When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Tuesday, June 5, 2012

Government We Can Afford

For those of us living in the United States and watching the travails of Europe, it is too easy to overlook our own fiscal cliff looming right before our eyes.  The problem has been festering for years. What's the problem? We have a government we can't afford. 

This problem has variously been referred to as "our fiscal crisis" or "fiscally unsustainable government spending" etc.  Bottom line, federal spending has increased, government revenues haven't kept up. Simpson-Bowles provided a framework to navigate out of this mess. But no one in Washington, from the President on down, has the courage to steer the vessel to a sustainable future.

What to do? In simplest terms, the thing to do is figure out the priorities, fund them, terminate spending for everything else. How much total can we allow for "spending?" About 22% of GDP (2011 it was 24% of GDP--historically federal spending is 21%). Paul Krugman says in addition, right now, we need stimulus--OK, we can also have (in addition to the 22% of GDP spending above) infrastructure spending by borrowing at historically low rates on 30 year bonds--this would provide stimulus through spending on, and only on, needed infrastructure--e.g., updating to 21st Century standards the mass transit systems of our 50 largest MSAs.

If we can agree on the foregoing, then we need to raise revenue annually equal to about 20% of GDP (Paul Krugman says a small deficit is "OK"). How to get there? Abolish all payroll taxes, all capital gains taxes--capital gains, like everything else (including interest and dividends) would be taxed as "income"--why should a billionaire speculator on Wall Street pay a lower tax rate than our best "brain surgeons?" Abolish all tax "expenditures" (deductions, exemptions, special tax breaks, etc.). Only two tax brackets for all taxpayers--individuals, corporations, etc. (which would be territorial taxation only) plus an "employer tax:"

a) First $200,000 in income -- 16% tax rate (withheld by employers and other payors);

b) Income over $200,000 -- 24% tax rate (withheld by employers and other payors).

c) Employer tax: this tax on employers would be equal to 8% of gross "U.S. employee wages and inducements" including "wages, stock options, bonuses, and other corporate executive inducements" but excluding the income of self-employed individuals (which is equivalent to a dividend paid to a corporation stockholder). This tax provides that businesses including corporations, and non-profit corporations, as well as governmental entities, will contribute to the social security and health care costs of the population as well as other costs of government from which they benefit.

I'll let the "wonks" crunch the numbers--adjusting the "rates" is OK--but that's the framework. One benefit of the above is that no annual federal tax return would be required of employed individuals making less than $200,000 a year!

OK that covers "comprehensive tax reform" --what about entitlement reform and other "sacred cows?" I'll cover those over the next few days:
Social Security and Pensions--what's the future?
Education--an easy solution.
Defense--what and how much do we need?
Health care--yes it's a mess (and expensive!)

If you've got any ideas on any of this, feel free to leave a "comment" below.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects