There can be no question of the impact of the United States defaulting on its bond obligations. Devaluation of the dollar! Massive increases in the cost of borrowing for the United States Government and us as well! Failure to cover other obligations are not as dramatic but consequential as well. So why would we default? We do not really need to. Why not just pretend there is no debt limit?
Certainly, we cannot be concerned about the potential that the government will not comply with the law. That happens every day. We should be more concerned about efforts to reduce massive spending which is unsustainable. The Democrats believe that if there are to be cuts in expenditures, there should be equal increases in tax revenues. The Republicans say our problem is not taxing, it is spending. We must stop spending. If we attempt to resolve these conflicting positions before August 2, without the opportunity to reflect on potential resolutions, we will certainly end up with unintended results.
Wouldn’t it make more sense to undertake these important discussions without being under a hard deadline? For example, the call for increased taxes is put forward in political terms. We need to tax the millionaires and billionaires. Everyone, including General Electric, should pay their fair share. The conservatives are taking medicine from seniors to assure tax cuts for the rich. If we are looking for tax reform, lets be comprehensive.
Everyone says that a reform of the tax code would be a herculean task and the Congress is not up to it. My proposal for tax reform does not begin to “tax” the limited intellectual capacity of the Congress. You begin with the premise that the tax code is to raise revenues to fund the necessary functions of government. It is not to accomplish social goals or dole out benefits to “friends.” With these established as givens, the tax code would simply state that there shall be a tax on income. The tax could be a flat tax. It could be a progressive tax similar to the current tax categories. There would then be a comprehensive definition of what constitutes income. For example, if certain costs are incurred in making money, such as raw materials, they would be deducted from “income.” If there is a desire to help one group or another, there could be a direct appropriation. There is no need to complicate the tax code for that purpose. For example, if the Congress wanted to encourage the production of ethanol, they would appropriate funds for ethanol manufacturers. In this way, the American public would be able to watch their Congress give $6 Billion to ethanol manufacturers. Further, since the federal government wants to increase the amount of ethanol in fuel, despite the damage it does to engines and fuel systems, and realizes that selling such fuel requires expensive fuel blenders. The government wants 10,000 pumps across the nation at the cost of $120,000 per pump. Since it would not be hidden in the tax code, it would have to stand the burning attention of the American people. How about farm subsidies? Why are they hidden in the tax code? If they can stand the attention of the public, appropriate the funds directly. How much are we talking about? Billions of dollars, $30 Billion over a decade.
This would be so much better than simply stating that we need to tax the rich. This is partially true because if the rich were taxed at 100%, the deficit gap would still not be closed. This is truly a red herring but seems plausible until one understands that it will not do what it promises. Even eliminating all of the tax benefits will not resolve the deficit. At least, it will deal fairly with taxation and will better justify the program cuts that must be made.
While we are debating unrealistic goals of both sides, the debate does not move forward in a vacuum. As the Obama budget languishes, we need to remember that the debt will double between 2011 and 2021. Clearly, we cannot continue on this course.
The American people know that increasing debt is not good. They also have said that they feel that spending must be reined in. When we get to which programs must be paired, the numbers change. The majority does not want to change Social Security and Medicare. Unfortunately, without change, our fiscal position will continue to crumble.
I tend to agree with those who suggest that we cannot grow our way out of our mess but clearly it is a constructive part of the solution. We can cut our way out but the cuts will be deep and painful. Nonetheless, this also is a step in the right direction. We also know that we cannot tax our way out. We can eliminate unnecessary tax breaks but most tax increases would further erode our potential to grow our way out of the mess. The answer then is a compromise of a number of approaches. First, completely revise the tax code as suggested above. This will likely be a revenue source but not one that is destructive to economic growth. Next, we cut expenditures to substantially reduce the costs of government. Next, we will begin to grow our way out.
The premise of this paper is that this type of approach cannot be undertaken under the pressure of dealing with a national debt limit. It takes a reflective approach and some adult supervision. The question is whether our Congress is capable of either.
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