Now Is the Time to Fight

Liberals, conservatives and everyone in between need to work together now to hash out a plan to balance the federal budget in a reasoned manner and not wait for a debt-driven financial crisis to force us to act.

President Obama's deficit commission has issued its final report, and there are numerous other plans spanning the ideological gambit. All agree that the primary problem with the federal budget is the cost of health care. The large deficits triggered by the economic crisis will be replaced by predictably large deficits due to the cost of Medicare and Medicaid.

Social Security faces a purely demographic problem; fewer workers paying taxes for each person receiving benefits. Medicare joins the same demographic problem with a 40-year history of health costs rising much faster than overall inflation (in both Medicare and private insurance). Medicare is a far more difficult problem than Social Security because it pays for health care, including innovations tomorrow that are unknown today.

Costs must be addressed in both private insurance and Medicare simultaneously because the same providers care for persons covered by each. Slowing costs only in Medicare would just shift costs to private insurance. And if Medicare pays too little compared with private insurance, it will limit seniors' ability to find doctors. We already have this problem in Medicaid.

To slow costs in the private market, the deficit commission report proposes capping the preferential tax treatment of employer-paid health insurance in 2014 and moving toward eliminating this subsidy embedded in our tax code. Currently, the amount an employer pays for an employee's health insurance is not considered income, shielding workers from the true cost of their insurance. Capping this tax preference is a flexible policy that will work to slow cost inflation, regardless of whether the health reform Affordable Care Act is implemented fully, modified or repealed.

The report also proposes beefing up the Independent Payment Advisory Board created by the ACA. The board would be granted more power to determine what Medicare covers and how it pays for care, a key step to slowing cost inflation in the program. The commission recommends that if this and numerous other policies do not produce enough cost savings in Medicare by 2020, Medicare's growth rate should be capped.

These are consequential policies that are far more serious than past attempts to address health care cost inflation in either private insurance or Medicare.

Controversially, the commission report sets a target of 21 percent of GDP as the level of taxes and spending at which the budget should be balanced by 2035. Many liberals say 21 percent is too low, and conservatives that it is too high.

If the federal budget were balanced at 21 percent of GDP, this would represent an increase in taxes and a decrease in spending from typical levels observed the past 40 years. In 2009, federal spending was very high (24.7 percent of GDP) due to the economic crisis, but federal spending has often been higher than 21 percent of GDP: in 1975, 1980, 1985 and 1990. And the baby boomers were working and paying taxes then, not collecting Social Security and receiving Medicare.

If federal tax receipts equal 21 percent of GDP, that would be the highest amount collected in the past 40 years (it was 20.6 percent of GDP in 2000). Put this paragraph together with the one above, and that is why we have had only four balanced budgets (1969, 1998-2000) since I was born. However, future deficits will be very large, pushing the total amount of debt our nation has accumulated toward crisis levels that will harm our economy.

The proportion of the economy that is redistributed by federal spending is a profound decision that deserves reasoned discussion and debate. We need to commit to achieving a long-term balanced budget as a matter of principle, and then have individuals and groups make the case for the level of spending, taxes and timing that they think is best.

The deficit commission report is one of many proposing a means of addressing the fiscal crisis facing our nation, but it has the advantage of having been discussed, developed and supported by some Democrats and Republicans. It is a good place to start. We should fight this out now and not wait for a financial crisis to force us to do so, when our options will be limited.

Donald H. Taylor Jr. is an associate professor at the Sanford School of Public Policy, Duke University. He blogs at www.donaldhtaylorjr.blogspot.com.

This op-ed originally ran in News Observer.