Real Entitlement Reform: 4 Steps to Cut Billions from the Budget Without Hurting the Safety Net

You can’t throw a stone in Washington, DC without hitting one of what Paul Krugman calls the Very Serious People (VSPs): self-described “moderates” who are very “gravely concerned” about our country’s fiscal situation.

These VSPs say the main thing we need to do is “get serious” about “entitlement reform” and “tax reform.” Pro tip: When they say “entitlement reform,” they mean cutting Social Security benefits and shifting costs to Medicare beneficiaries. Don’t be fooled. We don’t get these benefits because we feel “entitled,” we get them because we pay for them our whole lives through payroll deductions. It’s like sneering at someone with a movie ticket and saying they feel “entitled” to see the movie, or berating a mother because she feels “entitled” to the groceries she just purchased. When someone turns 65 and receives SS benefits and health insurance through Medicare, it’s because they earned it. It’s because they paid for it.

But the Very Serious People are right about one thing: there are “entitlements” in our budget – and they fit much closer to what that word actually means. We’re spending money on benefits for individuals and corporations who expect payments for absolutely no logical reason. And when you suggest taking them away, they react with horror and indignation that taxpayers shouldn’t shower them with free money. Very “entitled” indeed!

If there’s a Very Serious Person in your life, send this over to them. They’ll love it. Here are 4 quick steps to real “entitlement reform” that doesn’t cut the earned benefits of Social Security and Medicare.

Step 1. Close loopholes for outsourcing. Right now, you the taxpayer are subsidizing the cost of companies shipping jobs offshore. How? A loophole in our tax code allows American corporations to “defer” or “delay” paying taxes on overseas profits. “Deferral” amounts to a tax break for American companies when they shift production offshore, and we’ve seen how entire communities suffer when that happens.

Repealing “deferral” would raise $583 billion in revenue over 10 years, and companies would have less incentive to leave American communities high and dry.

Step 2. Close loopholes for Wall Street. Any politician who says our corporate tax rate is too high is either lying to you or has been asleep for many years. The fact is that the U.S. has a lower effective corporate tax rate than most of the developed world. Not only that, but in recent years at least 78 large corporations paid no federal income tax or actually made money off the tax code (Example: Between 2008 and 2010, Verizon paid a -2.9 percent income tax. Yes, that’s a negative sign). Not only that, but between 2008 and 2010, at least 30 corporations spent less on income taxes than they did on lobbying our lawmakers!

And it’s not like they don’t have the cash to spare, seeing as corporate profits are at an all-time high, at the same time worker wages as a percentage of GDP fell to a record low.

Reform of the corporate tax code could generate hundreds of billions of dollars in tax revenue over the next 10 years.  Want an added bonus? See Step 2a.

Step 2a. Put a tiny fee on financial transactions. The London Stock Exchange has one. So do Singapore, Switzerland, and 27 other developed countries. It’s called a financial speculation tax (FST) and it places a fee of a fraction of a percent on financial transactions.

This isn’t a new idea. The U.S. used to levy 0.02 percent on trading in stocks, but that ended in 1966. During the Great Depression, Congress actually doubled the tax to aid in recovery and job creation. Sound familiar? European countries are now moving forward with a plan to collect a very small speculation tax on trading in a much wider range of complex financial products. As a bonus, the added transaction cost would discourage the kind of reckless, high-volume, short-term trades that got our economy in trouble in the first place.

Critics argue that the burden of such a tax will be borne by middle class investors. Sorry, not so. As economist Dean Baker points out, most middle class investors don’t do much trading – they mostly want to save for retirement and higher education, and they are less interested in flipping stock for a profit. The bulk of the FST would be borne by hedge funds and high-volume traders who, coincidentally, are its most vocal critics. The FST would not tax consumer financial transactions, such as bank transfers and credit cards.

Step 3. Close loopholes for big drug companies. When Congress passed Medicare Part D in 2003, no one was happier than the big drug companies. The Medicare Part D drug benefit prohibited Medicare from negotiating lower drug prices with drug companies. Closing this loophole could save Medicare more than $200 billion over 10 years (hear that, Paul Ryan?). A more modest proposal would be to apply the Medicaid rebate on single-source drugs to Medicare Part D would save $156 billion over 10 years. As the law stands now, taxpayers are essentially forking over free money to one of our country’s most profitable industries.

Step 4. Tax fairness for the 98 percent. During the Clinton years, individuals making roughly $250,000 a year or paid 39.6 percent in income tax, and the economy boomed. During the Bush years, rates across the board were cut, so individuals with annual incomes between roughly $178,000 and $38,000 paid 33 percent and above that they paid 35 percent.

You know the end of this story already – the Bush years weren’t so great for the economy! And while there are zillions of other factors to consider, it’s important to keep this in mind when politicians holler bloody murder about small increases in the marginal tax rate: The Clinton increases were followed by full employment and a budget surplus, and the Bush cuts were followed by the greatest economic crisis since the Great Depression.

During our last Fiscal Showdown/Cliff/Curb/Whatever in December, the compromise was to let the tax rates for those making $400,000 or more to revert to Clinton levels. In truth, all of those in the top 2 percent making $250,000 and above can more than afford to revert back too, and by exempting them we lost out on $100 billion over 10 years in badly needed revenue. If the conversation is going to be between cuts for the 98 percent and a marginal, 1990’s level increase on the 2 percent, we should all agree what the priority is.  Limiting tax breaks for the richest 2 percent of taxpayers could raise $500 billion in revenue.  So could a surtax on income over $1 million.

A very conservative back of the envelope calculation shows that the right kind of tax reform – “entitlement reform” for corporations and the uber-wealthy – could lead to well over $1 trillion in new revenues.  And the right kind of social safety net reform – the kind makes entire systems more cost-effective, without cutting benefits or shifting costs to beneficiaries – could also save hundreds of billions of dollars.

So if you’re “Very Serious” about our fiscal situation, these policy changes should be on the table.