Friday, December 15

Leveraging The Bush Tax Cut Debate – Killing Multiple Birds With One Stone

Google+ Pinterest LinkedIn Tumblr +

As the lame duck session of Congress convenes, I am sure we will here a lot about whether or not and how the Bush tax cuts should be handled since they expire at the end of this year. If nothing is done, every U.S. tax payer will pay more in income taxes next year. If all of them are renewed, then everyone will not see any increases in taxes.

The main sticking point between the two factions within the American political class is whether or not to renew the tax cuts for those American families earning more than $250,000 a year or individual Americans making more than $200,000 a year. Obama and the Democrats want those hard working, higher earning Americans to pay more while the newly invigorated Republicans want all of the tax cuts renewed. Thus, I am sure that unless things change, we will have more childish debate, as we always do with our politicians, as they pit one group of Americans against another for their own political gain, the good of the country be damned.

However, it does no have to be that way. The following paragraphs explain a way for all parties to get what they want, the deficit and national debt gets addressed, and pertinent national needs are addressed. But before we explain what could accomplish all of this, let’s review where we currently are:

– The Obama administration’s economic stimulus program was supposed to address infrastructure needs, using stimulus funds to not only create work but also fix the country’s crumbling infrastructure. However, an in-depth Associated Press investigation in late 2009 revealed that fully half of the stimulus construction money set aside to fix crumbling bridges was actually spent on fixing bridges that were in perfectly good condition.

How could this type of screw up occur? Because the political class wanted to direct taxpayer money to bridge projects in their home districts and states, regardless of whether or not it was needed. Thus, the political class ended up fixing things that did not need to be fixed and wasting the opportunity to create true infrastructure repair only where it was needed.

– Other parts of the economic stimulus budget was spent on out of control and useless projects. These wasteful projects ranged from using taxpayer money to research and photograph exotic ants in east Africa to spending hundreds of thousands of stimulus dollars to replace windows in a Mt. St. Helen’s government visitors center that is currently shut down and will probably never be opened up again. Thus, the political  class spent and wasted money on projects that had not chance of being successful in fixing a national problem, spent funds on projects that affected very few U.S. households,  and created no long lasting jobs, all objectives of the stimulus program.

– If the Bush tax cuts are not renewed for the higher earning Americans, the budget deficit will be expanded by about $70 billion a year for the next ten years. While everyone wants to reduce the deficit, Obama and Democrats seem fixated on this group of Americans and their relationship to the budget deficit even though the Democrats have increased the budget deficit about $1.4 TRILLION a year for the past four years. Thus, this $70 billion would have reduced the Democrat’s annual wild spending by only about 5%. And this assumes that the $70 billion was actually saved and used to reduce the deficit and national debt. In all likelihood, if this additional $70 billion is sent to Washington, it will be wasted by the political class.

– Our national debt is currently over $13 TRILLION and growing steadily. One of the biggest drivers of the national debt is the ever growing budget required by Social Security to meet their obligations.

– I came across  an interesting article by Joseph DiStefano in the Philadelphia Inquirer this past Sunday. According to the article, a lot of super-rich and regular rich Americans think that they should be taxed at a higher rate. More than 400 hundred of these richer than average Americans signed a petition that called on Obama and Congress to let the Bush tax cuts expire for the higher earning Americans. Consider a quote form Warren Buffet in the article:

“People at the high end – people like myself – should be paying a lot more in taxes.”

Many of those quoted in the article wanted to see their additional taxes go for investment in education, health, job creation, transportation, infrastructure, and renewable energy. Many of them lambasted past tax cuts for ruining the economy.

While I find it interesting that these rich Americans is that none of them claimed to have paid higher than required income taxes through the years. If they really felt so bad about not paying enough taxes and felt that their lower than historical tax rates were destroying the country, their words would have had a lot more meaning if they had proudly stepped forward over the past few decades and written checks for additional tax dollars, payable to the U.S. Treasury.

Okay, the above paragraphs set the stage. Now, let’s solve the problem:

1) First step is to maintain the Bush tax cuts for those American families earning less than $500,000 a year and let them expire for families earning more than $500,000. This keeps the tax structure unchanged for over 99% of the population and raises taxes for less than 1% of Americans.

2) By raising the Obama target from the $250,000 to $500,000, my calculations show that only about $56 billion additional dollars will annually flow to the government and political class, not the currently estimated $70 billion a year. This difference would be made up by upping the taxes imposed on those patriotic-minded Americans like those that signed the petition described above. The IRS would go back over the past ten years of tax returns for these super-rich Americans who think they underpaid their past taxes and re-calculate their taxes as if they were taxed at the higher rates, pre-Bush tax cuts. Since they want to be so patriotic, let them put their money where their mouth is.

The IRS would allow these super rich Americans to make up their additional taxes over a ten year period. For example, if Warren Buffet should have paid an additional $100 million if the Bush tax cuts had never been implemented, he would now have ten years to repay that deficit. That way those who think they have been under taxed over the years can make the amends for their shortfall. It would certainly make their signing of the petition more impactful.

3) At the same time, we would adjust the Social Security rules according to Step 11 in “Love My Country, Loathe My Government.”  Step11 calls for the Social Security eligibility rules to be changed so that any American with over $3 million in assets and wealth, not income, would not be able to draw any checks from Social Security until their net worth was under $3 million.

$3 million in assets should be able to conservatively generate about $150,000 a year in income, placing that person’s income in the top 5-6% of all U.S. earners, i.e. they do not need the extra Social Security money to live comfortably. This sacrifice on the part of those types of Americans that signed the above petition would allow them to further contribute to the good of the country. By not paying out to those Americans that seem to have too much money and wealth, we can protect the program for those Americans that truly need the Social Security coverage for basic living needs and reduce the national debt at the same time. Two birds with one shot.

4) The biggest component of the program would be that two virtual lock boxes would be created to protect additional tax dollars from the political class. Half of the additional dollars from allowing the Bush tax cuts to expire for those earning over $500,000 a year would be put in a lock box that would only be used to pay down the national debt. The political class would never be able to get its hands on the additional funds, it would go straight from the Treasury to the pay down of the national debt.

The other half of the additional dollars would be put into a lock box that would be used to address the issues that Warren Buffet and others who signed the petition discussed in the article. Infrastructure projects would be determined on their merit and not on how well a politician would earmark money for unneeded projects in their home state or district like they did with the bridge stimulus money. The last thing we want to see is all of this additional money be spent as foolishly as the stimulus money was spent.

An independent commission would be set up to screen projects based on needs. No politicians would sit on the commission. One model might be the Public/Private Consortium that is buying up distressed mortgage securities in order to clean up the financial mess in the housing industry. I would have no problem allowing those 400 signers of the petition to run the commission since it is their money we would be spending. Whatever process is used, it has to keep the political class out of the decision making process and be totally transparent relative to how projects are selected for funding, how the funding is spent, and how the results turn out.

Executing this plan would make everyone happy:

The Republicans would be happy since they protected more Americans from tax hikes (those making over $500,000 would pay more vs. those making more than $250,000) but still got the tax breaks extended for most Americans.

The Republicans would also be happy because they could claim they helped solve Social Security’s shortfall and reduced the national debt by reigning in Social Security costs by ending payments to those Americans with more than $3 million in assets and wealth.

Obama would be happy since his irrational disdain for higher earning Americans would be mostly satisfied with the Bush tax cuts expiring for the richest Americans.

Obama would also be able to claim that he is a deficit cutter with the rich sacrificing for Social Security solvency.

People like Warren Buffet would be especially happy since they would not only be paying more taxes going forward, like they want to, but they also would be able to make up for their low taxes paid over the past ten years with the IRS billing them for their shortfall.

The economy would be happy since we would have some certainty in tax policy, reducing the uncertainty in the minds of consumers and small business owners.

We would all be happy since we would know that the additional taxes would be put to good use via the lock boxes, i.e. the actual reduction in the national debt and the spending of money on only needy infrastructure and other worthwhile projects. 

Thus, we would solve some important problems with a little compromising on everyone’s part, i.e. killing multiple birds with one shot. The only people that would be unhappy would be those politicians that could not spend the additional taxes on their pet projects and unneeded expenditures. But that would be a good thing. We do not need more ant research and photographs and replacement windows that no one will ever look through.


About Author

Leave A Reply