Alan D. Viard

Fiscal Solutions: A Balanced Plan for Fiscal Stability and Economic Growth

Our country faces a serious fiscal crisis. According to President Obama’s National Commission on Fiscal Responsibility and Reform, the nation is on an unsustainable fiscal path, with spending well above tax revenue. The Congressional Budget Office projects that, under current policies, federal debt will soar from 62 percent of annual GDP in 2010 to 87 percent in 2020 and 185 percent in 2035. The plan presented here represents the collaboration of its four authors and does not reflect the position of the American Enterprise Institute or any other organization. The individual authors do not fully agree with every provision of the plan, but we join in presenting it as a way to address the fiscal imbalance while promoting economic growth.Our plan re-establishes a balance between federal spending and revenue that achieves long-term fiscal stability and promotes economic growth. We cannot simply tax our way to a balanced budget without suffering the consequences of a sluggish economy and reduced prosperity. We also cannot simply cut spending without risking the loss of essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies.Our plan limits the national debt to 60 percent of annual GDP in 2035. Ambitious cuts in federal spending are required to achieve that goal while minimizing tax burdens on the American people and the drag that high marginal tax rates impose on long-run economic growth.

Are Income Taxes Destined to Rise? The Fiscal Imbalance and Future Tax Policy

We present a model of optimizing government behavior in which a need for increased revenue leads to the introduction of a new revenue source, such as a VAT, accompanied by a reduction in income taxes. We argue that this is a plausible outcome for the United States, in view of international experience and recent fiscal reform proposals, and has important implications for individual investment decisions.