Cut Spending, Raise Taxes, Overhaul Entitlements – The Only Common Sense Road To Recovery

Whether you like it or not, there is only one path to true economic recovery in the US, and it includes a combination of substantial spending cuts, revenue and tax increases, and overhauling entitlement programs. Nothing else works and everything else is political posturing with no chance of success.

The single greatest impediment to the creation of jobs, reestablishing our global economic status and raising the quality of life for every American is founded in the restoration of the economy. It’s not any single issue or subset of the greater problem alone, and these goals can only be attained by addressing every area that impacts the overall, not picking just the political plums to focus on.

As difficult as it may seem to grasp we can effectively reduce the gross national debt to less than $2 trillion in ten years, while stimulating economic and job growth with every passing year. It won’t be easy and it will require accountability and responsibility at all levels but we have little choice, as we are on a clear path to fiscal Armageddon.

There are many complex parts to this solution and I will not try to present them all here, rather this article is designed to paint the broad brush strokes that are necessary and touch on a few of the most important individual issues.

In 1980 Gross Domestic Product (GDP) was approximately $2.8 trillion, national debt was less than $1 trillion and the deficit was just over $21 billion. In 2010 GDP was $14.5 trillion, national debt exceeded $13.5 trillion and the deficit was over $1 trillion. These two years figure prominently in my analyses since they represent actual data, and the charts below show some glaring differences between the two.

Revenue and Spending in Actual Dollars – 1980 versus 2010

 

 

 

 

 

 

 

 

 

 

 

 

Revenue and Spending as Percent of GDP – 1980 versus 2010

 

 

 

 

 

 

 

 

 

 

 

 

Two major issues are easily seen in the charts. First, the enormous growth in the size of the Federal government and second, that revenues have shrunk as a percentage of GDP while spending has increased. As a business owner and a realist, it’s easy for me to see that no enterprise can sustain itself when it continually takes in dramatically less in revenues than it lays out in expenses.

Increasing Revenues With Tax Increases and Tax Code Reform

Simply returning tax revenues to the 1980 percentage of GDP revenues will increase revenues by $535 billion and as quickly as 2013. The breakdown is $377 billion in individual taxes, $145 billion in corporate taxes, $56 billion in other taxes and revenue, and a notable decrease of $43 billion in social taxes which should be allocated exclusively to households earning less than $100,000.

Individual taxes can be increased by a combination of rate increases ranging from 2% to 20% for all households making more than $100,000 and increasing exponentially up to those making more than $10,000,000 annually, and while not directly included with individual taxes, changing the taxation on 501(c)(3) non-profit organizations, foundations and trusts.

Based on the latest hard data, non-taxable entities in the US raked in $600 billion in revenues, currently control more than $3 trillion of assets and only have to spend 5% of annual income on charitable or philanthropic contributions. This may be one of the greatest hidden cash resources in the US, dwarfing the more oft discussed $1.2 trillion in offshore corporate monies that could be repatriated.

Corporate taxes can be increased by closing the absurd loopholes currently in place and establishing common sense tax code that ensures every corporation that turns a profit pays taxes. Businesses and corporations do not require non-existent or ridiculously low taxation to create jobs. They need economic stability and increasing consumer spending to drive demand for their products and services.

Having established these changes, and with the accompanying decrease in unemployment and increase in GDP, we raise revenues substantially from current levels without undue or unfair burden on any individual or business. At the same time we create an environment of growth and stability.

Direct Revenue (in billions) for Next Ten Years

 

 

 

 

 

 

 

 

Having spent the 1980’s in the investment banking business, when tax rates on investments were much higher, I listen intently when very successful business people speak, and few are more successful than Warren Buffett. In August of this year Mr. Buffett had the following to say in the New York Times:

“I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

Decreasing Expenses With Spending Cuts and Entitlement Program Overhauls

In 2010 direct government spending exceeded $3.2 trillion and this must be cut 20% across the board in 2013 resulting in a net reduction of $652 billion. There are way too many places to cut spending and I will not delve into great detail here (though I may in future articles) but there are several areas worth addressing individually.

I’m a proponent of a strong and effective military for both national security and to support our role as a world leader in global conflicts when warranted. However I also favor greater use of covert ops and special forces for limited engagements resorting to full-scale wars when no other option is realistic. A reasonable reduction in the Pentagon’s budget can be achieved given these and other current circumstances.

I believe we must assist the truly helpless with effective social programs but we must also take radical steps forward to eliminate benefits of all kinds for those who do not require them. Any retiree who possesses the accumulated wealth to provide for their own retirement, needs neither Social Security nor Medicare benefits. These are programs designed to provide for those who cannot provide for themselves not augment the considerable income many retirees receive from their investments. Also I don’t subscribe to the idea that “I paid in all these years so I’m due something now.” Social taxes are a small price you pay to live in a free and democratic society that has a responsibility to help the helpless.

With regard to government regulation, I advocate that certain things should be regulated to prevent unbridled disregard for the consequences of one’s actions, either individual or corporate, but we have crossed way over the line. The Small Business Administration estimates the direct and indirect costs of all current government regulations may exceed $1.7 trillion annually. I’m willing to discount that number as to necessary regulations and the indirect costs by 75% down to $425 billion. That’s three-quarters of the $652 billion in spending cuts I previously cited.

Having established these expense decreases I want an additional flat 5% annual reduction in total government spending for the next ten years. This can be accomplished through increases in efficiency, elimination of waste and fraud, and a reduction of the government payroll. With the economy growing as it will be with these changes there will be more than adequate jobs in the private sector for displaced workers and many of these jobs will pay better than current or future government wages.

Direct Spending (in billions) for Next Ten Years

 

 

 

 

 

 

 

 

It is important to note that none of the expense reductions I advocate impede, and they actually enhance, our ability as a country and society to care for those least amongst us. The issue is helpless versus apathetic, ignorant and lazy. Dennis Miller states it accurately and rather directly, “We need to help the helpless but can no longer give a shit about the clueless.”

The Bottom Line and Bringing It All Together

The revenue increases and expense decreases I cite result in a $91 billion surplus in the first year. With the economy rebounding and growing I expect a 1% annual decrease in the U6 unemployment rate as jobs come back to the market, and the reversal of the current trend to higher revenues with lower expenses allows the surplus to grow each passing year. That surplus pays down the national debt reducing our interest costs and lessening the global risk of having too much of our economic future in the way of debt holdings in unfriendly hands.

GDP goes up, employee compensation rises, corporate profits increase and the national debt plummets with every passing year. None of which is voodoo economics or smoke-and-mirrors, but simple math created by reversing the trend lines of revenues and expenses.

The Important Numbers (in billions) for Next Ten Years

 

 

 

 

 

 

 

 

Are my solutions utopian? No.

Are they without some discomfort for the upper-middle and upper class? No.

Can they be accomplished without accountability and responsibility at the individual, corporate and government levels? No.

Will they work and can we reverse 12 plus years of economic insanity? Absolutely.

We are headed for a fiscal calamity of epic proportions and we are out of time. Left unchecked and without curtailing the current partisan bickering over the most ridiculous issues we will all ultimately suffer.

Now is the time for a return to common sense. It’s our only hope of averting disaster and requires a combination of spending cuts, tax increases and entitlement program overhauls.

Anything less is wishful thinking or blind ignorance, and have no place in the solutions we need now!

NOTE:  I will be a guest on the Mitchell & Ray Show on CDNews Radio on Thursday December 22 at 10:00PM EST (7:00PM PST) and on an upcoming episode of the RINO Hour of Power, if you want to call in and ask questions or discuss any of the details of this article.

All data sources used are US Government or nonpartisan third-parties, and I’m happy to provide a copy of the spreadsheet I created in my research, and links to the data analyzed, if you follow me on Twitter (@Tom1247) and send me a DM with your email address.