The nonpartisan Penn Wharton Budget Model is at the forefront of discussions on reducing the national debt and spurring economic growth. Kent Smetters, the faculty director, joins Varney & Co. to share their research-based analysis.

Key Policy Deadlines and Their Implications

In 2025, the federal government faces several crucial policy deadlines. The debt limit suspension ends in January, requiring Congress and the President-elect to raise it. Spending caps on the discretionary budget expire in September, and portions of the Trump-era tax cuts are set to sunset. These deadlines will force policymakers to address the massive national debt and spending growth.

Simplifying the Tax Code

The Penn Wharton Budget Model's tax simplification plan includes taxing capital gains and dividends at ordinary income tax rates and at death without a stepped-up basis starting in 2025. It expands the employment tax base to cover all pass-through income and disallows most itemized deductions except for charitable ones. A mandatory health savings account is introduced to cover out-of-pocket health care expenses. The standard deduction and personal exemptions are replaced with a partially refundable tax credit, and the top income tax rate is lowered from 37% to 28% with no marginal rates above that.This approach not only simplifies the tax code but also has potential economic benefits. By reducing tax-induced distortions, it can encourage more investment and economic activity. For example, businesses may be more inclined to expand and create jobs when faced with a more straightforward tax system.

Addressing Social Security and Medicare

The aging of America's population is straining the finances of Social Security and Medicare. To address this, the model suggests raising the full-benefit Social Security retirement age from 67 to 70, phased in between 2037 and 2056. New minimum and maximum benefits would also be implemented in 2037.For Medicare, the eligibility age would be raised from 65 to 67, fully phased in by 2036. It would also convert Medicare to a premium support system, giving beneficiaries the choice of different insurance plans with the federal government sharing the cost of premiums.These reforms are necessary as the current system is not sustainable in the long run. With a growing number of retirees and relatively fewer working-age families, these programs need to be adjusted to ensure their long-term solvency.

Enacting a Carbon Tax

A $50-per-ton carbon tax on coal, oil, and natural gas products starting in 2025 is part of the model's analysis. This tax is estimated to cut greenhouse gas emissions by 7% in the short run and nearly 16% by 2054.By imposing a carbon tax, the model aims to address negative externalities and encourage a shift towards more sustainable energy sources. It sends a clear signal to industries to reduce their carbon emissions and invest in cleaner technologies. This not only benefits the environment but also has the potential to create new economic opportunities in the renewable energy sector.Overall, the Penn Wharton Budget Model's analysis shows that it is possible to reduce the national debt while driving economic growth. Through these policy reforms, the model aims to achieve a more sustainable and prosperous future for the country.