Saturday, May 14, 2011

How to reduce the deficit and balance the budget, from my point of view. (Part 4)

As you many know, we are locked in a fierce budget between Democrats and Republicans. Democrats went to raise taxes on top earners and mildly cut spending, while Republicans want to cut, no butcher spending and maintain and even reduce taxes on the top earners, claiming that if we raise taxes on the top earners, the economy will slow down because those are the people that produce jobs in this county. Thus, if any new regulation or taxes that is introduced, a minute will not pass before they label it as "job-killing."

To both parties, you are both wrong.

To balance the budget, you must raise taxes and cut spending at the same time. It's just common sense. Sure, it'll  involve make some tough choices, but when you have a growing deficit and debt, those choices are really necessary. Those who do make those tough choices and follow through with it display leadership, something we haven't seen from both Democrats and Republicans alike in a long time.

Taxes
Here comes the part in which almost everyone drags their feet, comes up with plans that really don't sound good (I'm looking at you, Paul Ryan) and where the most bitter and nasty political fights arise and occur. Ah taxes. We can always count on you for good old political rhetoricpolitical nonsense. But enough with the nostalgia. Let's get down to business. You may or may not note how aggressive I might be in this section, for better or for worse, it all depends on your opinion. Let us start with those estate taxes. I have three choices on the menu, and here they are (these come directly from the New York Times's Budget Puzzle)-

  1. The Lincoln-Kyl Proposal- As we all know, there was no estate tax in 2010. This proposal by Senators Jon Kyl, an Arizona Republican, and Blanche Lincoln, an Arkansas Democrat, is the most moderate of the estate-tax options here. It would exempt the first $5 million from any taxable estate and index this level to inflation over time. Any estate value above $5 million would be taxed at a 35 percent rate. 
  2. The Obama Proposal- President Obama's proposal is more agressive than Kyl-Lincoln, but would still cut the estate tax when compared to the Clinton years. The Obama plan would exempt the first $3.5 million from any taxable estate. Any estate above $3.5 million would be taxed at a 45 percent rate. These are the same provisions that applied in 2009, as part of the 2001 Bush tax cut. 
  3. Return to Clinton-Era Levels- Under President Bill Clinton, the estate tax exempted $1 million from any taxable estate. This level would not grow with inflation over time, subjecting more estates to the tax. The rate would start at 18 percent and climb to 55 percent, as it did in the 1990s. The 55 percent rate would begin at $3 million. 
The first one (Lincoln-Kyl) is not aggressive enough, so that's other of the shuffle. President's Obama's proposal is aggressive, but not aggressive enough. So, the rates would return to Clinton-Era levels. Next up- investment taxes. We have two choices, and here they are-
  1. The Obama Proposal- Capital gains and dividends are now untaxed for couples with incomes below $68,000. For everyone else, the tax rate is 15 percent. This option, proposed by President Obama, would raise the rate to 20 percent for households making roughly $250,000 a year and above.
  2. Return to Clinton-Era Levels- This option would return rates to their level under President Bill Clinton: 10 percent on capital gains for low-income households and 20 percent for everyone else, while dividends would again be taxed at the same rate as ordinary income. 
Again, I would choose a return to the Clinton Era Levels (Wow. I seem to be going all 90's.) I like I said in earlier posts, we need to make need to make some tough choices if we want to close the deficit and put this country on the long road to eliminating the debt. Next up on my plate- The Bush Era Tax Cuts. Here is where things get even more tougher. We have the two options, which are among the subjects of the most heated debates that takes place in Capital Hill. These are- 
  1. Allow expiration for income above $250,000 a year- This option would allow the expiration, on the next time this comes up for renewal, of the Bush tax cuts for the top 2 percent or so of households on the income distribution – those making $250,000 or more. On average, the change would equal about 2 percent of a given household’s pretax income.
  2. Allow expiration for income below $250,000 a year- This option would allow the expiration, on the next time this comes up for renewal, of the Bush tax cuts for the bottom 98 percent or so of households on the income distribution – those making $250,000 or less. On average, the change would equal about 2 percent of a given household’s pretax income. 
This was not that easy of a choice as I expected. I forced to think about it for a long time, to weigh it out. If I allowed the expiration for incomes above $250,000, I would have $54 Billion to add on for 2015, and $115 Billion for 2030. If I allowed expiration for incomes below $250,000, I would get $172 Billion for 2015, and $252 Billion for 2030. I'll take number one. Next up, I would subject some incomes above $106,000 to tax, because when the payroll tax – which finances Social Security and Medicare – was created, it covered 90 percent of all income. Today, with a ceiling at $106,800, it covers closer to 80 percent. This option would gradually raise the ceiling, until 90 percent of income was again subject to the tax. Next, I have again two choices for tax reform, and here they are- 

  1. The Bowles-Simpson plan- This would reduce tax breaks for companies and individuals, while lowering tax rates. On the whole, this plan would raise revenue. It would cut all tax breaks other than the child and earned-income tax credits and those for mortgages, health and retirement benefits. The corporate tax would then be cut to 28 percent, from 35 percent, while individual tax rates would be cut for all brackets too.
  2. Eliminate loopholes, but keep taxes slightly higher-  This option is the same as the previous one – except that tax rates would be cut less, raising more revenue to reduce the deficit.
Again, I'll go with the more aggressive and pick number two. Raises more cash to fight the deficit, and I don't want to see another headline that states that GE paid no taxes to the United States. I would also reduce mortgage deduction and others for high income, because the benefits of mortgage-intrest deduction flow mostly to those who make big mortgages, aka those of high income households. However, I have some limits. I will not impose a National Sales Tax, or a Carbon Tax, or a Bank Tax either. I know when enough is enough. 


So far, together with the two previous posts in this series, $564 Billion of the 2015 projected shortfall of $418 Billion has been accounted for, and $2,027 Billion of the 2030 projected shortfall of $1,345 Billon has also been accounted for. Thus, it leaves me with a suplus of $146 Billion for 2015, and a $682 Billion suplus for 2030, all which will go to reduce the deficit. Here is a breakdown-


  • Domestic Programs and Foreign Aid- $59 Billion out of the $418 Billion shortfall in 2015, and $62 Billion out of the $1,345 Billion shortfall in 2030 has been sliced off.
  • Military- $61 Billion out of the $418 Billion shortfall in 2015, and $107 Billion out of the $1,345 Billion shortfall in 2030 has been sliced off.
  • Health Care- $78 Billion of the $418 Billion shortfall in 2015, and $823 Billion out of the $1,345 Billion shortfall in 2030 has been sliced off.
  • Social Security- $19 Billion of the $418 Billion shortfall in 2015, and $301 Billion out of the $1,345 Billion shortfall in 2030 has been sliced off.             
  • Taxes- $347 Billion of the $418 Billion shortfall in 2015, and $734 Billion of the $1,345 Billion shortfall in 2030 has been sliced off. 
For those who want see how I did it, and with the complete numbers, check it out here.

Next Up- Reflections. 

Cutting & Taxing-This is the fourth in a series of articles that will examine how to balance the Federal Budget and in the long run, reduce the long term deficit.