A GREAT TOP TEN LIST! Our perspective on CRFB's tax debate list

The Committee for a Responsible Federal Budget takes great pains not to alienate either of the bipolar political viewpoints lest it seem to be playing favorites. 

It's no surprise that they don't always succeed.  This CRFB piece focuses on taxes. Since budget balance is their overriding goal, it favors tax increases. If you're a fiscal conservative, don't pout. When CRFB talks expenditures, big spenders squeal.

10.       Record low federal revenues as a % of GDP, tax breaks were higher. Federal tax revenues ran just a smidgeon under 15% of GDP in 2010, the same as 2009.  

MyGovSpending.com comment: The recession cut revenues, stimulus did, too..  Federal taxes historically have averaged 18% of GDP.

9.         The first round of tax reform since Reagan is in gestation.  Senators Wyden (D) and Coats (R) are working to simplify the tax code. 

MyGovSpending.com comment: Arthur Laffer pointed out today in the Wall Street Journal that compliance adds 30% to the cost of taxes. In one accepts that, the $28,000 all-in taxes that an average family generating $70,000 of cash income is really a tax burden of $36,000. Ouch.

8.         The 2010 tax deal gave everyone something and charged it on the national credit card.  

            MyGovSpending.com comment: The SWAG (slang for promotional freebies) came under the banner of stimulus. Ostensibly, these goodies will be withdrawn at the end of 2012.

7.         Estate Taxes disappeared, then re-appeared. 

MyGovSpending.com comment:  The 2001 tax killed estate taxes.  They were brought back at the end of 2010. 

6.         Value Added Taxes (VAT) get voted down. 

MyGovSpending.com comment: VAT are a type of sales tax levied at every level of production through an economy. They are credited with quietly boosting the tax take of governments across the world. In the US  the left complains that they do not ding the rich enough, and the right worries VAT revenues will be added to existing revenues. VAT off the table for the moment.

           

5.         Spending cuts are labeled tax increases.

MyGovSpending.com comment: Here is a lovely example of both semantic infiltration and the distance of Washington from its citizens. 

Fiscal folks have taken to renaming tax deductions and credits as tax expenditures. It applies to mortgage interest deductions, charitable contribution deductions, child tax credit, etc... The idea is that these items are spending through the tax code - that money not collected by politicians is equivalent to money spent.  It seems reasonable.

Or is it.  It reflects a power-centric viewpoint, that government has first claim on the money citizens earn.   Pushed a bit further, the concept implies that any money people take home from their paycheck after taxes is a tax-expenditure - money the government has not collected.  Therefore it is the rightful property of government. 

Taxpayers are more likely to think of taxes as the expenditure, not the absence of taxes.

4.         Non-Story of the Year. Politicians patch the AMT.  MyGovSpending.com comment: The Alternative Minimum Tax is tax code running parallel to the Form 1040. It was originally designed for people who took advantage of too many tax breaks. Now it is snaring many decidedly non-rich taxpayers. Rather than fix it permanently, Congress duct-taped it for another year.  

3.         CUTGO cuts out the PAYGO. 

MyGovSpending.com comment: This is the latest attempt Congress has made to appear to be fiscally prudent while leaving enough loopholes that it can act as it pleases.

2.         "Make Work Pay" tax credit expires.

MyGovSpending.com comment: This $400 tax credit was designed to be explicitly stimulative and temporary.  It turn out that it actually is temporary.

1.         Simpson-Bowles "Zero Plan". 

MyGovSpending.com comment: Obama's Fiscal Commissioners Erskin Bowles and Alan Simpson turbo-charged the tax debate by proposed to wipe out all tax breaks - even the best loved - then lowering tax rates.  Overall, they targeted a revenue increase with larger spending reductions. 

The Bowles-Simpson Commission put radical tax reform on the table for the first time in a generation. A huge step forward. Finally.

See  http://crfb.org/document/top-ten-tax-policy-developments-past-year

Big Government Needs Big Reforms

(This article was first published in Smart Girl Nation online magazine in March 2011)

Only humans with heartbeats pay Washington's enormous tab. Real people pay every nickel. Even corporate taxes are ultimately paid by flesh and blood people.

Take an ordinary, every-day American family; one that averages $70,000 of income during its earning years.  It will spend a stunning $1,300,000 in taxes during its lifespan. 

After extracting that sum, in an act that has been characterized as governmental child abuse, politicians push fresh debt equal to $11,000 per family onto politically undefended youngsters. 

The Government Accountability Office notes that the federal government will have to raise its taxes 50% simply to stabilize the national debt. Or it can cut spending 35%.

Certainly, portions of government provide vital functions. Nonetheless, it is vulnerable to charges of widespread inefficiency, special interest control, and financial negligence. Look at the money lost by the Post Office and Amtrak; a formidably mediocre public education system; the empty Social Security trust fund; and a Defense Department that cannot pass a basic accounting audit.

Naturally citizens are looking for ways to save tax money. The biggest programs deserve the closest examination.

Social Security and Medicare together consume a whopping 8% of the economy. They are large public policy mistakes. The $2.9 trillion trust funds are empty and the programs are short by a stunning $225,000 per family. 

Two keys to a realistic understanding of reform: First, the money that trusting citizens paid into Social Security is gone. Disappeared. Spent. Flushed. Second, the social injustice of raising taxes on younger people for a political "oversight" of this magnitude is profound.

Benefit cuts are not the end of the world. Many Social Security beneficiaries do not need it.  In 2008, 25% of families headed by someone 65 or over had income of more than $75,000.

US health care offers more low hanging fruit. It is twice as expensive as that of other rich countries. Singapore's patient-centered, free-market model is four times more cost effective than the US. Vast healthcare savings of 8% - 12% of GDP are within grasp, enough to solve much of the looming retirement shortfall. 

Defense and education, the second and third largest programs, are nearly equal in cost. Each burn through 6% of GDP.  For decades, the US has performed the bulk of the globe's security work. Perhaps the current arrangement is optimal, perhaps not. In light of the mounting financial pressures, a thorough re-evaluation is in order.

Federal, state and local governments will spend $880 billion on education in 2011, but struggle with quality. Productivity has fallen in half. Per-pupil K-12 funding doubled since 1971 while reading and math scores have remained flat. In 2009 international comparisons, American 15 year olds posted a mediocre 14th ranking in reading and struggled at 25th in math.  

A flick of a policy switch would greatly lessen a critical difference between the rich and the rest - high quality education. Less-than-wealthy families cannot escape the public K-12 system. It is a tool of financial repression. Watch quality increase and costs fall after freeing parents to use their tax dollars to shop for education in a truly free market.

Of course, government is necessary. Of course, collecting taxes is necessary, as well. Necessity, however, does not make tax collection less coercive. And coercion should be held to an minimum in any society purporting to be free.  

A government that extracts $33,000 in cash and liberty annually from middle income families to fund a sprawling, inefficient, and often venal government - then borrowing $11,000 per family more - is increasingly difficult for taxpayers to justify. 

Fire up your imagination. It's time to re-think government.  Completely.

David Walker on the federal budget and Health Costs

Hooray! David Walker, former comptroller general of the US Government Accountability Office, is proposing something akin to Singapore's health care system. That country's exemplary system costs 4% of GDP, compared to our 17%.

In Singapore, most health care is paid for from citizens' mandatory health savings accounts. The truly poor are subsidized, and there is a layer of insurance for the big risks that might deplete that account.

The key is that patients control most of the dollars directly. Providers respond with efficiency gains, much lower costs, and great quality.

It's way past time to try it here.

ACT I: A GRAND BARGAIN FOR THE NATIONAL DEBT- Will It Be Applauded, Booed Off Stage, or Simply Ignored?

Your odds of being richer tomorrow, rather than poorer, just got a wee bit better.

Maya McGuineas, a fiscal hero from the New America Foundation and the Committee for a Responsible Federal Budget, and Bill Galston from the Brookings Institute, put a fresh federal budget proposal on the table, summarized here.

It has the critical elements of a Grand Bargain necessary to avoid an exceedingly grand financial wreck.

Whether Washington acts on it in time remains to be seen. So far, camps of the right and left are having buckets of fun bludgeoning their opponents. There is a profusion of passion but no palpable progress.

McGuiness and Galston's 18 page plan moves beyond the Bashing Bozos. It realistically pushes the federal budget to near balance and stabilizes the federal debt at 60% of GDP, a number that has surfaced as a rough estimate of "safe". It gets this job done in ten years.

For the left, McGuiness and Galston tilt Social Security benefits more towards the poor. They raise taxes both by cutting tax breaks and by adding a carbon tax. Their plan trims defense and adds a war surtax, too.

For the right, the proposal adds private accounts to Social Security, freezes domestic spending for three years, and institutes tort reform.

The plan is fertile seed on middle ground that is currently barren. The Obama Administration's budget doesn't even pretend to get close to balance or to stabilize the national debt, much less bring it down. And Republican Congressman Paul Ryan's proposed budget works the federal debt back down to 60% of GDP by 2066 - snail's pace in a lightning fast world.

It's not that either man lacks the intellectual capacity to plan for a credible, sustainable, and timely budget. It's that the old political formula - spend big, tax less, to heck with tomorrow - still wins with special interest groups, the press, and most voters.

With the McGuiness-Galston plan, the first steps to gain control of the federal budget are clear. Both left and right can walk away winners.

Yet even if the plan were adopted tomorrow, government finances would still pose grave threats to family prosperity.

A grossly inefficient health care sector would still pour concrete into overshoes worn by every family's budget. Public employees would still be owed retirement benefits equal to 100% of the national debt. State and local governments would still have some very weak sisters that will soon be asking for taxpayer bailouts. And our present tax system would still bear a striking resemblance to Medussa's hairstyle.

Thanks to Maya McGuiness and Bill Galton, Washington no longer needs to write a script. It can simply raise the curtain and get to work. Let's hope it does.

_________________________

See Maya McGuineas in action before the President's Fiscal Commission on YouTube.
Roll forward to 14:30 where she is introduced.

SIX PUBLIC MONEY MISFIRES - Typical Families Face Nearly $30,000 In Fresh Annual Taxes

At the risk of sounding alarmist, the financial condition of America's government is in even worse condition than the deplorable state most people believe.

If the US attempts to restore public financial health through tax increases alone, in a few short years the odds are very high that a typical family earning $75,000 will be paying $29,000 more in taxes than that family now pays.

How is this possible? The federal budget deficit is huge, the national debt is crossing into financial no-man's land, state and local governments are on a long spending spree, government has been making "off the books" promises, and Social Security and Medicare threaten to consume enormous swaths of the economy.

First and foremost is the task of balancing the federal budget and bringing the national debt down to safer levels. Trimming the federal budget deficit by a mere 1% of GDP each year will run up the national debt because current deficits are running 9% of GDP - so deficits will continue to add to the pile of money owed for nine more years. Using conventional government economic forecasts, the country will not bring the national debt down to its current 60% of GDP for 12 more years. The debt to GDP ratio won't fall to a comfortable 30% until 2030. While this slow rate of deficit reduction is politically courageous, financially it is weak. It takes too long, risks more financial crisis, and requires taxes on a typical family to gradually increase to an additional $16,000 annually in 11 years.

And it still leaves much necessary public financial reform undone. The feds have run up another $5.7 trillion in promises for employee benefits for which nothing has been saved. Assuming no cut in benefits, that obligation will be paid off as those pension liabilities come due. If we make the simplifying assumption that taxpayers spoon that out evenly over 40 years, that will add another $2,300 dollars of annual taxes starting immediately.

There are more hidden surprises, too. State and local governments have run up big debts. If they are folded into the definition of national debt, and we pursue a limit of 60% of GDP, then this debt should be extinguished. If taxpayers pay it off over 40 years at 4% that will add another $1,000 to the typical family's annual taxes.

Fourth, like the federal government, state and local governments have also made promises to government employees beyond which they have been willing to save. This shortfall could be as high as $3 trillion. We'll use $2 trillion to err on the conservative side. Assuming this gets paid over 40 years, and is evenly spread across the country (which it is not) it adds another $800 to that $75,000-a-year family's taxes.

Fifth and sixth, Washington still has to deal with Social Security and Medicare. If we pay for the shortfalls there evenly over the next 75 years, and close that gap with tax increases, Social Security adds $2,700 and Medicare adds $7,800 in fresh taxes per family each year

To deal with these issues squarely and through tax increases alone means raising taxes on our typical US family by $14,600 next year and ramping that up to $29,000 of fresh taxes - on top of taxes already paid - by 2021.

What will this do to our typical family? Obviously, it will strangle their cash flow. Many are already dealing with mortgages they cannot afford, and retirement savings that are critically short.

Where is all this money going to come from? Ultimately, every penny comes from someone with an actual heartbeat. That narrows it down to individuals. Companies are merely paper tigers owned, worked, and supplied by live, flesh-and-blood people. The bottom line: only real people pay taxes.

The middle class and the poor will not escape lower standards of living even if politicians could stick the rich for the whole bill. Since rich people are the nation's primary savers, taxing the rich succeeds in depleting the nation's pool of capital. Without that investment, Americans will feel innovation dry up, smell the decay of slowing productivity growth, and watch the paint peel across the country.

One can safely bet that discretionary family expenditures of all kinds will feel the cleaver. Cuts will come in vacations, restaurants, clothing, cars, books, housing. More cuts will come from education, retirement and yes, maybe even medical care.

Paying those taxes will also take more sweat, more hours on the job, more output for each hour worked, more teen employment, more elderly employment, fewer stay-at-home moms. The 40 hour workweek - widely exceeded by salaried folks and nothing more than a distant dream for most small business people, is in jeopardy for hourly workers, too. And bet on a larger "under the table" economy.

For American families, it looks like the New Normal is just starting.
 _____________________________________________

All numbers used in the analysis reported above are derived from government sources with the exception of state and local government unfunded liabilities.  Government does not estimate these numbers, private sources do occasionally. Contact me if you would like more detail.

Stark Doubts From A High-Wattage Brain

Luminaries in economics and business have been expressing concerns about America's financial future recently. They may not be household names, but they are well known in their fields. Among them are Carmen Reinhart, Ken Rogoff, Bill Gross, Mohamed El Arian, Stephanie Pomboy and, of course, Nouriel Roubini.


Now another high-wattage brain, who happens to be a global media billionaire, is expressing doubts about America's future, too.  Starkly.

When the Wall Street Journal interviewed John Malone recently and asked about risks in the cable business he responded; "The concerns really tend to be much more macro: Is America going to make it, rather than are we going to make it? It's pretty hard. If the country doesn't make it, do any of us make it?"

He goes on to muse about illegally fleeing to Canada on a snowmobile trail.

This sounds a bit wacko. But this is not a man known for rash judgment

The Other National Debt

Kevin Williamson of National Review Online has sharpened his pencil toted up the national debt numbers.  He finds "the other national debt" to be 10 times the official $14 trillion.

Why?  Because no one holds government to accounting standards remotely as stringent as those that business uses.  Like so many entities; it can fudge, so it does.

His piece is both entertaining and sobering. Read The Other National Debt.

Or listen to him talk about the article in this radio interview on Mike Rosen's 850 KOA Denver. 

These numbers are starting to sink in.  Let's hope we take action before they sink us.