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Written by: Eugene Steuerle
In my previous column, I outlined several macro issues that explain our broken federal government: an unsustainable budget; tremendous focus on consumption for the nonwealthy and wealth for the wealthy largely to the exclusion of upward mobility and wealth for the nonwealthy; a half-century of emphasis on some winners, such as older people, but not others, such as the working class; the relationship to recent shifts in voting patterns; and how these issues intertwine.
Successful reform, however, requires both a bottom-up and top-down strategy so the parts blend into the whole. Below, I outline some of the many types of fixes required or at least helpful at the micro or programmatic level to achieve the broader macro reforms.
Old Age Programs have problems that extend well beyond their lack of sustainability, the squeeze they put on programs for the young and middle-aged, and the inability of Social Security and Medicare trust funds to pay promised benefits.
- One could easily lift the elderly out of poverty or near poverty by using only a modest portion of the built-in growth in Social Security scheduled for future cohorts of retirees. However, reform proposals from both parties not only neglect poverty reduction as a major goal but, at times, would increase the share of the elderly in relative poverty over time.Reforming Social Security, Medicare and other old age programs together would allow
- Congress to consider broad tradeoffs, such as allowing higher Social Security benefits than otherwise possible in exchange for lower health costs and paying greater attention to the older old when infirmities and long-term care needs arise.
Health Insurance. Government now covers most of the cost of healthcare in the U.S., while healthcare has become the dominant source of growth in government spending.
- Government-provided insurance will remain inefficient and expensive as long as providers and customers can decide what goods and services the government should cover and often at what price.
- While it might make sense to limit a household's out-of-pocket health expenses—see, for instance, the new Medicare Part D limit of $2,000 for drug costs—someone somewhere must cover the average healthcare spending per U.S. household, which now exceeds $35,000.
Tax Reform and the Tax Cuts and Jobs Act of 2017 (TCJA). The expiration of many provisions of the TCJA in 2025 allows consideration of many subsidies that could be made more efficient and fairer, regardless of whether related government subsidies are increased or cut.
- Only one-tenth of the population with the highest incomes receives tax subsidies for their charitable contributions, and many subsidies provide little or no incentive to contribute more. Congress could indicate its support for charitable giving by allocating those subsidies more universally and effectively.
- Homeownership tax subsidies also apply mainly to more affluent households. They could be made effective and fair, such as by converting money spent on the home mortgage interest deduction to a well-designed first-time homebuyer’s credit.
- Congress has not only designed retirement tax subsidies to benefit higher earners but has also refused to tackle some of the most egregious ways this system is gamed. Reform here could help enhance retirement security for many households.
Family Policy. I’ve been involved in family policy for a long time. My research instigated President Reagan’s early support for what later became a doubling of the dependent exemption; along with Jason Juffras, I introduced the idea of a child tax credit through the National Commission on Children; as economic coordinator of the Treasury’s 1984-6 tax reform effort, I proposed what became the first significant expansion of the earned income child credit (EITC) since its first enactment in 1975; and I began and have participated in an annual chronicling of how children are treated in the budget ever since. In every case, family policy has been an arena with much bipartisan support.
- Despite many legislative reforms, however, subsidies for children still account for only a modest share of total government spending; in recent years, that share has declined and is scheduled to decrease further.
- Democrats and Republicans increasingly treat government policy toward children as a welfare issue when, historically, there has been long-standing support for more universal approaches. Few would deny, for instance, that the presence of children reduces the ability of all households to pay taxes and that education should aim to help every child reach maximum potential.
- Substantial marriage penalties apply across programs to young and middle-aged couples in their child-rearing years. On the other end of the life cycle, substantial marriage bonuses apply to older individuals when children are less likely to be in the household.
Work Subsidies. The working class has been upset about government policy for a good reason: Congress has neglected them for a long time in both their educational and work years. Congress could end this neglect by prioritizing them when allocating rising government revenues over an extended period.
- The earned income tax credit (EITC) could be made into a purer work subsidy, setting the child credit aside to deal with what support Congress provides for children. By doing so, the EITC could be based on individual earnings, eliminating the marriage penalties that its current structure creates. These penalties are so steep that few benefits are currently provided to most married couples with two earners.
- Expanding work subsidies would be a superior, market-based approach to supporting workers. It would avoid many of the inefficiencies of both industrial policy and tariffs, which have proven ineffective and often detrimental to workers by making them less competitive.
Charities. While the government can support charitable giving by creating a more universal tax subsidy (see above), the charitable sector could also make efforts to strengthen itself.
- Federal and state legislators will never provide IRS and state charity officials with the resources required to regulate the sector well. The sector needs to take greater responsibility through more extensive self-regulation and transparency.
- Getting people to consider giving out of their wealth rather than just income can encourage a much higher level of legacy giving, both at death and during life.
Government efficiency and administration. Many debates will soon arise over the efficiency of the advisory Department of Government Efficiency (DOGE) itself.
- Efficiency is achieved by maximizing benefits less costs—which sometimes means smaller or bigger government and more or fewer government workers.
- Much of the bureaucracy already looks for ways to make programs more efficient. Knowledgeable government workers must be co-opted into this process, not threatened by engaging it.
America’s debt policies and its wealth bubble. America’s policies toward debt, whether due to monetary, tax, or other policies, bear significant responsibility for the growth in wealth inequality.
- An extraordinary wealth bubble, as measured by total wealth valuations relative to our GDP, has been a significant cause of the growth in wealth inequality since 1990.
- For much of this century, borrowing costs have been below zero, especially after accounting for tax subsidies and the effect of bankruptcy protections on expected costs.
- The next decade will likely see a retreat from these patterns, with significant implications for the interest cost of the national debt, state and local financing, banking, commercial real estate, private equity, state pension plans, and household portfolios. I doubt that many public and private investors, especially those with significant leverage, are prepared.
If these issues and their relationship to the macro issues discussed in the previous column resonate with you, please consider recommending this column to at least one other person. Also, please add comments on what you think I am missing.