There’s a Bipartisan Way to Save $1 Trillion: Cut Benefits for the Rich 1

As structural budget deficits grow to trillions of dollars and politicians promise even more spending, “tax the rich” has become a progressive rallying cry. Meanwhile, conservatives typically prefer spending cuts to reduce the deficit.

There is a simple bipartisan compromise: Cut federal spending on the rich. This would accomplish both the progressive goal of increasing government redistribution from the rich to the poor, and the conservative goal of shrinking government.

Beyond representing a healthy bipartisan compromise, this approach, which is the topic of my new Manhattan Institute report, “Cut Spending for the Rich Before Raising their Taxes,” is also sound policy. While economists debate the magnitude, there is a broad consensus that steep tax rate increases reduce incentives to work, save, invest, and be productive. Taxes distort economic decision-making, incentivize expensive avoidance and evasion schemes, and often drive income away from the jurisdictions doing the taxing. Reducing federal spending on the rich can achieve the same redistributive goals as taxing them, without all these broader economic harms.

Tax increases also reduce policy flexibility. Each tax hike to finance new spending leaves fewer remaining plausible taxes to address the $100 trillion in projected baseline budget deficits over the next three decades. They also reduce policy flexibility by creating expectations for large new government benefits, particularly for social insurance programs that are nearly impossible to reverse if they become too expensive. Finally, spending cuts are simply better targeted than tax increases.

Critics contend that stronger income-relating of federal benefit programs will make them less popular and easier to cut. But means-tested programs have proven extraordinarily politically resilient. Since 1965, federal antipoverty spending has steadily risen from 0.5 to 4.0 percent of GDP—across Republican- and Democratic-led governments—and programs like Medicaid have been expanded with the strong support of state referenda.

Furthermore, “tax the rich” advocates should recognize that—if they are worried about maintaining wealthy families’ vital support for federal programs—cutting their benefits and raising their taxes are two sides of the same coin. Both options break the link between taxes and benefits and make the programs a worse deal for the affected families. If wealthy people support Social Security because their taxes finance their future benefits, then doubling their Social Security taxes (by eliminating the payroll tax wage limit) without a corresponding benefit increase would undermine their program support just as much as a direct benefit cut. So if we’re willing to tax them, it makes sense to cut their benefits first.

Upwards of $1 trillion can be saved over the decade (and significantly more after) from reducing upper-income benefits. We can begin with Social Security and Medicare benefits for wealthy seniors. While many surely struggle financially, today’s seniors are, overall, the wealthiest cohort in the wealthiest country in its wealthiest era. Average household retiree income grew more than twice as fast as working age-salaries between 1979 and 2016 (the latest data available). And the wealthiest 10 percent of seniors are doing remarkably well. Four million retiree households hold more than $1 million in investable assets, including 1.1 million households that hold more than $3.5 million. Relatedly, CBO data show that 6.3 million elderly Americans live in households that currently earn annual market incomes (i.e., excluding Social Security and other government benefits) of at least $87,200/$123,400 (for a one- or two-person household)—including 2 million seniors in households earning more than $174,100/$246,200 annually. To the extent that such high post-retirement incomes derive from annuities or 401(k)-style investments, they suggest investment portfolios that are well into the millions of dollars.

Social Security, Medicare, and farm subsidies are three areas ripe for cutting spending on wealthy families.

And yet Social Security will provide even wealthy seniors with large benefits that exceed their lifetime contributions into the system—even adjusted into net present value. Such a system goes well beyond providing basic social insurance against poverty, and has little policy justification. Over the next decade, Washington is projected to provide $1.6 trillion in Social Security benefits for upper-income seniors. Congress could save hundreds of billions of dollars by modestly paring back the initial benefit formula for future wealthy retirees, and by cancelling annual cost-of-living adjustments for seniors who are still earning more than $100,000 (single) and $200,000 (married) after retirement. These savings would grow rapidly in future decades as more wealthy seniors retire.

High-earning seniors should also pay more for their Medicare Parts B and D benefits. While Medicare Part A is (in theory) “pre-funded” with payroll taxes, Parts B and D benefits are not “earned” through any lifetime payroll contributions. This makes them closer to welfare than traditional social insurance. More than 90 percent of seniors are assessed a premium that covers 25 percent of their B and D costs, while taxpayers fund the rest. These premiums gradually rise from 35 percent to 85 percent at post-retirement incomes between $176,000 and $750,000 (for married couples). But seniors who are still earning hundreds of thousands of dollars after retirement do not require Medicare subsidies, and aggressively raising these premiums for the wealthiest seniors can raise nearly $500 billion over the decade while costing these households just a few thousand dollars annually.

Finally, farm subsidies are America’s largest corporate welfare program. The persistent public support of this $20 billion annual expenditure is based largely on the false perception that they help poor, struggling family farmers who are always one drought away from bankruptcy. In reality, decades of government-encouraged consolidation of the agriculture industry have resulted in three-quarters of all farm production coming from 180,000 households that run commercial farms, and who report an average household income of $300,000. And in fact, the majority of farm commodity subsidies are granted to families with annual incomes exceeding $166,000.

The agriculture industry continues to thrive, earning $134 billion in net cash income last year. According to the American Enterprise Institute, debt-to-asset ratios are in a long-term decline, only 2 percent of farm loans are currently classified as “non-performing,” and less than 3 percent of farms meet the definition of extreme financial stress. AEI adds that, since 2000, the annual farm bankruptcy rate has been just 0.02 percent.

Yes, farming brings large year-to-year income volatility. But a permanent welfare program is not the solution for what is essentially an insurance problem. Imagine a hypothetical farm household that—over a typical decade—earns an income of $250,000 in eight of those years, and zero in the other two years. A simple insurance program (or futures contract) could be crafted that ensures a comfortable and steady income of $200,000 for each of the 10 years. Smoothing out the profitable and unprofitable years should have a net zero cost to taxpayers. More funding can be saved by repealing farm tariffs and the resulting tariff support payments. Conservation payments should also be limited because most farmers already have the incentive (and financial resources) to protect their land investments, and sensible regulations can address ground pollution. These reforms would save more than $150 billion over the decade from traditional farm programs, and more from ending tariff support payments.

Social Security, Medicare, and farm subsidies are three areas ripe for cutting spending on wealthy families. Other possible candidates include flood insurance, unemployment insurance, and several loan and loan guarantee benefits for upper-income households, as well as corporate welfare spending in areas like defense and energy. Before lawmakers endanger the economy and limit their future policy flexibility by drastically raising taxes on upper-income families, they can promote their redistributive goals simply by cutting federal spending on the rich.