A rational proposal for resolving the fiscal cliff debate.

Lets start with some assumptions:

1. The Democrats and Republicans both want Americans in general to have more wealth and for the US Government to have deep pockets full of valuable purchasing power.

2. Pro-growth policies such as low tax rates, light and tight regulation, improved access to infrastructure (including an appropriately educated work force and research and development programs in addition to the bricks and mortar projects) have the most potential to create wealth for individuals and revenue for the government.

3. Large amounts of debt relative to GDP are a drag on the potential to grow the economy because money that would otherwise be spent to promote bullet 2 is spent financing the debt.

4. Job creation (stimulating business activity) is the number one thing that everyone can agree is good and should be promoted immediately to address the sluggish recovery.

Now some food for thought (facts, not assumptions):

100 million Americans are receiving Medicare or Medicaid at a cost of almost 1 trillion dollars a year.

Defense spending (EXCLUDING the wars) has increased 77% in ten years. Including all defense spending, the defense department also spends about 1 trillion dollars a year.

The people earning over $250,000 account for 25%, or 2 trillion dollars of the roughly 8 trillion dollars in total US household income.

All the corporations in the country (including small business) earn income of about 1 trillion.

Taxing the “rich” and corporations at 100% would fund the government budget completely but most would agree that it would also lead to the greatest economic depression since the fall of Rome.

It would fund only 3/4 of the budget if you include social security.

If you are employed, your employer subsidizes your future medicare and social security benefits through the payroll tax.

A “payroll tax holiday” means that medicare and social security are not being properly funded in order to provide a “stimulus” to the economy.

The top 2% of earners claim a disproportionate amount of money from “tax expenditures” – exemptions and deductions – than the rest of the population, while government benefits – medicare and social security dollars – are roughly distributed according to the distribution of the population.

**Therefore – reducing or eliminating deductions will have a disproportionate effect on the very wealthy while cutting benefits will have a disproportionate effect on the middle class.**

Goldman Sachs pays 35% in federal income taxes but Lloyd Blankfein pays just over 15% in federal income taxes.

Because wealthy people make twice as much money as corporations, for every 1% more that people like Lloyd pay on income (primarily capital gains and dividends), the corporate tax rate on Lloyd’s company can come down by 2%.

Therefore, here is my proposal for a politically expedient yet meaningful solution to the fiscal cliff, the debt, and the economy all in one:

Reduce ordinary (excludes the wars) defense spending by 50% over 10 years.

Do nothing to Medicare now – amend the Obamacare law as needed after the effectiveness of cost savings measures are known.

Eliminate capital gains and dividend income reporting for individuals except those held in retirement accounts. -Income is Income unless you save it for later so we don’t have to bail your ass out when you retire.

Eliminate all “tax expenditures” (i.e. credits, deductions, exemptions, etc.).

-Yes. I understand this one will be difficult to argue given political realities, but it would have the added benefit of removing distortions from the marketplace.

Assuming that 90% of top-earner income comes from gains and dividends, and that they will pay the CURRENT top rate of 35% as opposed to 15%, then taxes on wealthy PEOPLE will increase by 18% (9/10 of 20%) and therefore, the corporate income tax rate can fall from 35% to ZERO! without costing the government anything.

In a nutshell,

Tax rates on all income brackets remain the same.

With the elimination of all “tax expenditures”,

A. Many middle income households will have marginally reduced take-home income because they will no longer receive breaks for having kids, buying a house, and paying for college. However, there are plenty of reasons why such incentives are bad for society. The whole cause of the great recession after all was overzealous lending to homebuyers.

B. Rich people would see a much larger reduction in their take home income as compared to the middle class. In some cases, they may see their marginal tax rate go from near zero to 35%. They would finally pay their fair share.

C. If the public really demands it, then they can institute new programs to help people buy a home, pay for college, etc., etc. but I suspect starting from a clean slate will have enormous benefit to the political process and actually simplifying the code.

Defense spending will return to levels similar to those before 9/11.

Entitlement programs will function much the same way they do today from a structural standpoint, but there will be continued efforts to find cost savings in medicare and medicaid, and ensure social security is properly funded through the payroll tax.

Individual income will be treated as ordinary income no matter where it comes from.

America will have the lowest corporate (i.e. both big business and small business) tax rate in the developed world.


Shows the government can cut spending.

Placates those who are angry that wealthy people don’t pay their fair share.

Makes America the most tax friendly place in the world to do business.

Grows the economy at a much faster rate than anyone is currently anticipating.

Achieves budget neutrality through increased growth prospects, reduced spending, and closing loopholes.

Assuring that it works:

Pin the tax rates on individual income to the deficit over a 3-5 year rolling period.

If the plan outlined above cannot generate enough revenue to be deficit neutral after several years, then the tax rates on everyone will go up unless spending is reduced.

Such a rule would provide accountability, predictability, and fairness.

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3 Responses to A rational proposal for resolving the fiscal cliff debate.

  1. A says:

    A good rundown and a decent proposal. I agree 100% about “tax expenditures”…in theory. There’s a reason those “incentives” (if you like a given one) or “loopholes” (if you don’t) are in place, though.

    And that is: voters are stupid. We hate spending, but we love “stuff,” as Mitt Romney so eloquently dubbed it. So we end up with all this hidden spending in the form of tax subsidies. Some of it helps the poor, some of it helps the plutocrats, some of it helps Mom and Dad in the ‘burbs. If you got rid of it in any sudden way, it would be a disaster for everybody.

    Consider for instance the charitable deduction. How many organizations rely on that? An inconceivably vast range of them. Every church, museum, hospital, activist group, arts entity, soup kitchen, etc., in the whole country. That’s just the way it is. Like I said, in theory I’m against it: the purpose of charity should be charity, not dodging taxes. But in practice, man, would that be a huge deal. It would screw a lot of people. People who are, by definition, also very good at lobbying. So politically, too, it will never happen.

    With the mortgage deduction, the key is to implement repeal gradually. We don’t *need* it per se, but people have to be given time to adjust their economic behavior, knowing well in advance that this change is coming. We should also consider simply capping it rather low. Honestly, a lot of our gov’t giveaways just aren’t progressive enough to be either affordable or effective. Libs still fight for them on principle even when people don’t need them (rich people for instance have no business collecting SS, though I understand politically why it’s that way), whereas the conservative side NEVER has any problem violating their own principles by accepting the cash.

    • Yes. I agree that some things like the mortgage deduction can be phased out gradually to allow for budget planning in American households. For charitable donations, that’s a tricky one. I would suggest that if the charity provides education, job training, housing, food, health care, child care, and legal services, then yes those donations are probably doing more good for the community than sending the dollars to the federal programs which provide the same services. Arts, foreign aid, churches, universities, and museums, however, are questionable. No I don’t want some wealthy oil man to reduce the revenue potential of the federal government (and hence increase my future tax liability) by taking a deduction to give money to the Houston Symphony Orchestra. You can just pay $500 a ticket because only rich people go to the Orchestra. In the same way that conservatives don’t like their tax dollars funding abortions, I don’t like people getting tax breaks to give to conservative church groups that organize political activism and lobby against universal rights.
      I think the basic problem here is transparency. Instead of tax “incentives”, law makers can vote to create an “arts fund” that will distribute money to eligible organizations in a peer-reviewed system like the National Science Foundation at a certain fixed level every year. Just make it part of the budget!

  2. Another point I didn’t make in the article is that with the lowest corporate tax rate in the world, all the American multi-national corps and banks will return the hundreds of billions in cash held in foreign countries back to the United States, practically overnight, not to mention the mass migration of businesses to American soil. An instant stimulus package that doesn’t cost the government anything!

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