Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- Budget Sequester Hits the Wrong Targets
Budget Sequester Hits the Wrong Targets
Shifting Focus Could Yield Greater Economic Growth
Washington, D.C., March 4, 2013—The automatic federal spending cuts known as the sequester will provide deficit reduction as promised, but will do so by targeting the wrong categories of spending and causing unnecessary economic harm, according to a new analysis by the Tax Foundation. Instead of cutting government spending on so-called discretionary programs like defense, roads, and education, sequestration should be re-targeted at the growth of entitlement programs like Social Security, Medicare, and Medicaid.
“The major source of increased federal spending in recent and projected years is from entitlement spending, and this is left largely untouched by the sequester,” said Tax Foundation chief economist William McBride. “Research indicates that it would be better for economic growth, short term and long term, to cut mandatory spending.”
Not only does the sequester ignore many of the federal programs with the largest budgets and rates of increase, but it cuts exactly the areas of government most likely to boost economic growth. These cuts will most directly impact Washington, D.C. and other towns heavily dependent on federal spending, such as those with large military bases. Many people in these locations will see a pay cut, be furloughed, or be laid off entirely as a result.
To improve the outlook for both government finances and the wider economy, Congress should replace the sequester with cuts to the entitlement programs currently considered to be “mandatory” spending. This would boost economic output significantly in the long term, and might even yield greater growth in the short term.
The worst option of all, already suggested by some lawmakers in Washington, would be to replace the sequester in part or whole with higher income taxes. Economic research has shown that the vast majority of countries that have successfully reduced their debt from the levels the U.S. is experiencing today have done so by reducing spending rather than increasing taxes.
Tax Foundation Fiscal Fact No. 363, “Economic Effects of the Sequester and the Proposed Alternatives: What is the Evidence on Spending and Economic Growth?” by William McBride is available here.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or firstname.lastname@example.org.
Join the Tax Foundation's fight for sound tax policy Go
Tax Policy Blog
The official weblog of the Tax Foundation.
Tax By State
For information on your state, select it from the drop-down menu.
Ask a Tax Expert
Contact information for Tax Foundation policy staff Ask