Tax code needs lower rates, broader base

Washington is again engaged in a tax debate. Each year, lobbyists and political contributors persuade politicians to insert new loopholes. As a result, the four million-word, 74,000-page Internal Revenue tax code is riddled with special interest provisions.

The mind-boggling complexity of the tax code is a money machine for lawyers, accountants, and huge corporations. Americans spend six billion hours and $10 billion annually preparing and filing their income tax returns.

This is the exact opposite of the broad tax base with low rates that would best serve the American people. A broad-based income tax is one in which whatever you earn is taxable. Taxpayers lose their deductions but get a simpler and fairer code, and much lower rates. If the tax rate is low, economic decisions will be based on business and personal considerations, not tax implications.

In April, the Trump administration released a broad outline of proposed tax changes that would reduce the corporate tax rate from 35 percent to 15 percent and include a one-time tax of 10 percent on overseas profits designed to bring the estimated $2.6 trillion stashed abroad back to be invested in the United States.

The plan cuts individual tax rates and reduces seven brackets to three. The top rate falls to 35 percent from 39.6 percent and the lowest rate starts at 10 percent. The plan also doubles standard deductions. It does not specify to which income levels each bracket would apply. It also eliminates the federal income tax deduction for state and local taxes, except for mortgage interest and charitable contributions.

The Trump administration promises that 3 percent annual GDP growth would make up for potential revenue losses. On the other side, Democrats argue that the White House and Republicans would exacerbate income and wealth inequalities by throwing money at the rich at the expense of the middle class.

Republican deficit hawks argue the plan will add trillions to the national debt over the next decade. They argue that deficit-financed tax cuts usually impede growth. For example, increased government borrowing drives up interest rates and reduces the financing available to the private sector. They want revenue neutral reform under which tax cuts are offset by closing loopholes.

Among the risks is that Americans will not spend the money they get from tax breaks, instead saving it or using it to pay down debt. Corporations could also decide to use the money to increase dividends, juice up executive pay and generate a fresh wave of mergers and acquisitions. 

Tax cuts are often confused with tax reform, which restructures the code to make it simpler, fairer, and more efficient. Cuts are easier than reform, which is a tough sell because there are winners and losers.

The United States needs a completely new tax code; one that reduces rates; broadens the tax base; and eliminates back door spending in the form of exemptions, exclusions and tax credits.

This kind of reform was accomplished in the Tax Reform Act of 1986, which reduced the top marginal rate for individual taxpayers from 50 percent to 28 percent, eliminated about $100 billion in loopholes, and taxed labor and capital at the same rate. It also cut the basic corporate tax rate from 48 percent to 34 percent and eliminated many corporate deductions.

But since then lobbyists and political contributors have succeeded at restoring tax breaks, which narrowed the base. As a result, rates had to increase to generate the same amount of revenue.

What needs to happen is clear, but don’t hold your breath waiting for it to pass. Congress and the White House are distracted by the investigation into possible ties between former Trump aides and Russia, and the Senate healthcare debate could drag on through the summer.

Meanwhile, momentum for major tax cuts or major infrastructure investments has stalled. This time next year, leaders in Washington will likely still be arguing about tax reform.

Originally published: June 10, 2017

Candidates run from, are ignorant about, and mostly just ignore the national debt

There have been few signs that the three remaining presidential candidates seeking to capture the nation’s commanding heights are willing to confront the subject of America’s public debt, which has grown to over $19 trillion, more than the gross domestic product. It is estimated that by 2023, entitlement payments, military spending and interest on the debt will consume 100 percent of tax revenues.

All three have behaved like they know less than zilch about the subject. Assuming the final match-up is Hillary Clinton versus Donald Trump, you get to choose from two disliked candidates who give egomaniacs a bad name. All in all, this match-up is not a battle of good against evil. It is a choice between bad and less bad.

When it comes to the debt, all three remaining candidates have behaved like Scarlett O’Hara in “Gone with the Wind” who reacted to every adverse circumstance with the statement: “I can’t think about that right now. If l do, I’ll go crazy. I’ll think about that tomorrow.”

Donald Trump, the presumptive Republican nominee, did wade into the subject several weeks ago. There are a thousand things you can say about Trump, some of which you can even print in newspapers. But we have come to know one thing above all else: He’s going to say what is on his mind.

Several weeks ago, Trump made the stunning suggestion that maybe Uncle Sam can save a few shekels by renegotiating the public debt and paying back holders of United States bonds less than 100 cents on the dollar. Such action would be tantamount to a default. His proposal overshadows everything he has said about the economy. It was greeted as lunacy and created quite a kerfuffle in global financial markets, which found his suggestion as enticing as exploratory surgery.

Despite concerns about the United States putting its fiscal house in order, Treasury securities are seen as among the world’s safest, if not the safest, debt because they are backed by the full faith and credit of the United States government. No other investment carries as strong a guarantee that interest and principle will be paid in full and on time.

Responding to the tsunami of ridicule that greeted this absurd suggestion, Trump walked back his comments the following day, saying he never meant to suggest he wanted the United States to default on its debt.

Some perspective is in order here regarding who owns our nation’s debt. American stakeholders own nearly $13 trillion of the more than $19 trillion. More than $5 trillion is held by trust funds such as Social Security and the Highway Trust Fund; $5.1 trillion is held by individuals, pension funds and state and local governments; and the balance of$2.5 trillion is held by the Federal Reserve.

Of the remaining $6.2 trillion, China holds $1.3 trillion, followed by Japan with $1.1 trillion, and the $3.8 trillion that’s left is held by other countries such as Saudi Arabia, with $117 billion.

Foreign governments don’t own us; we owe us.

While nobody knows for certain what would happen, failing to pay creditors anything less than the full amount owed undermines the very notion of the full faith and credit guarantee of United States government sovereign debt. Americans whose savings and retirement accounts include treasury bonds would be hurt. International investors would panic and raise future borrowing costs for the United States government by demanding higher interest rates since the debt would be seen as a less safe investment. This would prompt interest rates around the globe, which are often tied to U.S. treasuries, to spike. After all, U.S. treasuries are the pillar of the global financial system.

Sadly, it’s time to toss in the towel, the tablecloth and the rest of the accoutrements and admit it: We got these candidates to this point; they are what the American public deserves.

Originally published: May 28, 2016

Eating soup with our hands

With the usual drama and theatrics, Congress and the White House put together a last-minute New Year’s Day deal to avert pushing the economy into recession. As a result, we have temporarily overcome our cremnophobia – fear of cliffs.

But once again, our leaders averted immediate crisis without addressing any of the nation’s most pressing fiscal problems.

By way of background, during an absurd tangle over the nation’s debt ceiling in the summer of 2011, Congress and the White House agreed to get serious about reducing the deficit and accumulated debt. But when they couldn’t agree on how, they instead struck a deal.

Congress created a super committee that was given the job of developing a long-term budget solution. The deal stipulated that if the committee failed, a $600 billion mix of spending cuts and tax increases would automatically take effect on January 1, 2013. Half the spending cuts would come from the defense budget and half from domestic spending.

Nobody wanted the cuts, but that was the point. They were designed to be so intolerable that Congress would make a deal to avoid them.

Predictably, it didn’t work. The super committee failed and Congress and the White House did nothing until just before New Year’s, when they passed the American Taxpayer Relief Act of2012.

The law makes most of the Bush tax cuts permanent- at least for now. Current tax rates were extended for individuals with incomes up to $400,000; $450,000 for married couples.

Households above these thresholds will see their income, capital gains, dividend and estate tax rates increase slightly. The law also permanently fixes the Alternative Minimum Tax and extends an additional year of unemployment benefits to two million people.

It also postpones the first installment of automatic spending cuts for two months while Congress works on a fiscal plan and the country hits the current $16.4 trillion debt ceiling. Congress and the White House again star as Scarlet O’Hara- I’ll worry about it tomorrow.

After all the sound and fury, the headline number for increased revenue is about $600 billion over 10 years. But the Congressional Budget Office estimates that compared to going off the cliff, this deal will add about $4 trillion to the debt during that time.

The inconvenient truth is that the fiscal cliff minideal was another missed opportunity to remodel our fiscal house. It dodged all the important questions about entitlement reform, stabilizing debt as a share of the overall economy, and comprehensive tax reform that helps America’s long-term prospects by promoting growth and generating revenue.

But special interests benefited from the deal. Several tax breaks that were to lapse at the end of 2012 were extended.

Accelerated tax write-offs for NASCAR track owners will cost taxpayers about $70 million. Film and television producers get to expense the first $15 million of production costs incurred in America to encourage domestic TV and film production, at an estimated cost of about $430 million.

Tax perks for algae growers total $59 million, consumers get $7 million in breaks for buying electric motorcycles and manufacturers of energy-efficient appliances retain perks worth about $650 million.

Meanwhile, the expiration of the temporary 2 percent payroll tax cut means the average American worker will pay another $1,200. So much for good old-fashioned middle class tax relief.

As Democratic Sen. Joe Manchin of West Virginia noted, “Something has gone terribly wrong when the biggest threat to our American economy is the American Congress.”

Now it remains to be seen whether the recent fiscal follies are a coming attraction for the next crisis, when Congress must again raise the $16.4 trillion debt ceiling in March.

Is this any way to run a country? To paraphrase 19th century writer Sydney Smith, if Americans had made the same progress in the culinary arts as they have in governing themselves, they would still be eating soup with their hands.

originally published: January 12, 2013

America’s debt is the real fiscal cliff

Escaping wall-to-wall fiscal cliff headlines is a full-time job. The media constantly tells us we cannot sleep until we solve the crisis, which, of course, puts people to sleep.

If we go over the fiscal cliff, we lose $600 billion in spending we can’t afford and we increase taxes that should have been raised a long time ago. One reason the situation has come to this is that politicians don’t like to talk about taxes, except to use them the way a matador uses a red cape.

The fiscal cliff, while serious, is a short-term problem. The real cliff is America’s addiction to debt. The average American household’s share of the national debt is now about $137,000. This is an epic, generational tale, while the fiscal cliff is a short story.

In fiscal 2012, the federal government spent about $3.5 trillion, or about 23 percent of gross domestic product. It collected revenues of about $2.4 trillion, or 16 percent of GDP. The resulting $1.1 trillion shortfall marked the fourth year in a row the deficit exceeded $1 trillion.

The federal government borrowed about 30 cents of every dollar it spent. As the late U.S. Sen. Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking about real money.” Today, substitute trillion.

By the end of fiscal 2012, total government debt was more than $16 trillion and growing feverishly. Our GDP, the value of goods and services produced in the United States each year, is about $15.7 trillion. The ratio of debt to GDP is a measure of our production and ability to service the debt.

The federal debt as a percentage of GDP is at the highest level since the end of World War II. It has increased from 35 percent in the 1990s to over 100 percent, which means our debt is now bigger than the entire economy.

To make matters worse, it is estimated that our total unfunded liabilities are north of $60 trillion. Medicare and Social Security alone make up 75 percent of these liabilities. In the near future Medicare, Medicaid, Social Security, and interest payments will consume all available revenue.

Needless to say, this kind of debt results in some scary interest payments. Despite the lowest interest rates in 200 years, America will spend around $220 billion on net interest on its debt in 2012, money that can’t be spent on other priorities.

If the debt problem is not addressed, annual interest payments are expected to top $1 trillion by 2020. Each point interest rates go up increases the payments by at least $150 billion per year.

If interest rates return to their historic average of about 6 percent, interest on the national debt will likely be the largest line item in the federal budget by 2020. It would slow economic growth, reduce our standard of living, displace other government priorities, require future generations to pay for current government spending and reduce our ability to respond to future crises.

In the long run, a growing federal debt is like driving with the emergency brake on, slowing an economy that already can’t get out of first gear. We will take on the economic profile of a third world country: a few rich folks at the top, scarcely any middle class and a vast peasantry.

With all their posturing, Washington political leaders have spent 90 percent of their time talking about less than 10percent of the real problem: the mounting level of debt. With all the talk about taxes on both sides, the new revenue would only address 5 percent of the problem.

We need comprehensive spending and tax reforms that are crafted to encourage economic growth. To do otherwise is sheer masochism. After all, our economy is what keeps America strong.

We must also keep in mind that leaders don’t lead without the consent of the governed. It may be, as Shakespeare’s Cassius said, that the fault lies not in the stars but in ourselves.

originally published: December 15, 2012