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A New Analysis Offers a Path to Reducing the National Debt and Spurring Economic Growth
As the incoming Trump administration prepares to face policy debates over taxes, spending, and debt, a new analysis from the nonpartisan Penn Wharton Budget Model (PWBM) outlines policies that could reduce federal debt while spurring long-term economic growth.
The federal government faces several key policy deadlines in 2025, including the debt limit suspension ending in January, the expiration of spending caps on the discretionary budget in September, and the sunset of the Trump-era tax cuts at the end of next year.
According to the PWBM analysis, simplifying the tax code, reducing tax-induced distortions, implementing taxes to address negative externalities, and reinforcing the long-term solvency of Social Security and Medicare could reduce federal debt while driving economic growth.
The analysis suggests curbing the national debt can occur while driving economic growth, and argues that serious debt reduction does not need to come at the expense of economic growth or the social safety net.
One key reform outlined in the analysis is the simplification of the tax code, including taxes on capital gains and dividends at ordinary income tax rates, taxing capital gains at death without a stepped-up basis starting in 2025, and removing all itemized deductions except for charitable deductions.
The analysis also calls for a carbon tax on coal, oil, and natural gas products starting in 2025, which would cut greenhouse gas emissions by 7% in the short run and nearly 16% by 2054.
Additionally, the analysis suggests raising the full-benefit Social Security retirement age from 67 to 70, phasing in between 2037 and 2056, and implementing new minimum and maximum benefits in 2037. The Medicare eligibility age would also be raised to 67, with the change fully phased in by 2036.
The analysis concludes that the proposed reforms would boost GDP by 21% over 30 years compared to current law and raise wages by nearly 7% in that period. Private health insurance premiums would fall by 27% over 30 years, and the federal debt held by the public would be 37.8% lower than projected in 2054.
