What beat? The beat
of political drums is pounding across America. Cut spending!
Raise taxes! Create jobs! Help the sick and the poor! Defend our country and our way of life!
As political debate rages around us, spending, taxes and
the federal budget deficit remain high on the list of topics. If people thought the deficit issue or the problem
would go away with the recent passage of an increase in the federal debt
ceiling, they were sadly mistaken. Our
government faced the enemy and it was staring back at them in the mirror. They had a chance to do the correct thing for
the good of our nation but, instead, they blinked.
At the eleventh hour and fifty-ninth minute they agreed on a
not-at-all-sufficient deficit reduction program offset by a too-small debt
ceiling increase. They kicked the can
down the road until another day in the not-too-distant future: 2012.
What was the hang-up?
The answer is easy but sad. They—both
sides—worried more about getting re-elected than doing the correct thing for
America.
What should they have done? Although complicated and not at all popular, this answer is easy, too.
They should have raised the debt ceiling in conjunction with significant spending cuts and an
increase in taxes on the very rich. Now that I've said it, I may not be very
popular, either.
Warren
Buffett, a very smart and really rich guy whom many of us respect, wrote
recently, "My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice." [Excerpted from an opinion article in The New York Times.]
I agree with Buffett. The “very
rich” should pay higher taxes. The problem is where one draws the line. President Obama says he wants millionaires
and billionaires to stop getting a free ride and pay their fair share. He talks about taxing the super-rich, flying
around in their personal jets but his proposals call for tax rate increases on
incomes of $200,000 or more. Does
anyone recognize the term, “disingenuous?”
Who, exactly, are the very rich? According
to Warren Buffett, he made $40 million dollars last year. That’s very rich. It’s also a long way from the $200,000 annual
income figure that the Democrats use in their tax proposals.
So, what’s the correct income number on
which to pay higher taxes? If it were up to me, the magic number would be
two additional tax rate brackets at $500,000 and $1,000,000,
respectively. The top tax rate, now, is 35% on income above
$380,000. I’d keep that rate and the lower brackets where they are but
add a 37.5% rate at $500,000 and a 40% rate on income above $1,000,000.
So, what’s that going to cost? A couple filing a joint return with taxable
income of $500,000 would pay taxes in the future equal exactly to what they
pay, now. No increase. Let
me repeat that—No increase for 99% of
tax filers.
However, a family who earned $1,000,000
would pay $12,500 more in federal income tax than before. They can afford
it.
Someone who had a very big income of $2,000,000 would pay $37,500 more under this new
tax plan than they would under the current structure. Again, they can
afford it.
Incidentally, if Warren Buffett's income was ordinary earned income, he would have
to pay a little over $1.5 million more in federal income taxes but, in case you’d forgotten, he’s not
complaining and, you guessed it, he can afford it. In reality, he wouldn't have to pay it because most of his reported income is from long-term capital gains, which I have not suggested changing.
Further, these proposed new income
brackets and tax-rate increases would not destroy jobs, deter investment or
prevent jobs from being created. On the contrary, the financial stability
that a realistic deficit reduction program would bring to the economy would
encourage new investment and encourage corporations to begin spending some of
the cash they’ve been hoarding.
To quote Warren Buffett, again, "I have worked with investors for 60 years and I have yet to see anyone--not even when capital gains rates were 39.9 percent in 1976-77--shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off." I can buy that. The statement isn't true because Buffett said it, rather he recognized the truth of it in our economy.
How much new tax revenue are we talking
about? According to the most recent
complete IRS information I could find (2008), returns with $500,000 or more of taxable
income represented 19.2% of total taxable income from all returns. These proposed tax rate increases would
generate a little over $50 billion in additional tax revenue annually. That’s $500 billion over a decade but it
alone won’t fix the problem—and it shouldn’t.
Actually, $50 billion of new tax revenue
is only a drop in the bucket. The deficit
in 2010 was $1.3 trillion, which was more than 37% of total outlays of $3.5 trillion. I’ll come back to these numbers later, so
please remember them: $1.3 trillion
deficit; 37% of total outlays.
Is there a lot of waste in government
spending? Yes but it alone can’t save
enough money to fix our problem. Real
cuts need to be made.
Where should we cut? Isn’t everything on which the federal
government spends money critically important?
No, it isn’t. That should be the
easiest to cut but some of the really important stuff will need to be reduced,
also.
First, we, the people—represented by our
federal government—spend approximately 20% of our annual budget on Social
Security payments. Current spending and
current beneficiaries should not be
touched. Social Security is a future
problem that must be fixed in the long term but not today. We should adjust the start-point for future
benefits of people who are under 55, today, so that the program will be
sustainable in the future but current recipients should not be negatively
impacted by any changes.
We also spend approximately 20% of our
budget on defense, in one way or another.
That includes the costs of two wars that have cost many precious
American lives and burned trillions of American dollars, many of which will
never be accounted for. We cannot afford
to weaken our defense but we cannot afford these two wars of dubious value and
accomplishment. We surely cannot afford
the waste and outright fraud that has accompanied them. We should pull out of Afghanistan and Iraq
and focus on the real defense of our
nation.
We spend a whopping 21% of our budget on
Medicare and Medicaid. Are they
sustainable? Not in any calculation you
can make. Recent legislation has done
nothing to reduce the runaway increase in healthcare costs. Rather, it is an insurance program designed
to decide who receives medical treatment and who pays for it. Further, the cost of what is most often called
Obamacare is enormous, does nothing to reduce the cost of healthcare and will
most likely be judged unconstitutional.
We must find a way to cut these two huge programs—Medicare and Medicaid—now.
We spend about 6% of our budget on
interest payments on Treasury debt. The
bad news is, because of runaway deficit spending over the last decade, we’re
borrowing way too much. The good news is
rates are cheap. The yields on all
bonds, including US Treasury bonds, are at historic lows. The ten-year T-note is currently at a yield slightly below 2%. If interest rates double
over time, our debt service cost could double.
We cannot reduce this cost immediately because our sovereign debt must
be honored but we must reduce the rate at which we’re adding to our national
debt. Then we have to find a way to
reduce the debt itself. Nothing less
should be tolerated.
The remaining 33% of our expenditures
should not be safe from reduction or elimination but there are no really big
single programs to attack. Instead, there
are a bunch of little ones. With these
programs, the job of finding reductions will be different but we must reduce or
eliminate many of them.
So, here we are at another critical
crossroads. If our government could
reduce the cost of Medicare and Medicaid by one-third (7% of budget), defense
by one-third (6.67% of budget), and the cost of other catch-all of programs by
one-half (16.5% of budget), we’d still have a deficit of around 7% of
expenditures. The tax increases proposed above on incomes greater than $500,000 would further reduce the deficit to about 5.5% of total expenditures. That sounds pretty good
compared to the 37% of outlays in 2010 but it’s still too high.
The solution to a balanced budget in the
future lies beyond this correction phase in a little thing called growth. With renewed confidence in the stability of
our government and our finances, people and businesses will invest. They’ll put people to work and pay them
salaries and those workers will pay taxes.
With our newfound responsible approach to
expenditures, we also will need to hold the growth of spending to around 4%
annually, compared with a historic average since 1950 of about 7.5%. By itself, that won’t be enough. We’ll need a steady increase of revenue, not
from more tax increases but from economic growth. Between 1990 and 2000, government receipts
doubled, reflecting a 7% compound annual growth rate. Between 2000 and 2010, gross receipts
increased only 7%, reflecting the effects that two serious recessions had on
economic activity. The solution to this
problem is clear: Actively pursue
government policies that promote economic growth with a targeted GDP growth
rate of 4-5%.
This is what Congress and the White House
should have been brave enough and strong enough to do for the good of the
country, irrespective of political affiliation or the outcome of the next
election. Unfortunately, their
priorities lie elsewhere.
