DEBT CEILING DEADLINE TASERS D.C. PROCRASTINATION

Pols Get Busy with Budget Numbers

On 2 August, the US Treasury expects to run short of cash.  Both sides fear a US Government default if the debt ceiling is not raised in time. 

Vice President Joe Biden is attempting to shepherd a group of Senators and House Members toward a budget deal that keeps the government borrowing. 

Public deficits have been chronic since the US Bureau of Economic Analysis began its tally in 1929.  Washington is quaking at the thought of changing its "don't worry, be happy" tax and spending habits. But change they will. Those policies have gradually metastasized over the last 80 years into a lifetime tax of $1.3 million for a typical US family and unfunded public liabilities of $800,000 in addition.

With concern swelling last year, President Obama appointed the Simpson-Bowles commission to recommend a fix.  Contrary to near universal expectations, the team produced a remarkable work product.

It recommended wholesale reform of the corrupted US tax code.  In return for closing tax breaks and straightening the twisted economic incentives, the Commission would lower tax rates significantly.

Further, Simpson-Bowles grasped the famous third rail of Social Security and Medicare. It recommends cuts to senior subsidies and increasing related taxes, while boosting benefits to the poorest of oldsters.

The Commission's plan makes progress reducing the federal deficit to 1.5% of GDP by 2020 from 10% last year.   

Obama did not endorse Simpson-Bowles.  On 13 April the Administration issued the President's Framework, staking out a separate budget position.

That Framework does not change Social Security. Attempting to control medical costs, it goes beyond Obamacare in shifting more power away from the public and to a beefier Medicare bureaucracy.

Notably, the President supports sweeping tax reform and lowering corporate income tax rates.

The President's Framework cuts deficits $2.5 trillion over the next 10 years, versus Simpson Bowles cuts of $4.0 trillion. That's from a baseline of $9.4 trillion in deficits the President first proposed in February.

Paul Ryan, chair of the House Budget Committee, reforms more.  His plan cuts Washington deficits by $4.0 trillion between 2012 and 2021. And it does this while reducing the nation's tax burden by $610 billion.

Senior subsidies are at the core of the nation's self-destructive financial trajectory.  Ryan tackles Medicare by changing the program from a free all-you-can-eat buffet to a fixed government payment toward seniors' health insurance. Most importantly, he caps the growth in taxpayer costs per beneficiary to inflation.  Of the three leading budget plans, Ryan's proposal addresses medical costs most squarely.  

Ryan's plan is a greater agent of change than the other two. His youth-oriented budget puts more of the boomer generation's cost on the boomers themselves. That reduces the burden on younger people. It offers the best hope of broad prosperity for the middle-aged and the young.  

Each of these three prominent proposals agree on important points. All favor major reform of the tax code. All make attempts at controlling medical costs.  All cut spending.  Regrettably, all continue to run deficits for a decade, too.

The current round of budget action is expected to go to the brink. Former President Clinton remarked, “If we defaulted on the debt once for a few days, it might not be calamitous.”  Expect wonderful political theatre.

This observer suggests that if you do not play a role, you will be written out of the script.  Contact all your federal, state, and local elected officials with your opinion. Do it early. Do it often.

Regardless of the outcome of the current negotiations, intense budget debate is here to stay. And that is healthy for democracy.  Citizens are learning that public sector finance is too dangerous to leave to the public sector.

Sources: US Bureau of Economic Analysis, MyGovSpending.com, the Committee for a Responsible Federal Budget, Wall Street Journal


(This article first appeared in the June issue of Smart Girl Nation.)

BUSTED BOOMERS

Mismanaged Entitlements and Generational Bankruptcy

Will You Pay? Or Someone Else?

"...The boomers are stealing our future..."  I overheard these words from a 35ish fellow talking on his cell phone. I'm a boomer. He is right.

Social Security and Medicare together are by far government's largest expenditure. They account for 22% of federal, state, and local spending.  Next in line is education at 15% and defense at 13%. 

Social Security and Medicare pump out an average of $50,000 annually per retired couple whether seniors need it or not. According to Robert Samuelson, a quarter of households over the age of 65 have incomes that exceed $75,000 annually.

The fabled trust funds are just that - fables.  From a taxpayers' viewpoint, the trust funds are irrelevant. They never held any real money.  The trust funds can pay out only if citizens pay in - with higher taxes, fewer public services, or borrowing yet more. 

Holistically, the boomer's retirement picture is even worse. In 2007, before the recent recession, the median household aged 55-65 had wealth of only $250,000. The cost of a barebones retirement is in the neighborhood of $600,000 to $800,000 depending on assumptions. That $350,000 to $550,000 shortfall can only be closed if seniors' cut living expenses or youngsters pay up.

A hard view of the situation is that seniors consumed their earning years while relying on Social Security's "don't worry, be happy" financial structure. Only the boomers are financially responsible for their own mistake.

The softer, more emotionally soothing view is that the retiring boomers are senior citizens stuck in a tight spot. How they got there does not matter. They need a big financial hand from the youngsters in the pursuit of one version of fairness. 

As younger people living in the boomers' wake come to grips with the problem, a middle position seems logical. The boomers dallied while the most anticipated train wreck in history unfolded. They were negligent in planning for their retirement. 

Therefore, the Woodstock generation should take a large portion of the financial responsibility by accepting lesser subsidies.  Subsequent workers will pony up some of the boomers' shortfall out of the goodness of their hearts. 

So far, young people are too busy studying, building careers, and raising families to pay much attention. So not surprisingly, today's proposals put most of the burden on them.

Post-boomers will be prudent to make sure this does not happen again. So they'll engineer a stronger retirement funding mechanism.

There are only three ways to fix today's problem. 1) Cutting senior subsidies puts the burden on boomers - unless, of course those benefit cuts are pushed into the future. That puts the cost on youngsters.

2) Raise taxes. Here, again the weight falls on youngsters because they'll be paying those taxes.

Or 3) reduce the cost of retirement. This could be a very rich vein. US health care is two to four times more costly than other rich country medical systems. Productivity savings of 6% - 10% of GDP are ripe for harvest...sufficient to ease the transition to a new system. 

Chew on this issue. Don't discard proposals condemned as politically undoable now. Times change.  Cutting current benefits, means-testing, pushing medical cost savings, prioritizing disability, and private accounts all have great potential.

Enough stress is building in the system to force a torrent of change over a short span.

With the cohesion that Smart Girl Nation Summits build, and a little luck, the Smart Girl generation can enjoy a theft-free future.

(This article first appeared in the May issue of Smart Girl Nation.) 

The Tax Man Cometh

This year 38%  of America will be funded via coercion.

The tax man cometh. This month and every month. This day and every day.

Citizens obediently dish out the shekels in the certain knowledge that if they refuse, the state will respond with serious ugliness. 

Take Kaleesha Cashstrapt, a woman with a husband and two kids. Together they expect to earn a very typical $75,000 in cash income this year. Government will pump $30,000[1] directly and indirectly from her family into its own wallet.  

Government has punctured Kaleesha's finances with a variety of intravenous tubes. Income taxes - often thought of as a big, brazen pipeline - account for only 14% of Kaleesha's total tax.  Social Security and Medicare suck out another 37%.  Sixteen percent drips out in deceptively small streams via sales and other taxes on everyday purchases. Then Kaleesha's family ultimately pays all business taxes through higher prices, lower wages, or smaller returns on stockholdings. That's 20%.  Property taxes make up most of the rest.

But we're still missing a big piece.  Borrowing is simply taxes deferred. So add another 33% to that tax burden.

Note that the rich pay more.  Good estimates show the top 4% of families by income paying 32% of all federal, state and local taxes. As a portion of economic income (which includes more than cash income) the non-rich pay 26% of their income in taxes. The rich - those earning above $200,000 - pay 30%. 

Clearly, the threat of force is necessary to collect taxes. Government is expected to spend 38% of GDP this year. So 38% of the economy is coercively based. America's founding ideals appear forgotten. George Burns may have inspired the public sector when he cracked, "Sincerity is everything. If you can fake that, you've got it made".

With 38% of citizens lives deemed public property, raising taxes may no longer be the path of least resistance. 

Finally citizens are paying attention to public finances. Rolling back the concentrated force of government won't be easy. Nor will taxpayers ever be rubes again.

The tax man will never goeth away. Nor should he. In time, however, he may be satisfied little more than a simple cup of tea.

(This piece was first posted in the April 2011 issue of Smart Girl Nation.)

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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.

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