President Obama’s pet solution is to have millionaires hand over a minimum of 30 percent of their income to the federal government. This is the so-called “Buffett rule.”
There are two problems with the president’s approach. First, a millionaires’ tax would not solve our fiscal problems - there just aren’t enough millionaires. According to the congressional Joint Committee on Taxation, the official authority for tax legislation, the Buffett rule would only raise $47 billion over a decade. That’s a far cry from even the $1.2 trillion deficit we face this year alone.
Second, raising taxes does nothing to solve the federal government’s spending problem.
Any viable solution must cut spending growth. Sen. Mike Enzi of Wyoming and Rep. Connie Mack of Florida have introduced legislation in their respective chambers to do just that. Their “Penny Plan” - recently updated to reflect the latest budget developments - calls for reducing federal spending (excluding interest payments) 1 percent a year for five years, balancing the budget in the fifth year.
To maintain balance once it’s reached, Mr. Enzi and Mr. Mack would cap federal spending at 18 percent of GDP. By no small coincidence, 18 percent of GDP roughly matches the U.S. long-run average level of taxation since World War II.
Is it realistic to think Congress could limit federal spending to 18 percent of GDP? Actually, there is precedent. Federal spending fell as a share of GDP for nine consecutive years before bottoming out at 18.2 percent of GDP in fiscal 2000 and 2001. The Penny Plan would return federal spending, expressed as a share of GDP, near the level achieved during the last two years of the Clinton administration.