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Saturday, December 15, 2012

I Put a Deal on the Table

 

The lack of anything concrete coming from either side on the cliff debacle is troubling. I don’t think the process should be as hard as it is made out to be. I have a plan. I try to address all the hot-button issues. I also try to force significant concessions. I attempt to craft something that has a chance of working.

 

Before the specifics, I have to address the broad topic of “Debts and Deficits”. My thoughts on the “big picture” drive some of the details in my proposal(s):

 

A) It is not possible, nor is it desirable, for the USA to have a balanced budget at anytime in the foreseeable future.

 

B) It is possible to reduce the deficits to a more manageable percentage of GDP. Achieving this will result in a lower trajectory of the rate of increase in the national debt.

 

C) All talk of deficits, budgets and taxes is a fools game. There is only one thing that matters. Economic growth will solve the debt problem, or it won’t

It doesn’t matter what the tax rate on the top 2% is, or if the retirement age is pushed out a few years. For the next ten-years, it will be grow-or-die. Washington has to focus on that side of the equation. As of today, all the focus is in the wrong direction.

 

It proved difficult for me to solve all of the crushing economic issues facing the country in 300 words or less. My thoughts are presented first in summary, after that, the details.

 

SUMMARY

 

 A series of compromise on taxes and spending that results with:

1) Income of $250 – $450 > to 37.5%.

2) Income of $450+ to 39.6%.

3) Income for <$250k Unchanged and made permanent.

4) Long-term Cap. Gains – unchanged.

5) Patch the AMT for one-year.

6) The Payroll tax for Social Security reverts to 6.2% –  A 2% increase.

7) Deductions for state and local taxes paid will be capped at $30,000. Deductions for mortgages and charity will be retained.

8) Inheritance tax will be 40% over $4m.

8) The Transaction Account guaranty will be allowed to expire.

9) Emergency unemployment benefits will be extended for one year.

10) The programed cuts in spending (the Sequestered Amounts) will be reduced by 50%.

11) Social Security and Medicare spending will be reduced by $1T from 2014 – 2023. 50% of the savings will come from Medicare, 50% from Social Security. The framework that achieves the savings at Social Security will be applied to both the Military and Federal Workers retirement funds.

12) A four-year, $500b spending program dedicated to infrastructure building will be established. A portion of this program will be funded with new federal excise taxes.

 

Now the long-winded discussion:

 

On Taxes

- The Bush era tax breaks for those under $250k should be made permanent. (Both sides can take credit for this)

- The Bush breaks for those >$250 will be increased as follows:

a) $250-450k goes to 37.5%

b) >$450 goes to the full 39.6%

The change in tax rates would be a substantial concession by Republicans. This is nearly 100% of what Obama has demanded. Note the carve-out for the $250-450 set. That actually is a significant portion of the top 2%, so when you look at the reality, the Republicans don’t do so bad.

This increase in taxes would fail to achieve the minimum of $800b of increased revenues that Republicans have offered. To bring the revenue number up to $1trillion (Obama now wants 1.4T, but he previously agreed to 800b) I propose that there be limits put on deductions. This is an issue that Republicans have insisted on. Democrats hate this topic as it hurts homeowners (mortgage deduction) and charitable giving (this is about Religion).

To defuse this very tender topic I propose to limit deductions on only one class of deductions. State income and local property taxes deductions would be subject to a cap. The cap would be around $30,000. ALL other deductions would remain as they are today.

Who would win with this cap on “other taxes paid”? Red states like Texas would win very big (no state income tax). NY, California and Illinois would get crushed (all big Democratic states with big income and property taxes). It would drive a stake into the political “prizes” in the country.

All the big-ticket fund raisers for the Democrats on both coasts would pay for this compromise. If Republicans want some additional revenue, and to set themselves up for 2014, they will push for this. The Democrats won’t have a leg to stand up on with any opposition.

 

-AMT would have to be patched over for another year. There simply is not enough time left for this complex topic to be worked out before New Year’s Eve.

This is a terrible, stupid, awful, unfair and ill-conceived tax; but some form of it is necessary.

The classic example is Mitt Romney. He made $10m and paid 11% tax. Sorry, there has to be a minimum. The current minimum level for AMT is an absurdly high 28%. I think it should be 20%. A new minimum tax has to be part of a deal; it broadens the base, it raises revenues and insures that fat-cats like Warren Buffett finally pay their “fair share” (I want Warren to get what he’s been saying).

Let’s be clear about the implications of a minimum tax. Yes, it does some good things, but it will also have the effect of reducing charitable giving. Mitt would not have given $4m to the Mormon Church if he’d been faced with a 20% minimum tax. The “tax-efficiency” of his giving would have capped out his charity at only $2m. (It’s about the money, after all)

Anyway, we’re talking budgets and taxes; hard choices have to be made. Last I heard, there was something about Church and State anyway.

 

-The 2% reduction in payroll taxes will be eliminate. Sorry. Either Social Security (SS) is a self-funded program that doesn’t add to the deficit (as so many liberals have claimed),  or it is an entitlement program that sucks down $170B a year from the general tax payers. Those who love SS can’t have their cake and eat it too.

Note: The 2% increase on payrolls is a very regressive tax increase. Come January, it will be felt by 155m workers. They will all hate that. This is a perfect opportunity for Republicans/Conservatives to swing popular opinion away from SS. This “mind change” of the voters away from SS is the only hope that Republican’s have.

 

-The current low tax rates on dividends and capital gains will be retain. However, the establishment of a minimum tax (see above) will raise the effective tax on capital to 20% for those who have incomes/deductions that make them subject to the minimum. Again, this is a compromise that both sides should be willing to accept.

 

-Inheritance taxes will be set at 40%, the threshold for the tax will be set at $4m. (another compromise)

 

 

Okay, that solves all the tax matters that people have been fussing about. Now the rest of the issues:

 

Regulatory

- Do not extend Transaction Account Guaranty (subsidy for banks, TBTF issue – Trust me, the world will not end when this happens).

 

- Extend unemployment benefits for yet another year.

 

These trade-offs are on political lines. No one should argue about this horse-trade.

 

Sequestered Spending

IMHO, the cutback amounts that were agreed to as part of lat year’s Budget Control Act were draconian. They were more of a “show-pony” to prove to the public that D.C. was serious. Recall that a lot of the maneuvering on this was driven to placate the likes of S&P. The motivations for setting the sequestered amounts were misguided. If there is to be a deal before the end of the year, a very big concession has to be made by both sides on spending.

Time does not permit much finesse in this important area. My simple solution is to cut the sequestered amounts in half.

 

Multi Year Stimulus Program

The problem, and the solution, is staring us in the face every day. The country needs a big investment in infrastructure. All our “stuff” is falling apart. Want construction jobs? Build things. Want high paying jobs? Build complicated things. Want economic growth? Build things that will have a long-term return on the investments. The list of things that need fixing/new is endless. The only question is, “Where does the money come from?”

 

I propose doing something radical. I would like to establish a national sales tax. The tax would be 1/2%; it would be applied to all retail sales EXCLUDING autos. The tax would be collected by the individual states. Washington would put up an additional $5 for every dollar of federal sales tax.

The retail sales number (again- ex-autos) is nearing $4T. A 1/2% national tax would raise only $20b. Such a small amount would not have a significant negative consequence to the economy. D.C.would contribute 5Xs the amount collected; bringing the total in year one to $120B. I would create borrowing authority for up to 75% of the next few years of anticipated revenues (this borrowing is secured by a dedicated source of revenue. This is a different type of debt, it gets paid back.) Borrowing will facilitate/accelerate the timing of the new infrastructure investments. 100% of all of this is spent on infrastructure – no leakage permitted. The states choose the projects.

$120b is a decent sized stimulus (equivalent to the 2% payroll cut). To be effective, there would have to be a commitment to do this for a minimum of four years. Every year, there would be an obligation of Congress to either extend it for an additional year, or let it die in the remaining three.

This would help the broader economy. Jobs would come fairly soon after inception; every month the demand for labor would rise. The results would be visible in  a matter of years (new roads, bridges, airports, seaports, water projects etc.)

What I am proposing is very modest. By itself, it will not create a boom. Economically, it is a step in a direction that must be taken. Remember, it’s grow or die. There will be opposition to any new tax, especially a federal consumption tax. It will add to the bill at the grocery store, gas pump and Wall-Mart.

Call me a fool, but I believe that everyone should have some skin in the game. Yes, the cost of a quart of milk for a family already living on the poverty line will go up by a penny. And the cost, all in, for those new spiked heels, will be $2.50 extra. But the fact is, the milk is probably being bought with food stamps, and who cares about the cost of those stilettos (or a boat for that matter).

I say to D.C., “Suck it up!” and get this done. If there is no movement on this front in 2013, then you can kiss off any chance for digging out of an economic hole for the rest of the Obama years.

The politics of this are interesting. I would like to hear a Pol say that this (or some/any version) is “off the table”. That legislator would get their picture in the paper, for being a fool.

The deficit hawks will not like this. It would add $100b a year onto the deficit ledger. To this, I say that there are two kinds of debt; one is bad, the other is okay. NYC’s Triborough Bridge has paid for itself 50Xs over. Same with the Golden Gate,the airports, the interstate, the water clean up/availability investments etc.

Who would love this plan? All fifty Governors would cheer. The states would have a pot load of money to spend. Yes, this will create its own set of problems, but governors can be held accountable a lot easier than some technocrats in D.C. If money has to be spent (it does) then I think it is better spent by the states.

Another group that would cheer, would be the 1,000,000 small business’s (and their employees) who would benefit. What needs building requires steel, aluminum, concrete; it needs welders, masons, truck drivers, architects, engineers and designers.

So far I’ve covered all of the critical variables (including a nifty stimulus idea), save two. What remains are the thorniest of all issues. What to do with the debt limit and what to do about entitlements (Social Security/ Medicare/all other federal retirement plans).

 

The Debt Limit

The debt limit is one of the dumbest things ever created. It is an issue that, at the extreme , could send the country into a depression in a matter of months. (We came fairly close a year ago.) The debt limit creates the opportunity for a self inflicted wound that could lead to a systemic implosion. With these things in mind, it’s easy to say “Fix this!”.

But, sadly, the debt limit is a speed bump that must exist in some form. The US debt trajectory is simply unsustainable. Something has to exist that acts as a “check” in the system. That check is not coming from the White House, Congress or the Federal Reserve. The only thing left holding back exponential growth of red ink is the debt limit. So, as flawed as it is, the concept of a debt limit has to be retained.

This would be a big concession by Obama. In exchange for giving in on this, the Republicans would be forced to set a new debt limit that would cover the country through the 2014 elections. The debt limit agreement would be held hostage to a resolution of the final, and most difficult of all issues, entitlement reform. There is not a chance in a million that there can be any agreement on entitlements in the next 17 days; the issue is too complicated and too emotive.

 

Entitlements

There would be a framework for reforms as part of a deal to get over the cliff. In order for all of the tax fixes and other compromises I’ve described to get inked before the lights go out, there would have to be a deal that outlined the scope of the cuts in entitlements. Both sides would know what has to be accomplished, and be committed to the process.

Legislators would have a short window to complete a final agreement. If there is no deal on what gets cut to achieve the agreed target by April, then everything falls apart in a very big way. The debt ceiling extension (required in April) will be contingent on a final agreement on entitlements. The targets for entitlement cuts that will be agreed to in December and made into law by springtime:

2014 – 2023 Cuts in Social Security and Medicare = $1,000,000,000,000.(The Big T)

The cuts will come 50% from Medicare, 50% from Social Security.

 

I can hear the screams already. Obama wins the election, then turns on his base and guts America’s favorite social programs? Not a chance! Hear me out.

- Over the ten-year period, Medicare (Does not include Medicaid and CHIPS) will pay out 4% of GDP. In real dollars that comes to $9T. $500B (5.5%) of savings/cuts has to be found as part of the final deal.

- Social Security will pay out $11 Trillion. Both sides of the aisle will have to find ways to cut $500b (4.5%).

What I’m proposing is by no means “gutting” these programs. If the folks in D.C can’t agree on cutting $1T out of $20+T over ten-years, the country would deserve the consequences (Shutdown, default, downgrade). To get the complete package of a cliff saving deal, all of the parties would have to agree to the $1t, and sort out the details in 90 short days.

Obama has said that he would have a discussion on entitlements, “sometime next year”. That doesn’t work, it’s not what most Americans want. It’s asking for a fight. Obama, a number of Democrats, and the House Republicans, have to do what the have already promised.

I’m certain there is a political consensus to take a walk in this direction. No “new thinking” is required. The tools to achieve this have been discussed to death. Age and COLA adjustments, means testing, more taxes on benefits, higher fees. A beat down on the providers, blah, blah blah.

It would not be difficult to suck $1t out of these two very big pieces of the pie. To a significant extent, this would have to be born by those with both means and/or income. We are headed in the direction where medical benefits will be priced at 100% of the Social Security checks for those who have done well for themselves. Sorry.

Liberals will hate this. Their opposition is ideological, not economics. I think they have no argument at all. The objective of the changes in entitlements is to strengthen these programs so that they can achieve what they were intended for. An insurance safety net, not a retirement program will free medical.

70+% of the people who get these benefits are heavily dependent on them for basic necessities. The goal is to ensure that the 70% get what they need, the 30% who are less dependent (or don’t really need it at all) have to pay a price.

One can’t take a more liberal position than this. So folks like Krugman, Pelosi and all of the other defenders of “the safety net” will have to stand by and watch this happen.

Conservatives won’t be pleased either, by and large, this is money out of their pockets. What they (and the country) get in return is an economic plan that has a chance, and a very important directional change for entitlements. That result would be worth the cost.


If Obama wants a legacy he will have to solve the fiscal cliff in a way that addresses the real problems the country faces. That means he has to take on entitlements. If Obama chooses to extend the Roosevelt Dream, there will be no fiscal cliff deal, and he will have no legacy at all.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 


 

Comments

  1. Driving spending to the moon and then “compromising” by raising taxes to fund it is a non starter in my book.

    Cut spending. That is where the problem is.

    • Jim Nazyum manages to say in two sentences what BK couldn’t say in 9999 words…

      Bruce — you simply have to get past the idea that every problem is solved with more taxes and more spending. That is how your deadbeat generation became bankrupt. No one will voluntarily give you any more credit (Bernanke is the only one still extending credit to deadbeats)

      You must cut government spending significantly or everything else you have to say is bullshit

      • Jim/Greg – My regular readers, and they think I’m out to lunch. Egad….

        Fellas, I put $1T of money on the table out of entitlements. No one has done anything like that. That would be the most most momentous cuts in expenses since WWII.

        And you think I haven’t scratched the surface.

        This shows how far apart things are. I took, what I believed to be, a centrist approach to putting a deal together that had a chance of getting inked. Either guys like you two, or the “lefties” over at ZH are saying, “No way”.

        Tells me that we’re going over the cliff. There is no agreement on any of this. No chance for compromise. No Deal….

        • Bruce —

          You supposedly put $1T of entitlement money on the table, but it is nonsense. Did you even fool yourself with that line? Any sentence that includes “$x spread over n years” (or variants of that) is nonsense. We all know that this sort of lie means that the first year’s cuts might happen, but just as likely they will just get re-added in a supplemental bill as soon as they can. And from the second to “n” year it simply won’t happen at all.

          More importantly, your cuts are against “government services” (cough) — not against government bureaucracy. Don’t make an ass of yourself and suggest we can’t get rid of half the idiots on the government payroll. If we do, government will still have much lower productivity than the private sector. It simply takes too many government losers to produce each unit of “service” (which is of lower quality anyway). The other half of the bureaucrats need to take massive pay cuts…. let them threaten to leave if they don’t like it — even if they have skills, they won’t get nearly the same pay out in the real world. Public servants should not make more money than the public they are supposed to serve — even if they were actually doing the work.

          Government needs to have a massive productivity increase to become economically viable. A lot more work needs to come from fewer bureaucrats, and those remaining bureaucrats need to be paid real world wages (on average, HALF what they currently get).

          Is that outcome likely? Probably not — ergo why so many globally dominant empires collapsed throughout history. The bureaucrats place their own jobs ahead of the greater good (ie society as a whole).

          Since “we the people” know that “them the bureaucrats” don’t give a crap about their customers, we have no interest in helping them. They are not on our team, and we all know it.

          As long as the debate is between higher taxes / less services — what we the people can do for them the bureaucrats — why would anyone compromise? Those corrupt arrogant pricks are supposed to work for us, not the other way around. Share the pain never seems to include the corrupt losers in Washington.

          Cut government headcount and pay-level. Companies that have bloated headcount and pay levels always fail (needing a bailout is failure). Government might have a longer time frame to work with, but they are not exempt from reality.

          So yeah, they are going over the cliff (they technically already did — bernanke is the only idiot still buying certificates of confiscation).

          The government doesn’t represent us anymore (they haven’t in decades), so why should we care?

          • Jim,MtnViewCA,USA says:

            “… they are going over the cliff (they technically already did — bernanke is the only idiot still buying certificates of confiscation).”
            Does anyone have handy the stats on how much debt is being bought by “us”, versus how much is being bought by, say, China, UK, Japan, private citizens and other traditional buyers?

            • @Jim — you can get “exact” figures for Fed purchases (they bot 60% of new issuance debt last year 2011, and a significantly higher percentage in 2012). Just to use an example, China may buy US debt directly, or they may buy it via London based hedge funds/asset managers — in which case it gets reported as “UK”owned. Same for a lot of OPEC buyers. Japan was the only country that tended to buy / hold US debt directly. They were just playing the yield carry (supposedly both countries are AAA / no risk) … but they got hosed on forex rates.

              As for domestic “traditional” buyers … keep in mind that many pension funds have investment policies that are price (yield) insensitive. The investment committee decrees that 40% of total assets shall be in US government debt. I just picked 40% because many pensions use a 60/40 stocks to bonds allocation. Those investment allocation policies do not get updated very often. That said, ask yourself how a fiduciary can defease liabilities at 7% or 8% rate, while collecting under 3% on the fixed income portion of their portfolio. Over the last 10yrs, the Vanguard S&P500 fund returned 6.34%, while intermediate term investment grade bond fund returned 6.35% (that bond fund assumes one spends the capital gains as well as the coupon, and it is based on much higher interest rates in the past).

              Pension funds will have to adjust their bond allocation WAY down (a lot more risk), or (b) require vastly higher contributions (damaging corporate profits), or (c) slash benefits / default.

              There is no way to defease retirement costs under Bernanke’s artificial rates, not even if you were responsible enough to save for your own retirement. It is mathematically impossible. Either the Fed has to normalize interest rates (which means staggering losses for the Fed and other over-levered hedge funds, not to mention higher interest costs for Uncle Deadbeat) … or pensions will be defaulted.

              Pension managers are aware of the problem, which is why they have been pushing Bill Gross (as proxy for bond managers in general) to “do something”. Gross has been telling them they cannot expect the same returns going forward, and he has been expanding PIMCO into more equities.

              China, Japan, OPEC, etc will have to decide how much of a loss they are willing to accept. Forex losses are easier to hide from their home populations, but the size of the losses might make that difficult too.

              As for the certificates of confiscation thing (remember the 1970s, the last time we tried this Keynesian stupidity?) CPI is running slightly over 3% yoy, and 5yr x 5yr forward TIP break even CPI is showing 3.3%. Long term CPI has averaged 3.4%. Meanwhile long bonds (30 year Treasuries) are yielding around 2.7% (before taxes). Yields are even less for shorter maturity bonds. You cannot keep up with CPI inflation, much less the true cost of living, using US Treasury debt. Over time, that loss of purchasing power will impact foreign buyers via a worse forex rate.

              The rest of the world isn’t as stupid as Bernanke. They know the depreciating forex game — actually they have a lot more experience with it than US citizens. They see the writing on the wall and they are trying to diversify as fast as they can. Other markets are not big enough to absorb an overnight exit from US markets.

              Uncle Deadbeat Sam is in really serious trouble, no matter how far Americans stick our heads in the sand. Raising prices for a low quality, overpriced product (as Bruce and the losers in DC are suggesting) is not fixing anything — its just another delay tactic to avoid making tough decisions. Unfortunately, the true cost of delay is the country will collapse — at least that is what happened historically to EVERY single country / empire that behaved this way.

              Cue the morons telling us that this time will be different…

  2. Means test retirement benefits by net worth and household income.
    Means test unemployement benefits by net worth and household income.
    VAT to replace FICA and most federal gotcha excise taxes that overall don’t collect much of the federal revenue in the first place.
    EIC for more seniors to rebate the VAT to them. ealderly income credit based on net worth and household income.
    VAT on everything excpet used stuff, insurance, school tuition and rent.
    Everyone pays including state and local government, not for profits and charities and block grant rebates to the states to kick it back to towns and give grants to not for profits. It’s less paper work and makes cheating harder.
    Income tax, raise the standard deduction a lot and no more joint returns and no itemised anything or tax breaks or loop holes or dependants.

    schools, get all the frills out of them and put them under parks & recreation, sports, drama, music and run the programs on weekends with volunteers and part time help. Stop warehousing the Kelly Bundy’s and Forrest Gumps of the world in high schools, lower the work age and make kids take enterence exams to get into high school.Thomas Jefferson said we should have a grammer school system and select the most promising students to send to high school and than the cream of the crop to a university, we should have no smart child left behind.

    estate tax 25% on everyone from the first dollar and call it the Bush baby tax instead of the death tax. It has a better ring to it than the kennedy kid tax or kerry kid tax or Koch kid tax and close the loop hole a few billionaires are using to give away their money without ever paying a penny of capitol gains taxes or income taxes.

    the above is a rough draft that would require lots of explaining and the details. It’s not worth the time to type it all out because nobody is going to listen to me anyways. The naysayers and defeatist attitude people in this country will cause the can to just be kicked down the road a little more as the hole gets even deeper.

    • How does any sane person recommend or defend an estate tax? You work your whole life, pay more than you fair share, then you’re volunteering to have the pigs take a full 25% of what’s left of your after-tax wealth and do the same to others ?!?!!!!

      Hard to say if that or ”means testing” is more offensive. Let me guess, you have no estate to tax or means to test. Either that or no brains in your head.

  3. Bruce, you fronted some good analysis and ideas. But let me put forth a completely different angle to this comment, “The lack of anything concrete coming from either side on the cliff debacle is troubling. I don’t think the process should be as hard as it is made out to be.”

    Indeed, not that hard. One very likely reason that it’s being made diffucult (this will make plenty of readers here go defensive, no doubt) is simply: GENDER!

    This is just 1 minute in length….give it a look: http://www.youtube.com/watch?v=LKlNzMXEx7s

    C’mon guys, get over yourselves.

    • So women hack politicians blowing smoke is better than men?

      Hard to tell if you’re mor sexist or they are. Imagine men or blacks saying the same thing about women or whites?

      Or maybe you were being sarcastic, in which case I say ‘Good one!’.

      • Sexism is not a part of the observation, or the video clip. No discrimination is being asserted.

        Simply, women are more interested in getting things DONE in the best way reasonably possible…… even if they have to sacrifice or compromise more than they hoped to. The draaaaging things on in hopes of pummeling the other side and then the victor struts around with a trophy held high for all to fawn over……is not what women are interested in. We want a world where all can thrive….not one where the more you lose somehow means the more I’ve won. That is sheer self-involved EGO at work (much more a guy thing).

        FYI, if interested, we also think that war sucks and if we had our way, it would be rare.

  4. I appreciate the thoughtful proposals, but to me it’s fascist garbage and I’d sooner see my family be killed while protesting most of these ideas than to agree to them for any length of time.

    There should never be taxes raised for ANYONE. save maybe those who pay nothing.

    There should NEVER have been deductions for motgage expenses or charity donations.

    There should NEVER be an inheiritance tax. That flies in the face of all legal and moral laws, much less basic human instinct.

    There shouldn’t even be a ‘retirement age’.

    Etc. Etc.

    Come up with ideas that don’t #### people over and rape their human rights.

  5. Why so serious? The US is an empire in decline and can’t be “fixed”. Let’s enjoy the ride and the bath houses before the Visigoths arrive.

  6. Conscience of a Conservative says:

    For those sides this is not about operating the government in a fiscally responsible manner but a fight over the future shape of the government and protecting one’s power base and the shape of what their vision of government looks like(big vs small , etc)

    • Fighting over which side of the Titanic to place the deck chairs is really stupid. Based on the status quo / current spending patterns, the future shape of government is: there is no future for Uncle Sam. It won’t be done in by al-qaeda or commies, or evil hollywood directors — it will have been squandered away by spineless leaders (in government and business) who refuse to live within their means

      We have seen the enemy, and it is ourselves.

  7. enjoy the decline says:

    Agreed Chancy Pants.

    Let.
    It.
    Burn.

  8. What a load of crap — you wasted how many hours coming up with a long winded way of saying “tax and spend, tax and spend, tax and spend”? This isn’t a new idea, its the same stupid crap that wanna-be Keynesians have been suggesting over and over for decades.

    Listen you deadbeat old man. Cut spending or retire in hell. Those are your two options — and choice #2 is the default scenario since you are such a spineless wuss

    • I “wasted” a bunch of hours on this crap.

      Sincerely,
      Dead Beat Old Man

      • Actually, it was a reasonably good compromise and is within the realm of what the politicians could agree on. However, you left some big elephants out of the discussion – military spending, homeland security, and the Department of Education. Military spending could be cut by 150B per year if we would just get out of stupid places we don’t belong. Homeland security is at least 50% waste. The Department of Education could be shut down tomorrow and the country would far be better off (I know a number of teachers and No Child Left Behind has turned into a disaster for average and gifted students). Add those up, we get around 2.5T over 10 years – way better than raiding SS and Medicare.

        • And actually, if you want to cut Medicare, eliminate Medicare Part D NOW. It was never funded. Social Security disability could also be cut dramatically – it seems to be the most out of whack and most affected by fraud.

        • Homeland inSecurity is 100% waste plus interest plus intangible costs on our rights & freedoms.

          And don’t forget the Drug Warscam.

      • that’s what Lincoln first said about the Gettysburg Address too

  9. BK — “A) It is not possible, nor is it desirable, for the USA to have a balanced budget at anytime in the foreseeable future.”

    Bruce, your initial premise is just plain wrong and insulting. Anything you come up with that doesn’t involve at least some inter-generation fairness is just more of baby boomers spending beyond their means and expecting someone else (younger) to make the tough choices for you. its the reason the country is bankrupt already.

    Your generation (as a group) has already spent far more than you made and far more than will ever be able to pay back. Unless you accept this, your government cannot be saved and it will go the way of dozens of failed empires before it.

    You have absolutely lost your mind if you think government spending cannot be cut in half with no impact outside the DC beltway. If democrats want to believe Clinton had balanced spending — lets start by cutting the federal government back to Y2K spending levels… no more TSA full of perverts, no endless “intelligence agencies” that don’t work, no Iraq/Afghan wars that no one knows why we are still there, no Dept of Homeland Screwing, no FNMA/FHLMC being transformed from mbs insurers to highly levered MBS hedge funds, no building any more buildings for government bureaucrats. Slash spending everywhere else. You can’t actually visit a government office without finding dozens if not thousands of redundant employees all over the place.

    IBM had to cut headcount to survive, so did GE. GM did not; they raised prices for crappy products instead…. you are proposing to have Uncle Sam do what GM did, and you will get the same outcome (without any entity able to do a bailout)

    You might as well have proposed to shut down the government entirely….

    Why don’t you go back to writing posts about the financial markets? You used to be good at that. Oh, right, your bloated government bureaucracy rigged the markets. Your big government thinking wrecked your own profession. Nice job!!!

    You are out of credit, and more importantly you are out of credibility.

  10. I see the Reagan cult members have dropped in to throw tantrums.
    Grab some more koolaid and go play bingo.

  11. http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2011.png

    49% of the budget goes to interest, social security and medicare/medicaid and somehow the budget can be cut in half and not felt outside of washington DC
    every department of everything would have to be shut down except social security and medicare/medicaid
    no veterans benefits, no military or defense contractors, no coast guard or boarder patrol or US Customs
    somehow it wouldn’t be felt outside of DC.

    The internet is great, the stuff people post is hysterical.

    • Dear Ingrate Public Employee “John1959″:

      We expect our public servants to do more with less — the same thing that has been and still is expected of we the people. We are fed up of listening to you assholes tell us that you need 8 bureaucrats to do the work of one private sector person.

      We can cut ASSHOLES (public employee headcount) in half, and trim salaries for the remaining assholes — and no one outside DC would know, and even fewer would care. The public sector would still be massively overstaffed by any private sector standards.

      We are also fed up of the constant blackmail and extortion attempts — some federal spending cuts can and must come out of federal employees, not 100% service cuts as has been the norm for decades. If private sector workers behaved like the ingrate assholes in the public sector (and GM unions), the economy would have collapsed long ago.

      No matter how patriotic, Amercians got fed up supporting overstaffed Detroit auto companies, and fed up of hearing about THEIR pensions, THEIR benefits, THEIR paychecks — while they produced gas guzzling, wood paneled station wagons with poor quality parts and poor assembly techniques. We have seen foreign car manufactures build cars of higher quality right here in the USA — so it obviously can be done, just not by Detroit.

      Guess what asshole public workers!!! The very same logic applies to you idiots. You produce a very poor quality product, and you expect to be paid an obscene amount of money to do so. And it takes 8 of you idiots to match the productivity of 1 private sector worker.

      So yeah, we got rid of the lazy overpaid dolts in Detroit, and we are going to get rid of public sector sloth next. We can cut federal workers in half, and you assholes will be the only ones to care (maybe you get some sympathy from still unemployed UAW workers?)

      If you don’t like my attitude, feel free to quit and go find a job in the private sector. You will get half as much money, less benefits, you will be required to show up on time and to work a full day… all stuff you are not exactly used to.

      FUCK YOU public employees!!!

  12. Bruce,

    Good draft, especially the mechanism for SS cash to fund Medicare for the means/income-tested 30%, and your references to the other big funds that never make the headlines.

    I’m sending the URL to one of my state’s senators, who is a member of the Gang of N (N > 1 but it changes occasionally).

    After the holidays, assuming I haven’t missed your views on this already, ponder how we convert the X% of Medicare that goes to the final weeks of life — I’ve read it’s 40% — from death care to health care or wellness or something else.

    Meanwhile, enjoy the holidays. With this post alone, you’ve more than earned it.

    Good luck with everything,
    TD

  13. Bruce, you missed the biggest money pit on the planet, otherwise known as the Pentagon. It’s time to end the empire before it ends us, and use the money as you mentioned – repairing our infrastructure. It is also time to downsize the 16 (acknowledged) intelligence (sic) agencies that couldn’t find the time of day, and along those lines let’s get rid of the Gestapo-whoops-“Homeland Security” , the TSA-holes, and the rest of the trappings of the USSA police state.

  14. I hate the raising taxes part but seeing as how politics is to a large extent a game of compromise, and since neither side has a super-majority even if they both act like they do, I could get behind your plan. Sadly we probably wont get a deal done in time and when we finally get something done it will probably suck.

    Bruce I thoroughly enjoy reading your writings, this one included, thanks for all the work.

    Happy Trading,
    Dave

    P.S-Have a great Christmas as well

  15. Bruce,

    The tax system is a mess. If you add more lipstick (national sales tax) to a pig it’s still a pig.

    “Inheritance tax will be 40% over $4m” – taxation without representation

    * As the first two posters stated this is a spending problem pure and simple.
    * Believing that politicians will fix the problem is akin to believing in unicorns.

    Chancy Pants is spot on…

  16. It’s really fasinating living in a country full of financially illiterate people that are emotional basket cases regurgitating sound bites they heard some other clueless person say.

    The only difference between a tax increase and spending cut is who pays.

    In the world of real math.
    We need to get people back to work and cut some and raise taxes some.
    We need to stop importing so much stuff, including oil.
    We need to look at state and local spending as part of the problem seeing as how 50% of the taxes collected are done at the state and local level.

    The tea party temper tantrums and tear party on wall street are amusing. They should get together with the government unions and have a giant group hug and find some evil villian to blame.

    • No, the only difference between a tax increase and spending cut is not who pays.

      The moderately glib phrasing might be satisfying but it ignores any distinction in the productivity of money left in the private sector as opposed to money taken by government. Let me begin with the obvious caveat that much money in the private sector is wasted and that some money in the public sector is employed productively. That said, however, money in the private sector is generally more productibe. So, if you have a spending cut, that money will result in more production, more economic growth than if you have a tax increase.

      In fact, a fair amount of what is taken from the private sector in taxes is positively destructive of productivity. Let me give you an example that I encounter on my job. The U.S. EPA runs a program called the National Pollutant Discharge Elimination System or NPDES (here’s a link to that portion of the EPA web site: http://cfpub.epa.gov/npdes/index.cfm

      Before any knees jerk, it’s, of course, a fine thing to want to lessen or eliminate harmful pollution. But . . maybe things have gone a bit far. As part of the NPDES, the EPA requires that anyone altering one acre of land file a Notice of Intent and prepare a Storm Water Pollution Prevention Plan. That’s anyone. Anywhere. If, say, you own 3 acres of land and you want to cut some trees to enlarge one yard and you’re going to re-grade some more of your land to create a little kids’ soccer play area all of which involves altering a total of 1 acre of land, YOU have to file a Notice of Intent with the EPA and prepare a SWPPP. That applies to anyone anywhere. It doesn’t matter if you’re not anywhere near water or a wetland or any endangered species. It doesn’t matter if what you’re doing doesn’t have the slightest thing to do with interstate commerce. If you alter one acre of your land, the federal government says you MUST file a Notice of Intent with them and prepare a SWPPP. Incidentally the last several SWPPP’s I’ve prepared have all been about an inch and a half thick. Go ahead and poke around on their web site to confirm what I’m saying. Especially here in the state of Massachusetts where any construction activity is more than adequately supervised, it’s a pointless, duplicative process. And it costs people money. The firm for which I work doesn’t prepare a document an inch and a half thick for free. This is one sort of thing that gets done with tax increases, existing government infrastructure expands to the point of absurdity and assigns itself new goals the pursuit of which may be a total waste.

      • I also deal with water treatment and water quality permitting, and your comments are spot on.

      • All it comes down to is who gets to waste the money, some annoying government sloth or mooch or some Mcmansion dweller here in the nation of waste. We have mini storages to store all the stuff people own. We have posers in 4 door bubba delux pickups wasting fuel. The entertainment/sports industry all waste.

        In the age of the machines a small segment of the population can produce enough to supply everyone else.

        Obsolete economic theory from a generation or 2 ago isn’t going to cut it in the 21st century. Old people need to stop having tantrums and go play bingo. Some people change with the times, others try to live in the past and hang onto yesterday.

  17. Steve K from MA says:

    Bruce,

    I appreciate your time and efforts on trying to find a plan that both; requires compromise from both sides, and has a chance of passing. That said, you lost me at the VAT. I personally favor a VAT over an income tax (progressive or otherwise) – its far better for the country in the long run to tax consumption than wealth creation – but any plan which allows the existence of these two types of taxes simultaneously is very dangerous. Aside from the fact that it’s double taxation, once we’ve put a toe down that slippery slope and the pols in DC get their greedy little fingers on yet another revenue stream they (both sides of the aisle) will out spend that stream in short order.
    From the perspective, of growth in federal spending and the resultant size, scope and reach of the federal government, I see no difference between the 2 major political parties. That is one effort that Dem & Rep are steadfastly united. Somehow that needs to change or the fiscal problems we face will continue to escalate. The citizens of this country can no longer afford the cost of our current structure of federal governance.

  18. Bruce — explain to us why your proposal talks about more spending and more taxes, but you didn’t mention the obvious things that any private sector business would be eliminating if it expected to survive (never mind flourish).

    For example, we are still in a terrible recession that was caused in part by failed banks / quasi-banks. People asked why there were no regulations against this sort of nonsense, and the crooks in Congress dutifully tasked two of the worst financial fraud enablers to write the Dodd-Frank act. Dodd was the guy who ran interference for AIG financial products and took cut-rate loans from Countrywide bank for his second house in Ireland. Barney Frank is perhaps most famous for screeching on the floor of Congress that FNMA is perfectly sound, and taxpayers wouldn’t get stuck with the losses anyways.

    Before these two crooks made a bad situation worse … we had lots and lots of redundant financial regulators at the federal level:
    — SEC (Securities and Exchange Commission)
    — CFTC (Commodities Futures Trading Commission)
    — OCC (Office of Comptroller of Currency, part of US Treasury)
    — FinCen (Finance Central, supposedly looks for money laundering, etc — part of Treasury)
    — The Federal Reserve system (12 member banks, plus the main scam in Washington DC)
    — The Dept of Justice, Washington DC branch (which prosecutes crimes, as the SEC can only adjudicate administrative claims)
    — The Dept of Justice, New York City branch (this is where Rudy Guiliani worked when going after Ivan Boesky and Micheal Milken)
    — FBI (Federal Bureau of Investigation)
    — US Treasury (in addition to OCC and FinCen, the US Sec of Treasury has redundant authority and a whole redundant staff)

    For those keeping score, that is NINE different offices, each with hundreds if not thousands of staff. All of them were supposedly watching from 2000-2007. Why do we need NINE AGENCIES??? Can’t one agency drop the ball just as well as 9 of them? Other than politics and public unions, why do we need 9 groups to fail? Isn’t one enough?

    And it should be mentioned that Elliot Spitzer, when he wasn’t boinking that prostitute, worked for the NY **STATE** attorney general office — not part of the federal government at all. Various NY AG’s over the years have had more prosecutions than all the federal finance regulators combined. All 50 states have their own attorney generals, all 50 states have State Banking Commisions (and Insurance Commissions). On top of the federal redundancy, there is plenty of redundancy at the state level too.

    Why can’t at least some of these agencies be eliminated? Every argument I have heard sounds like the excuses used to justify GM keeping Oldsmobile and Chevy and GMC and Saturn and all the other divisions. They can’t make one good car, so they have to have 4 divisions each of which produces a bad car? That’s why GM went bankrupt, and that is why Uncle Sam is bankrupt. GM raised prices and it just made things worse — raising prices for federal “services” (aka raising taxes) is going to have the same effect.

    Lets talk about FEMA and TSA. FEMA failed after Katrina, and early reports for Sandy are just as bad — FEMA fails under Republican and Democrat presidents alike. Get rid of it. The Coast Guard and Army did all the rescues after Katrina (that is, the low ranking privates / sailors — not the paper pushers in DC). The Coast Guard and state National Guards rescued people after Sandy (again, the rank and file — not the paper pushers). Get rid of FEMA. The TSA has been caught groping and molesting, conducting illegal searches, stealing from passenger bags, failing to detect everything from a 9mm Glock semi-automatic pistol to a machete bigger than the passengers arm, running a prostitution ring out of JFK airport, and hiring a defrocked priest in Philli (pedophila issues). The TSA hired a pedophile that gave the Catholic church the willies!! Meanwhile, the TSA has not caught a single terrorist. Not one. Why do we need to raise airfares for this? Why can’t this stupidity be eliminated?

    While we are on terrorism and redundant agencies, lets mention the “intelligence” services. CIA, NSA, NRO, NCI, plus the FBI has another division for counter terrorism, not to be confused with ATF (part of the Treasury dept) and Customs/Immigration. The State department has a completely separate intelligence service, while the defense department has four officially acknowledged agencies. I doubt I have listed all the government agencies, and I have omitted the dozens and dozens of private security companies in northern Virgina / Maryland who’s only customers are the US government intelligence agencies.

    Guess how many of these thousands upon thousands of bureaucrats anticipated the collapse of the Soviet Union? Guess how many anticipated 9/11? Guess how many anticipated the attacks on the marine barracks in Beirut? Or the US embassy in Kenya? Should we mention that little fiasco earlier this year in Libya? Lets not bring up the number of times these agencies have been caught spying on Americans (instead of al-qaeda).

    How many intelligence services does a country really need? Especially a country with chronic deficits? Why can’t we eliminate all but one of these agencies? And *ALL* of the private security companies?

    Lets talk about the US Dept of Education, which does not operate a single school. Not even one. Dept of Agriculture collects money from taxpayers and distributes it to state agencies — and it somehow takes thousands of bureaucrats to do this? One bureaucrat per state writing checks would be 50 people .. what are the rest for? Why do we need even 50? Dept of Commerce apparently helps businesses by burying them in paperwork and red-tape. Sometimes they encourage mega corporations like GE to export some goods abroad — and jobs with them.

    Then there is Congress. These prima donnas each have support staff that would embarrass even Dennis Kozlowski (the Tyco CEO with the $20,000 umbrella stand). And they are now up to six massive office buildings to house their ballooning fiefdoms, and a private underground subway system (closed to the public) to travel the block and a half to the capitol building.

    The list goes on and on and on. All three TV networks have done hour long programs on federal spending stupidity — and they presumably weren’t trying to alienate viewers, just listing stuff the majority of viewers would object to.

    Anyone who claims we cannot slash spending in Washington is either a public employee or a fool. There are hundreds of billions that need to be eliminated before we discuss taxes and service cuts.

    That Bruce is a real proposal. yes, I am sure the losers in washington will not be happy with these cuts. Who cares? they are supposed to work for us. We the people have had to endure all sorts of downsizing, and its over-do for the public sector to share our pain. If the public sector doesn’t want to serve the public, then who cares when they go bankrupt?

  19. James Tetreault says:

    Bruce, almost 20 years ago in the Washington Monthly magazine, they ran a fairly startling article. First, for some background, the Washington Monthly was (and perhaps is, I’m not sure as I type this) run by a man named Charles Peters who had fairly typical liberal political positions but who was uncommonly honest. Anyway, the Washington Monthly ran an article in which they asked federal government employees “What percentage of the personnel at your agency could be eliminated without affecting its functioning?” Remember, these were government employees answering this question. And the quick consensus was . . 25%! Even back before computing power made a whole other leap forward in what any person in an office could do, Government employees said that 1/4 of their cohort were dead weight.

    Now, Charles Peters wanted to eliminate those 25% of the federal workforce . . but spend that money on new federal programs. That was Charles Peters.

    Why shouldn’t we eliminate 25% of the federal workforce (and also 25% of money to the literal hordes of outside consultants not technically gov’t employees but functionally nearly so)? As at least one other poster noted, you had a great omission in not calling for a reduction in “defense” and “homeland security” spending. Take down the military-security complex by 25% immediately working toward 50% over a few years.

    Then, change the laws that prohibit competition in medical services and goods and thereby drive the price through the roof. See Karl Denninger’s site Marketticker.com for a more complete explanation of this than I could give you.

    You make a good start, Bruce but some of your omissions are puzzling.