1. What are the three cuts or tax increases that you think make the most sense?

Today, you’re in charge of the nation’s finances – and you have to do a job that the government has been unable to do – balance the federal budget!

In 2017, the government is projected to have a $443 billion deficit. You need to eliminate the deficit by selecting a series of spending cuts and/or tax increases. The specific options are detailed below:

Spending Cuts

Cut foreign aid in half – $20B

At a time when the United States is facing large deficits, some budget analysts argue that the country should significantly reduce the money it spends helping other countries. Others say that foreign aid already represents a smaller share of the budget here than in other rich countries and that it expands American influence.

Eliminate earmarks – $18B

Earmarks are lawmaker-directed spending items, often to finance local projects favored by a member of Congress.

Cut pay of civilian federal workers by 5 percent – $19B

“During the Great Recession, most private-sector employees have seen their wages frozen, and some have even watched wages decline,” the chairmen of the deficit panel wrote. “In contrast, federal workers have seen their wages increase.” This option would be a one-time 5 percent cut in federal civilian workers’ pay; the chairmen called for a three-year freeze on pay, which would have a similar effect.

Reduce the federal workforce by 10 percent – $16B

This proposal would reduce the size of the federal work force by 200,000, from its current level of more than 2 million. The chairmen of the fiscal commission noted that the federal work force peaked at about 2.3 million in the late 1960s and fell to a low of 1.8 million in 2000. “Under this proposal, the government could hire two new workers for every three who leave service,” the chairmen said. The proposal would not take effect until 2012.

Cut aid to states by 5 percent – $35B

In the past decade, even before the stimulus bill, state aid rose significantly, as a share of the economy. In 2005, it equaled 3.4 percent of gross domestic product, compared with 2.3 percent in 1990 and 3.3 percent in 1980. Cutting state aid, advocates say, would persuade states to spend more efficiently and reduce waste. Opponents worry about the effects on education, poverty and public safety.

Reduce nuclear arsenal and space spending – $25B

Would reduce number of nuclear warheads to 1,050, from 1,968. Would also reduce the number of Minuteman missiles and funding for nuclear research and development, missile development and space-based missile defense.

Reduce military to pre-Iraq War size and further reduce troops in Asia and Europe – $37B

“This option,” according to the bipartisan Sustainable Defense Task Force, “would cap routine U.S. military presence in Europe and Asia at 100,000 personnel, which is 26 percent below the current level and 33 percent below the level planned for the future. All told, 50,000 personnel would be withdrawn.” The option would also reduce the standing size of the military as the wars in Iraq and Afghanistan wind down.

Reduce Navy and Air Force fleets – $25B

Under this option, the Navy would build 48 fewer ships and retire 37 more ships than now scheduled. Overall, the battle fleet would shrink to 230 ships, from 286. In addition, the Air Force would retire two tactical fighter wings and reduce the number of fighter jets it planned to purchase.

Cancel or delay some weapons programs – $25B

This option would cancel the purchase of some expensive equipment, like the F35 fighter jet and MV-22 Osprey, with less expensive equipment that the bipartisan Sustainable Defense Task Force judged to have similar capability. It would delay other purchases. Research and development spending, which the task force considered a relic of the cold war arms race, would be reduced.

Reduce noncombat military compensation and overhead – $32B

Would change health-care plan for veterans who had not been wounded in battle. Premiums, which have not risen in a decade, would rise. More veterans would receive health insurance from employer. This option would also take some benefits, like housing allowances, into account when tying military raises to civilian pay raises. Currently, increases in those benefits come on top of pay raises. The military would also reduce the length and frequency of combat tours. No unit or person will be sent to a combat zone for longer than a year, and they will not be sent back involuntarily without spending at least two years at home.

Enact medical malpractice reform – $10B

Many doctors believe so-called defensive medicine – ordering tests and procedures to avoid lawsuits – is a major reason health costs are so high. This option would begin to reduce the chances of large malpractice verdicts, and supporters believe, also reduce rising medical costs. Opponents say it could reduce doctors’ incentives to avoid errors. The savings estimate comes from the Congressional Budget Office.

Increase the Medicare eligibility age to 68 – $10B

Those who favor raising the eligibility age for Medicare often say that Americans are living longer and should work longer. And, some say, the new health-care bill will allow people in their late 60s without employer-provided insurance to buy a policy through an exchange. Opponents say that low-income workers have experienced the lowest increases in longevity, and they need Medicare the most.

Reduce the tax break for employer-provided health insurance – $55B

This option would reduce the tax break for employer-provided health insurance, by slowly adjusting the cap, so that it increases at the rate of economic growth, rather than the growth in health costs – which tends to be significantly faster. Over time, more employer spending on health insurance would be taxed.

Raise the Social Security retirement age to 68 – $17B

The increase in longevity has caused some to favor higher eligibility ages for Social Security. This option would gradually raise the age from the currently planned 67 to 68. Supporters say that the change would go a long way toward fixing Social Security’s shortfall, by reducing benefits and by encouraging people to work (and thus pay payroll taxes) for longer. Opponents say that longevity increases have been smallest among low-income workers, who need Social Security the most.

Reduce Social Security benefits for those with high incomes – $10B

“Currently, initial Social Security benefits are determined in a way that allows them to grow with economy-wide wage growth,” says the Committee for a Responsible Federal Budget, a private group in Washington. Under this option, workers below the 60th percentile of the lifetime earnings distribution would continue to have their retirement benefits grow over time with average wage increases. But the benefits of top earners would grow more slowly – with inflation – while benefits for workers just above the 60th percentile would grow at a rate between inflation and wage growth.

Tighten eligibility for disability – $12B

The costs of the disability insurance program, which is administrated by the Social Security Administration, have been rising rapidly. This option would cut disability spending by 5 percent by focusing on states with the loosest standards. Supporters note that growing numbers of workers are classified as disabled, though the average job is less physically taxing. Opponents worry that injured or ill workers with few good job prospects would be harmed.

Tax Increases

Return the estate tax to Clinton-era levels – $65B

Under President Bill Clinton, the estate tax exempted $1 million from any taxable estate. This level would not grow with inflation over time, subjecting more estates to the tax. The rate would start at 18 percent and climb to 55 percent, as it did in the 1990s. The 55 percent rate would begin at $3 million. If Congress takes no action, this would become law on Jan. 1, 2011.

Return capital gains rates to Clinton-era levels – $43B

This option would return rates to their level under President Bill Clinton: 10 percent on capital gains for low-income households and 20 percent for everyone else, while dividends would again be taxed at the same rate as ordinary income.

Payroll tax: Subject some incomes above $106,000 to tax – $62B

When the payroll tax – which finances Social Security and Medicare – was created, it covered 90 percent of all income. Today, with a ceiling at $106,800, it covers closer to 80 percent. This option would gradually raise the ceiling, until 90 percent of income was again subject to the tax.

Millionaire’s tax on income above $1 million – $72B

Currently, the top tax brackets starts at about $375,000. In past decades, it started at much higher income level, after inflation is taken into account. This option – which the House passed last year but the Senate did not – would create a new 5.4 percent surtax on income above $1 million.

Reduce mortgage deduction and others for high-income households – $32B

The benefits of the mortgage-interest deduction (and several other tax breaks) flow mostly to high-income households – because they tend to have larger mortgages and have marginal income-tax rates. This option would reduce the value of some of those breaks to high-income households.

National sales tax – $53B

Nearly every other rich country has a tax on consumption, also known as a value-added tax or national sales tax. This option would impose a 5 percent consumption tax, exempting education, housing and charitable giving.

Carbon tax – $47B

This option would tax carbon emissions, starting at $23 per ton of CO2. The tax rate would increase at a constant annual rate of 5.8 percent, from 2012 through 2050. Consumers would receive a partial rebate.

After completing the balance the budget exercise, please respond to the following questions in approximately 300 words:

1. What are the three cuts or tax increases that you think make the most sense?

2. How close were you to resolving the deficit? What was most difficult about the exercise?

3. Why is Congress unabiqule to balance the budget?

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