Today EPI is participating in the Peter G. Peterson Foundation’s “Solutions Initiative,” along with several other research and policy institutions. For this project, we submitted a model tax and budget plan. The revenues were scored by the Tax Policy Center (TPC) and the spending was scored by former officials of the Congressional Budget Office (CBO).

Normally in DC policymaking discussions, model tax and budget plans are constructed near-solely for the purpose of showing how a mix of tax increases and spending cuts can lead to lower budget deficits. But, while bending revenues closer to spending in a spreadsheet is a fairly trivial exercise, the real-world effects of changes in taxes and spending are often not trivial at all. To take just one example, the poverty rate of elderly households fell extraordinarily rapidly as Social Security spending rose in the mid-20th century. Ignoring this tremendous progressive achievement and instead seeing Social Security as just a budget line-item that can be trimmed to move expenditures and revenues closer together would be an extraordinarily myopic way to think about economic policy.

To ensure that we were keeping the big picture in mind while constructing our plan, we began by undertaking a diagnosis of the most-pressing economic problems facing the vast majority of U.S. households. We identified them as follows:

• Economic growth has been slow for almost two decades. The roots of this slow growth are too-slack aggregate demand for most of this period and anemic growth in productivity caused largely by weak private investment.

• Slow growth in recent decades has not been accompanied by any progress at all in reversing the huge upward redistribution of income that characterized previous decades—in fact, by many measures inequality has continued to rise.

• Taxes and spending in the United States are far smaller than in most other rich countries around the world. We expend far less fiscal effort in income support programs that fight poverty, social insurance programs that provide broad-based economic security, and public investments that spur growth.

• The most-glaring outcome of the small fiscal footprint in the U.S. economy is a health sector that is inefficient and unfair. Our health care system provides coverage to a smaller share of our population, delivers less health care, obtains worse health outcomes, and yet places a far greater economic burden on households than in almost any other rich country.

Using higher taxes and higher spending to reduce inequality and spur growth

Our plan would address these challenges in a number of ways. It includes progressive taxes (and particularly increased taxation of wealth) and expanded spending which would result in redistribution away from the top and towards the bottom and middle. Besides spreading income growth more equitably, this more-progressive fiscal system would mechanically boost aggregate demand because households at the middle and bottom of the income distribution spend a higher share of income than those at the top. Our plan would boost productivity growth by making up for slack private investment with ramped-up public investment. Much research shows that investing in basic infrastructure, green infrastructure, and in early childhood care and investment would have profound effects in boosting growth for the future.

Financing public health care for all

The largest spending expansion in our plan is a single-payer federal plan that would replace all health spending currently done by private insurance in the United States. We have obviously not accounted for all implementation details in this plan—issues of integrating a new public plan with the existing Medicare and Medicaid system will be complex. But we have specified where financing flows for such a health care expansion could come from, and, have identified evidence that such a plan would considerably reduce the trajectory of overall health costs over time.

Even as public financing of health care would reduce overall cost burdens for households, it is expensive in fiscal terms, requiring lots of revenue. Almost all other spending in our budget could be accommodated with revenue raised strictly from the top 2-3 percent. But a spending commitment as large as single-payer health care requires more broad-based tax changes on top of these explicitly progressive taxes.

We start with two new revenue sources that mimic how health care is paid for today by most working families: through employer and household contributions to insurance premiums. On the employer side, we introduce an employer-side payroll tax that will convert some of what employers are paying today for workers’ health care into taxes, and we also propose an income-based premium payment from non-poor households that is capped as a share of income (households under the poverty line continue to be enrolled in Medicaid or face no premium at all).

Radically reforming tax expenditures and taxation of wealth

The single largest revenue generator in our plan is the abolition of all tax expenditures except the Earned Income Tax Credit (EITC). Whenever possible, we try to meet the social goals allegedly targeted by existing tax expenditures with direct spending. So, for example, we replace the Child Tax Credit (CTC) with a Universal Child Allowance (UCA) that is even more effective in fighting child poverty. And we replace the tax exclusion for retirement contributions with an expansion of Social Security. We don’t replace the preferential rate afforded to capital gains (a large tax expenditure in current law) with anything; we just don’t see any redeeming social goal in taxing wealth more lightly than work.

Besides the radical reform of tax expenditures, other notable revenue features in our budget include a suite of taxes on wealth. Using the tax code to reduce inequality requires we tax income generated from wealth more heavily; compared to low and middle-income households, those in the top 1 and top 0.1 percent receive a far larger share of their income from wealth. Our budget takes on this challenge by significantly increasing the taxation of wealth.

Our plan leads to rapid reductions in public debt—but that’s probably OK

Finally, a quick note on the outcome of our plan for deficits and debt. We aimed for transformative changes in how the fiscal system helps the vast majority of American families. Our budget raises federal spending by more than 50 percent relative to current levels (but would still see the United States spending less than other high-spending rich countries).

But, we were given just one full chance to run our revenue plan through the TPC tax model (plus one tweak). In the end, we overshot a bit on revenue and our plan resulted in smaller deficits than we think are optimal—just under 2 percent of GDP in the last year of the budget and much smaller in the years before. These small deficits lead to rapid reductions in the ratio of overall debt to GDP over the 30-year window. In a forthcoming paper, we note that we think the evidence on economic growth and interest rates indicate that deficits of 2.5 percent—and maybe even as high as 3.5 percent—are consistent with debt to GDP ratios stabilizing at safe levels.

But, we’re mostly OK with the smaller-than-desired deficits that are the outcome of our plan. The primary reason to worry about too-small deficits in the current economic environment is that they might drag on aggregate demand and constrain growth. But our small deficits are the outcome of very large transfers to low and moderate-income households combined with very progressive revenue increases. This combination is quite likely to lead to a substantial “balanced budget multiplier” effect that keeps aggregate demand growth healthy.

Most importantly, our tax and budget plan would solve real problems facing U.S. households.