Thursday, November 11, 2010

Deficit Commission Upsets Both Left & Right with Plan to Stem Country's Red Ink

Some interesting initial proposals from Obama's bipartisan deficit commission as it would create a UK-lite austerity program (over a much longer time frame).  [Jun 22, 2010: UK Joins Austerity Parade]  Of course, it is causing an uproar among both the left and right... which generally tells you it has some merit.   But it also means it has zero chance of going anywhere in this country as everyone wants their cake, and not to pay for it.  With the political process all about job preservation and constantly promising more in return for votes, aside from the Chris Christie's of the world  [Feb 18, 2010: [Video] NJ Governor Chris Christie Talks Tough on Out of Control Spending, with Some Shocking Statistics]  - one can't see much political enthusiasm for such actions.   Far easier to have the federal government to print more money, and the Fed to monetize it.  Indeed, judging from the CA budget deficit it's looking like the states are going to need another stimulus errr  bailout errr "job preservation program" from the federal government in 2011!   [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] [Jun 18, 2010: States Nationwide Plead for More Backdoor Bailouts... err, "Stimulus"]

Much like the UK plan the commission offers a combination of tax increases and spending cuts but the ratio of tax increases to cuts is 1:3, which is probably sensible.  Granted I'd like to have all the services in the world with a 2% tax rate but that just seems a bit out of touch with the laws of math.  To put into perspective, all these controversial changes would only save $4 trillion over the next decade.  Which is just about the same amount as it will cost the country to continue the Bush tax cuts, for the next decade.  Put another way - all these changes will only pay for the Bush tax cuts.  Translation: we're screwed.

I don't see this in the AP story, but what I heard yesterday was America could move to 3 simple tax rates - 8, 14, and 23%.  In return all loopholes and givebacks in the tax code would be eliminated.  For simplicity and efficiency sake, this makes immense sense to me.  Doing my taxes in 45 seconds online would be a very fine thing indeed.  98% of the IRS could be eliminated (who needs auditors when "income x X%" is the entire tax code?) but the country would lose countless millions of its 'new paradigm service jobs' - i.e. the accounting class.

The corporate tax would drop from "35%" to "26%"... but in return all the loopholes would go away.   Winners in that scenario is small business which have relatively few loopholes, and no offshore tax evasion policies.  The losers would be our multinationals who thrive on corporate socialism.  Considering who provides the majority of campaign finance among those 2 groups (small business vs large business) you know how far this commission proposal would go.   Take a step back and think about it - our largest corporations will be fighting TO KEEP the "35%" tax rate (versus 26%!) - haha... that's how you know that number means nothing in reality and just is an excellent sound bite for the dogmatic & simplistic

While nowhere near the UK plans, most federal workers will get a 3 year ban on pay hikes and there would be a 10% cut in the federal work force (UK is 19%).  Fat chance of these things happening... but it would probably take a 20 year ban for the federal sector and private sector to come back in alignment... remember we have now reached the point where federal worker BENEFITS are reaching the same level of WAGES in the private sector.   [Aug 11, 2010: Federal Worker Benefits Now Approaching Parity with Private Sector Wages]

Another outrageous conclusion is that the government - like every other 1st developed world government on earth - would be able to negotiate discounts on drug costs.  Considering we have the largest expenditures in the world on healthcare, and hence in any economic model that would call for the LARGEST discounts in the world (think Walmart's ability to pressure suppliers due to scale), but indeed that just is not how the country works.  Again, think who provides the politicians funding for campaigns (notice a theme here?)

Some other "holy grail" items - taking away mortgage interest deductions, raising Social Security age to 68 by 2050 (and 69 by 2075) versus 67 today for those born after 1960, means testing Social Security (does Bill Gates really need that check?), only increasing Medicare benefits by 1% over growth rate of economy annually (while healthcare costs in the country continue out of control at 8-11% annum) and cutting away at farm subsidies (again, fat chance).  One surprise was no mention of a VAT tax which is most likely in our future in 10 years or so.  [Dec 11, 2009: NYT - Many See VAT Option as a Cure for Deficits]

Overall a nice academic study - but unlike the UK we won't accept any hardship, it's simply not America.   We have the Fed to fix all our problems.  Remember, even the 'conservative' Tea Party is against much of this stuff - "keep government out of our lives! Except for the Social Security and Medicare part."  Remember the current political battle cry: "cut spending!  Just don't be specific about anything you want to cut or if you do name something, make sure it represents 0.4% of the deficit."  

To that end, after countless years talking into the wind I am done fighting the good fight, and have thrown my support behind the candidacy of Hugh Jidette in 2012.  If we're going to blow up, let's go big!  Please see videos below.  (ignore the crazy lady at the end of the 2nd video)

Kissing Babies - HD from Peterson Foundation on Vimeo.

Main Street - HD from Peterson Foundation on Vimeo.


Via AP

  • In a politically incendiary plan, the bipartisan leaders of President Barack Obama's deficit commission proposed curbs in Social Security benefits, deep reductions in federal spending and higher taxes for millions of Americans Wednesday to stem a flood of red ink that they said threatens the nation's very future.
  • The White House responded coolly, some leading lawmakers less so to proposals that target government programs long considered all but sacred. Besides Social Security, Medicare spending would be curtailed. Tax breaks for many health care plans, too. And the Pentagon's budget, as well, in a plan designed to cut total deficits by as much as $4 trillion over the next decade.
  • Criticism was immediate from advocacy groups on the left and, to some extent, the right at the start of the post-election debate on painful steps necessary to rein in out-of-control deficits.
  • The plan would gradually increase the retirement age for full Social Security benefits -- to 69 by 2075 -- and current recipients would receive smaller-than-anticipated annual increases. Equally controversial, it would eliminate the current tax deduction that homeowners receive for the interest they pay on their mortgages.
  • No one is expecting quick action on any of the plan's pieces. Proposed cuts to Social Security and Medicare are making liberals recoil. And conservative Republicans are having difficulty with options suggested for raising taxes. The plan also calls for cuts in farm subsidies, foreign aid and the Pentagon's budget.
  • The document was released by former Democrat Erskine Bowles, a former Clinton White House chief of staff, and Republican Alan Simpson, a former senator from Wyoming. Controversial or not, Bowles said serious action was demanded. He declared, "This debt is like a cancer that will truly destroy this country from within if we don't fix it."
  • The red ink for all of the past fiscal year was $1.29 trillion, second highest on record, and this year is headed for the third straight total above $1 trillion.
  • Current deficits require the government to borrow 37 cents out of every dollar it spends.
  • The Social Security proposal would change the inflation measurement used to calculate cost-of-living adjustments for benefits, reducing annual increases. It immediately drew a withering assault from advocates for seniors, who are already upset that there will be no inflation increase for 2011, the second straight year.
  • The plan would also raise the regular Social Security retirement age to 68 by about 2050 and to 69 in 2075. The full retirement age for those retiring now is 66. For those born in 1960 or after, the full retirement age is now 67.
  • Better-off beneficiaries would receive smaller Social Security payments than those in lower earning brackets under the proposal, and the amount of income subject to Social Security taxes would be increased.  "The chairmen of the Deficit Commission just told working Americans to 'Drop Dead,'" AFL-CIO President Richard Trumka said in a statement.
  • For every $1 of new revenue, the plan demands $3 in spending cuts.
  • The entire commission is supposed to report a deficit-cutting plan on Dec. 1, but panel members are unsure whether they'll be able to agree on anything approaching deficit cuts of the size proposed. And even if they could, any vote in Congress this year would be nonbinding, Simpson said.  "This is not a proposal I could support," said panel member Rep. Jan Schakowsky, D-Ill. "On Medicare and Social Security in particular, there are proposals that I could not support."
  • The release of the plan follows midterm elections that gave Republicans the House majority and increased their numbers in the Senate. During the campaign, neither political party talked of spending cuts of the magnitude offered Wednesday, with Republicans proposing $100 billion in cuts (i.e. peanuts) to domestic programs passed each year by Congress -- but with no specifics.
  • For most Americans with job-based health coverage, the biggest change would be to limit or eliminate altogether the tax-free status of employer-provided health benefits, which would provide a stiff nudge to force people into cost-conscious insurance plans.
  • To deal with the rising costs of Medicare and Medicaid, the giant health care programs for seniors and low-income people, the proposal calls for limiting annual spending increases to no more than 1 percent above the growth rate of the economy.
  • It outlines a series of strategies to achieve that goal, including changing provider payments to reward quality instead of sheer volume, demanding rebates from drug companies that want to participate in Medicare and raising cost-sharing for Medicare recipients while also putting in place a limit on their out-of-pocket costs.  (all these seem reasonable and SHOULD have been in any healthcare reform - but lobbyists would never allow it)

Other proposals by Bowles and Simpson include:
  • --Increasing the gasoline tax by 15 cents a gallon to finance transportation programs.
  • --A three-year freeze in the pay of most federal employees and a 10 percent cut in the federal work force.
  • --Eliminating all congressional pet projects, known as earmarks.

  • The plan also calls for a major overhaul of both the individual income tax and the corporate tax systems with the idea of lowering overall tax rates, simplifying the tax code and broadening the taxpayer base.
  • For individuals and families, the proposal would eliminate a host of popular tax credits and deductions, including the child tax credit and the mortgage interest deduction. However, it would significantly reduce income tax rates. The top rate would drop from 35 percent to 23 percent.
  • The deduction that companies take for providing health insurance to their employees would be eliminated, but the corporate income tax rate would be reduced from 35 percent to 26 percent, and the government would stop taxing overseas profits of U.S.-based multinational corporations.

  • Even with the dramatic proposals, the Bowles-Simpson plan would leave deficits of about $380 billion in 2015, the year by which Obama tasked the group with balancing the federal budget, except for interest payments on a national debt that now stands at $13.7 trillion. If the changes to Social Security are dropped, the deficit would be about $400 billion in 2015.

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