tax bracket).
As for slowing the growth of medical expenses, maybe Obamacare will help. So much of health care spending is for insurance overhead (10%), insurance profits (10%), and provider billing (at least 15%). The size of these expenses don't make any sense. I don't have a solution of how to reduce them, but it would be easier to cut these than healthcare itself.