I am so tired of all this “fiscal cliff” nonsense in Washington—whether we like it or not, our elected officials created a mechanism for automatic spending and revenue consequences if a longer-term resolution could not be reached. So, if it is not reached, I say let the “sequester” happen. On the revenue side, we will be little worse off than the Clinton years and the tax base will be broadened, the spending cuts will be the first real cuts we’ve made in a long time, and the resulting harm to the economy and the military probably will occur over the next few years regardless of what Washington accomplishes by the end of this year.
However, it probably is worth trying one more round of negotiations. So, for what it’s worth, I am going to present my proposal for the GOP position as it enters the final stage of this process. I could go into a lot of explanation here as to my reasoning behind the following proposal, but I think that most conservatives can probably figure out the basis for each of the ideas without a lot of debate. So, if I were advising Speaker Boehner, here is what I would put on the table to avoid the fiscal cliff—and I would present it as the same sort of “take it or leave it” proposal that Obama seems to be comfortable with:
- The Bush-era tax rates would be made permanent for everyone making an income below $1 million a year. For everyone making between $250,000 and $500,000, itemized deductions and credits would phase-out so there would be no credits or deductions above $500,000 (except for the mortgage deduction on a portion of the value of one primary residence, and the charitable deduction). For everyone making $1 million or more, the top rate would return to 39{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}.
- Corporate and capital gains rates would be reduced to rates that would make them the most competitive in the world, but the rules defining “capital gains” would be tightened to exclude earned income from investment work and to avoid re-characterizing earned income from professions as capital gains—capital gains should limited to return on investments of capital, period.
- The federal estate tax would be permanently set to begin to tax estates worth more than $10 million, and that figure would index over time.
- Means testing for receipt of Social Security and Medicare benefits for those who were born on or after January 1, 1963, would be triggered by a net worth of $5,000,000 (exclusive of the net value of a primary residence) at age 65. For Medicare, the system would be converted to a premium support program for those born on or after January 1, 1963, and whose net worth (exclusive of the net value of a primary residence) is above $5,000,000.
- Federal spending for the 2013 fiscal year would return to the fiscal 2008 (pre-TARP) budget baseline, and the line-items of that budget baseline.
- Additional infrastructure spending to upgrade bridges, ports, and interstate highways should be appropriated and be paid for solely by increases in user fees, sales of radio-wave spectrum, leases and royalties of federal lands, and the federal gas tax.
- All non-military and non-entitlement spending would be based on zero-based budgeting starting with the fiscal 2015 budget, and Sunset review should be established for all federal departments and agencies, except the Pentagon (which should be set on it’s own review process).
- All increases in the federal debt limit after January 1, 2013 must be matched by spending cuts.
- If additional, consistent reforms contained in either the Bowles-Simpson plan or Domenici-Rivlin plan, are not enacted by the end of the 2013 fiscal year, the tax rules would return to the Bush-era laws and become permanent.
Then, if the Dems refuse to debate and deal with this proposal, I would propose that the House and the Senate pass their competing visions. After passage, James Baker and George Mitchell should be appointed to attempt a one-day mediation with the conference committee members from both houses and the White House to try to accomplish a temporary resolution for a final bill that the President will sign.
If that mediation is unsuccessful, we let the sequestration occur.
It's good. It's real good.
On principle I would prefer to see the Death Tax be zero percent.
See what Fox Entertainment had to say about the fiscal cliff.
http://www.huffingtonpost.com/2012/12/04/mr-burns-explains-the-fiscal-cliff-simpsons_n_2240270.html?utm_hp_ref=fb&src=sp&comm_ref=false
I agree with all of what you propose with the exception of your debt limit proposal. The debt limit is a stupid charade. The Constitution requires that the United States pay all debts incurred by Congress. The debt limit is increased in order to pay those bills, debts which have already been incurred by Congress, it is demagoguery to insinuate, as many politicians in search of votes do, that it is somehow connected with future expenditures. It is not. The horse is already out of the barn. The real Constitutional "debt limit" mechanism is the US Congress, and for them, the voters. The last artificial "debt limit" crisis cost me personally thousands of dollars out of my 401k because every time they pull these "debt limit" shenanigans, we are essentially telling global markets that we are thinking of reneging on our bond payments that we are OBLIGATED to pay. Whether you are a housewife or a global superpower, it is never a good idea to tell your creditors that you are thinking of dead beating your debts. The "debt ceiling" is also inherently un-Constitutional in its own right, the whole thing needs to be done away with. I am utterly unable to see how this political football that results in billions of investment dollars evaporating is good for anything.
Simple—I just looked at the Simpson’s video you linked. It’s pretty funny.
William—See how easy it is to reach an agreement if people are willing to negotiate. The fact that we could agree on 8 of the nine issues without additional discussion should tell our elected officials something. As for the “debt limit” issue, I guess I have to agree to disagree—continuing to borrow money to fund a government that is operating beyond its means is not mandated by the Constitution, and is simply wrong.
Having said that, I do understand your assessment of the impact of the war over the debt limit on credit ratings, investments and the economy. But, I disagree with your legal and political assessments. As I understand it, the constitutional argument that you re-state is that the Constitution requires that the federal government’s debt must be paid. While I have no basis to argue with that narrow assertion, I think that argument is really irrelevant to the issue of whether the debt limit should be increased to allow for more debt to be incurred.
Art. I, Sec. 8 authorizes Congress to borrow money on the credit of the U.S., and Sec. 9 states that no money can be drawn from the Treasury without Congressional appropriation, so Congress is the branch that must authorize increases in the debt limit to allow the government to borrow money. Sec. 4 of the 14th Amendment states that the validity of the public federal debt may not be questioned. I assume that this is the provision you are referring to when you argue that the government’s debts must be paid. But, even if you are right, that provision does not require the government to incur more debt to avoid the maturing debt from being questioned. Although the entire section of that Amendment is distinguishing between the legality of the debt incurred by the Union to prosecute the Civil War and the illegality of the debt of incurred by the Confederacy or the Confederate States as a result of that war, all Section 4 does is state that the federal debt actually incurred must not be questioned—it does not require that more debt be automatically incurred, even if it is for the purpose of paying off current debt.
If we reach a borrowing limit, we have at least three choices: stop further borrowing, cut spending, and use current and/or new revenue to pay off debt and to operate the government; increase the debt limit to continue to borrow money to augment revenues needed to pay off interest and principal of current debt, and to continue operating the government; or, a combination of the first two choices. All I am advocating is the last approach—if we are going to continue increasing the debt to augment revenue, we should cut spending to allow more of the money borrowed to be used to lower our debt burden and future debt needs. If we don’t start taking this approach, I don’t see how we will ever get the public debt under control—which we must do so that it will never be questioned.
Ed, Ed, Ed…….
A magnificent argument. Supported and reasoned. Filled with historical background, and solid Constitutional thinking, and unfortunately, so terribly, terribly wrong. And it shows the heart of what is wrong with the conservative movement of today. It is a wonderful argument for what the media is calling the Echo Chamber, it gets great applause from those who agree, makes clear and utter sense to those who agree, a savory and tasty intellectual stew to those in support, but unfortunately, once a single fact that you have neglected in the argument is added to the stew, it becomes a horrid, smelly kettle of fish.
Those who know this single fact recoil in horror at your arguments, and those who know the implications, know that you have unknowingly lit a political bomb which will later explode into electoral disaster. What is that fact? Well, everyday Ed, billions of dollars in US bonds sold 30, 20,10 or even 5 years ago become due. These bonds belong to little old ladies who buy them at the bank on payday, or they may belong by the billions to tycoons, global insurance companies, massive pension funds, multi-national banks, oil tycoons – in other words, they are an essential underpinning of the global economy, and have been since the days of yore when the world came to realize that any bond issued by the United States endorsed by The Full Faith And Credit There Of, was a guarantee of an investment that would eventually be paid in full with the interest indicated.
Your argument seems to jump to the conclusion that say, your average under-informed middle class conservative voter tends to jump to, that all that “government debt” that this “debt ceiling thing” applies to is money that will be delayed or prevented into going into the pockets of moochers, or the UN or some other bogeyman, so hell, let’s just jack with it and teach those old Democrats a lesson. Well, sounds great on an AM radio talks show, but unfortunately, it is not true. The real fact is, the government has to borrow the money to pay it’s prior bond obligations which are coming due every day. As you note, this was indeed something the Civil War Framers, who had war bond obligations financed by the bonds of their day, well realized, and they indeed took steps to make sure no future Confederate-sympathic Congress could use to wreck the country post facto, which was why the clause was inserted. Your argument seems to miss the whole “wreck the country” thing, because that is exactly what failure to increase the mythological “debt ceiling”, a wretched political fiction, will do. Those who hold massive amounts of bonds expect those bond obligations to be paid on the day they are due. You advocate a political path where a powerful faction of the US Congress is to make lots of noise to the global market as they speechify and shout on the floor of the House, that we, due to the political stupidity of a small minority of financially ignorant or outright evil demagogues, are intending to control government spending by defaulting on our bond obligations. It is as financially insane as calling your mortgage banker, or better yet, standing outside his bedroom window, and blasting a horn while holding a sign telling him you intend to no longer pay your mortgage. While psychologically, it may make you feel good, as your argument no doubt does, financially and politically, it is an incredibly stupid thing to do. US government debt, like it or not, is a central, and essential, underpinning of the entire global economic system. Your actions have sent, and will send again, bond markets into panic. Billions due on a particular day that are part of massive actuarial schemes that support private corporate bond payments, private pension payments, repayment of banking capital, all are now at risk of default. Just the possibility of such a thing (which indeed is what these “debt ceiling” fiascos create) send markets around the world into nose dives. The 401ks of those middle class voters, retirees, and the portfolios of small businessmen and other groups that compose the groups of voters who are open to your message, take massive hits. Financial reporters, who are not bound by the partisan gibberish that comes from the partisan media, tell all these people the truth, that their losses are the result of political fanatics jacking around with financial markets that they do not understand. These people will not vote for you. Many of them did not vote for you because of the last debt ceiling fiasco. The next one will cost you the Congress.
Actually, William, I am quite familiar with the public bond market, and the process you describe. Cutting through all of the partisan hyperbole in your comment, your argument still stands on a straw-man: that the debts of government can not, or should not, be retired from any source other than more bond debt. The problem with your argument is that it means that new bond debt must be perpetually issued to pay-off maturing bond debt as it becomes due, which perpetuates and increases the amount of operating expenses that must be devoted to paying interest on the public debt, which requires more issuance of bonds, etc. Additionally, such an argument means that the operating expenses of government that exceed tax and fee revenue, not just long-term capital expenditures, must be perpetually financed by new debt. Also, such an argument means that government should never pay-off bonds with current revenues.
These arguments lead to the conclusion that government should never balance its budget, because a balanced budget—current expenditures, including interest and principal of debt, paid from current revenues—would destroy the public bond market. That is simply wrong. Public bonds have always been a proper tool for financing long-term capital expenses, like infrastructure construction. One of the reasons we have so much need for renovation and new infrastructure is that we can’t afford to issue the bonds needed to finance those projects, because financing the federal and state operating debts has absorbed much of the available public bond market (and, because we have used highway trust funds to cover operating expenses by replacing such funds with bonds).
The point is not to continue incurring and increasing new debt to pay-off old debt, or to use long-term debt to pay immediate operating expenses. The goal should be to pay operating expenses from revenue, and to finance long-term capital expenditures with public bonds, and to maintain an appropriate level of bond debt so that interest payments on which investors are dependent can be paid from revenue rather than debt. A return to this approach will require a real reduction in operating expenditures, and a reallocation of available public bond borrowing capacity to long-term public projects; but it would not destroy the bond market. A return to this approach would make new public bonds more valuable in the market by re-balancing the supply to a proper demand for debt, while assuring the security of the government they are financing.
Finally, no one, especially me, is advocating an immediate end to paying bond debt or financing such payments with bonds. There is no way to get to the fix this cycle we’ve created except through gradual change. But we need to start, and tying further increases in the debt limit to real reductions in operating expenditures is a way to start this process, which also begin to shift bond capacity from financing debt payments to financing long-term projects.
Actually, that is exactly what you advocate. It is all so simple. These debt obligations were incurred by previous Congress. You state to the bond market that you intend not to honor these debts on the day they are due to be paid. Fiscal suicide. If you owed me money, I would not care a whit how you obtained it or whatever issue you personally have with how it is obtained, the issue is that the money is legally owed me on a certain date, and now you are stating that you are not going to pay me because you don’t want to borrow the money from someone else, you would just rather screw me. That is exactly what the GOP debt ceiling fanatics are telling the bond markets. Why do you think the markets tanked the last time these shenanigans were pulled?
I base none of my arguments on any partisan point, I am simply stating the facts. If you refuse to supply the government with more cash, and the government needs this cash to pay it’s bond obligations, then you have defaulted on your debt, and that doesn’t matter if it’s deficit spending in 1942 or 2012, if the government has an obligation, the Constitution clearly states it must paid, without question. You claim a right to stop the government from paying it’s legally owed debt, a debt which may have been originally incurred 30 years ago, for reasons that utterly mystify me as a logical person. You seem to say you have a right to repudiate a debt you legally owed because the spending of this money is something you are against. Well, I am against my wife running up the credit card for a new dress, but I certainly do not call up American Express and tell them I do not intend to pay them because of what she has done.
I could care less how the current political arguments are going, the government owes that money, it owes it today, and it has to be paid. If you, by law, you prevent the Executive Branch from borrowing money to pay a debt on the day it is due, a debt the Executive Branch did not incur, in fact a debt incurred by Congress itself, you are doing nothing more than cheating those to whom that money is due. It is a profligate act of utter financial stupidity. It is also an act of political stupidity, because the people who will get hurt the most are all potential GOP voters. If you want to control government debt, the Constitution clearly lays out how it is done, and it is not by welching on our debts, no matter how you fantasize or convince yourself that is not what is actually happening. You control spending by winning the House and the Senate. In fact, just controlling the House ought to do it, but for some reason, the GOP simply does not do what it needs to do, which is to quit appropriating so much money, which it has been unable to do. This ‘debt ceiling’ crap just gives these cowards political cover to cover the fact they don’t actual do much debt-limiting at all when it comes time to come up with a budget.
William, we could go around and around on this argument. The good news is that we agree on 8 of the 9 points I proposed. We also agree that our current debt obligations, whether they were incurred 30 years ago or yesterday, should be honored, as should all future debt obligations incurred by the federal governent. On the one point on which we disagree, I am advocating a gradual shift in reliance on incurring new debt to pay-off the maturing debt or to finance the operating expenses of government, by tying future increases in the debt ceiling to reductions in expenditures, and by reserving new bond capacity for long-term capital projects. I am not advocating any change that would discount, dishonor, default, or devalue our existing obligations. I simply want to gradually change the source of the payments of those obligations from new debt to revenue.
To continue to accuse me and others of advocating a position we are not advocating, is to perpetuate a straw-man argument to support doing nothing to change the current financial condition of the country. I get it, you don’t want to change the way we incur and finance the federal debt, but I do. We’ll just have to agree to disagree over which one of us is taking the proper position.
I don’t agree with the idea of “means testing” Social Security and Medicare. I recently read an article (the author escapes me) who I think spelled it out fairly well with this point:
As things stand, we live in a world in which something close to half of Americans pay no income tax at all. The top ten percent of earners bear the bulk of the burden. Means-testing – which already exists for Food Stamps, Medicaid, and the like – would serve only to reinforce a set of arrangements that is not only an outrage but counter-productive to boot. Why should anyone in today’s America work really hard, scrimp, and save? After all, in the end, you will only be punished for your efforts.
He has a valid point. High incomes earners are already bearing the lions share of taxes as it is, and there are a lot of people who don’t pay any federal income tax at all, and more who get back so many benefits that they have a negative burden (accounting for SS and Medicare).
This mantra of means testing is nothing more than Republicans getting on board with the idea that “The rich must do more” and amounts to another tax, and yet another forced transfer of wealth of one group that earned it, to another that did not. It is not only wrong, it is immoral. If this becomes the Republican mantra, then I for one want nothing to do with the Republican Party.
Richard, I understand your point and am open to other ideas to make Social Security solvent in the long-run, but very few ideas that are politcially and/or economically viable ever get put forward and seriously debated. Meanwhile, we continue to borrow the funds raised from the social security tax to fund the current operating budget of the federal government.
As has been often noted, FDR originally believed that Social Security eventually would have to be converted from a transfer payment from workers to retirees to an actuarial-based, invested trust fund in order to remain an economically viable public pension plan over the long-run. Although many good ideas for implementing such a system have been developed, and are currently being implemented in other countries, the reality is that there has never been any political will in this country to make such a conversion. So, we’ve continued to support the system as a generational transfer payment, even as our life-expectancies have outgrown the original assumptions underlying the program.
If we are going to continue to choose to structure the program as a transfer payment system, I don’t see the harm of narrowing the recipients of the transfer payments to just those who actually need the public support after they retire (or after they become disabled, as it covers disability transfer payments now, too), in order to reduce the tax burden on future workers.
My solution would be simple:
1) Establish an account for each worker that is solely held under that worker’s name.
2) Continue to deduct normal withholdings from employees and employers for “Social Security”, but divert all of those funds into this private account.
3) Establish that no person is allowed to touch this account until they reach the age of 65 (or otherwise show that they are retired, or have died)
Let’s look at an example to see how an average wage earner in this country would fare under this system.
Assume a worker earning $45,000 a year (and for simplicity sake, we will assume no raises their entire work life). That worker would contribute (this year being an anomoly) 6.2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of their paycheck to their own retirement account each year. That would be matched by an employer — resulting in contributions per year of $5,580.
So, assuming I start work at say, 25, and plan to retire at say 65, I have a 40 year work career. If we take the first year’s deposits of $5,580 and then assume monthly deposits (withholdings) of $465 a month (12.4{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} divided up monthly), and an interest rate of a mere 2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}. When I retire, my account would have a value of almost $350,000.
That is if we assume no pay raises, a mere 2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} return (which beats SS), and we don’t index anything for inflation. If we assume a 3{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} inflation rate, we are closing in on $600,000 upon retirement. Now, certainly you can structure this system in some fashion to allow people to go for higher returns, I don’t think 5{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} is unreasonable,in which case I retire a millionaire — but the bottom line is that I can stay in FDIC protected investments and be far better off than I would be under SS.
Added benefits of this approach mean that should I die at 50, instead of having nothing, I have an account of several hundred thousand I can leave to my children etc.
Now, I can agree that the political will to enact this does not exist — but I believe that is a testament to who we elect more so than anything else. It is high time we elected leaders to lead, and think long term solutions, even if it costs them their position.
As for the issue of if we are stuck with the current system, and we therefore should narrow the recipients…my objection still remains. I believe creates more incentive to not worry about the future, and will exacerbate the schism between the “haves” and the “have nots”, and ultimately only further an entitlement mentality.
I want to have the choice to opt out of Social Insecurity…I can obtain better investment results on my own…
Richard: That is a very good approach. I don’t think the problem with political will is with our elected officials; I think our elected officials merely reflect the problem that exists among a majority of Americans who either don’t want changes to the system, or who are too afraid of change to consider it. Although most Republicans and conservatives would consider your proposal, this last election shows we don’t make up a majority of the voters at this time. So, in the short run, I don’t see this idea as politically viable, though I would support it.
Yvonne: I agree with both of your ideas about the estate tax and Social Security, but in the present political climate I don’t think either is doable. I don’t think we can create an individual opt-out from Social Security as long as the system is structured as a transfer tax payment from the working generations to the retired generations. As for the estate tax, there originally was a societal reason for such a tax–it assured that land could not be amassed and kept by one family in perpetuity, thereby promoting a European-style landed aristocracy. I don’t think that rationale applies anymore because so little of our aggregate wealth is still tied to the land, but the idea of perpetuated concetrated wealth in a few hands over multiple generations is still an anathema to most Americans–so, in the polarized climate of today’s politics, I don’t think there will be enough support to end the estate tax completely. Instead, we need to just keep chipping away at it to protect family businesses and farms from liquidation.
That gets me to my final point for both Richard and Yvonne: My proposals were meant to be an example of how to start moving the ball down the field toward our conservative goaline in the long-run within the current parameters of the game, and against the current opposition. It is meant as the start of a grind-it-out, yard-by-yard, 1st-down-by-1st-down game, rather than a bomb pass for the whole 100 yards at once. We’ve tried that approach and a majority of the American people rejected it–as did the Democratic secondary. So, we have to be patient and move the ball as far as we can with each play. I know this type of strategy is too slow and frustrating for some, but we have to start somewhere–remember, that it took the Dems over 80 years to chip away at the system long enough to pass Obamacare when they finally got the super-majority in the Senate. The same principle holds true for our cause: a good running game usually creates openings for effective big pass plays later in the game.
Ed, I agree that we need to keep chipping away at it. And I love how you move the ball downfield! Would one day value your thoughts on Brian Hall et al vs Kathleen Sebelius et al …