This year our national debt climbed to more than 60 percent of our annual gross domestic product. If our federal government keeps on spending the way it does now, this will climb to 90 percent by the end of the decade and more than 100 percent soon after.
The time for a serious discussion about controlling our annual deficits and our national debt is long past due. This week the co-chairs of the President’s Commission on Fiscal on Fiscal Responsibility and Reform, former Sen. Alan Simpson (R-WY) and former Clinton Chief of Staff Erskine Bowles, released a preliminary report detailing ways to reduce the deficit.
Some of these proposals are quite provocative, and may not find broad support among the American public. But the proposals are a serious conversation starter. This should lead to vigorous debate in Congress, and, hopefully, solutions that the American people can get behind.
I am pleased that Simpson and Bowles rejected calls from some think tanks and politicians to create a new Value-Added Tax. The VAT is a tax common in Europe that assesses a sales tax at each stage of production. Speaker Pelosi indicated that a VAT would be one way for Congress to raise additional revenue for the federal government.
In May, I led 154 of my colleagues on a letter to Simpson and Bowles asking them to avoid the temptation of creating a VAT. This type of tax is a tempting revenue generator because the tax is built into the cost of a product, essentially hiding it from consumers. Economists point to the high VAT rates in Europe as one of the reasons why the U.S. has much higher job growth than many European nations.
The first budget-controlling proposal Simpson and Bowles endorse is a cap on government spending at 21 percent of GDP. Earlier this year, I co-sponsored the Spending Limit Amendment that would cap government spending at 20 percent of GDP.
Historically, government revenues have averaged just under 20 percent of GDP, regardless of where tax rates fall. But right now, government spending is over 25 percent of GDP while revenue is only around 15 percent. This means that 40 cents of every dollar in spending is debt-fueled. While I think that the proposed cap may be too high, I applaud the co-chairs for being frank about our need to spend within limits.
The proposal also calls for a broad tax reform that would simplify the tax rates and deductions. I’m concerned about their call for a gradual elimination of the mortgage interest deduction.
Many middle-class American families rely on this credit to meet their housing needs, and an elimination of the credit could have unanticipated effects on the housing market. With so many Americans going to great measures to pay their mortgages, we need to think twice about increasing the cost of paying for a home.
However, Simpson and Bowles recognize that our overly complex taxation system has increased the costs of compliance for the average taxpayer. Just like the pork projects typically associated with earmarks, there has been a proliferation of special tax credits. In fact, this year’s Republican moratorium on earmarks extended to these tax breaks.