Deficit Busters!!

At 9:53 pm Mountain Standard Time on 18 Dec 2010, the US deficit was at $13,872,370,279,521 or 94% of GDP, the highest ratio of debt to GDP since shortly after WWII. In other words, the United States almost owes dollar for dollar as much as the entire country produces in a year. That's insane. So insane, in fact, that the president of the Council on Foreign Relations has stated that the debt is a national security threat. If it helps to bring such an enormous number to perspective, realize that each and every citizen of the united states would have to fork over $44,614 or each TAXPAYER would have to shell out $125,559 to wipe it clean.

Now, that number is not quite as horrific as it sounds. The debt held by the public, which excludes debt owned by government accounts (debt the government owes itself), is "only" at approximately $9,000,000,000,000, or about 63% of GDP.

So why is the deficit such a big deal? Benjamin Graham wrote in The Intelligent Investor (a great book by the way) that he feels it is unwise to invest in a company that has a debt load of over 50%. In other words, if a company has $5 million in assets, but owes $3.15 million to its creditors, Benjamin Graham would likely turn his nose up to it. China, the United State's largest "investor", has made grumblings to this effect. It's possible that they're beginning to feel that the US is "over-leveraged" and may not be a good investment. Not a good thing.

Some argue that the US shouldn't worry about it's current deficit as it only has to pay the interest payment to its debt holders. The current T-bond yield is about 3%, so in essence, these guys claim that as long as the US can afford to pay $416 billion (and growing) each year in interest on its loans, we can continue to get loans. That's akin to somebody saying it's fine to keep racking up their credit card debt because they can afford the minimum payment. That's all well and good until your creditor changes the rate (something China has threatened to do), or until you don't make as much money as you expected for some reason.

Regardless of what degree of threat you think our deficit poses to our national solvency, it is a problem that needs to be addressed. Earlier this year, President Obama had a budget deficit reduction committee created with the sole purpose of finding ways to reduce our country's soaring deficit. They brainstormed and think-tanked their socks off and came up with a handful of solutions.

The primary fixes are as follows:

1. Collapse today’s five income tax rates (10%, 15%, 25%, 28%, 33%, and 35%) into three brackets (12%, 22% and 28%).

2. Eliminate itemized deductions

3. Tax capital gains at ordinary income rates

4. Eliminate and simplify a bunch of tax credits (mortgage, charitable giving, etc)

5. Gradually eliminate the exclusion for health coverage premiums

6. Change the corporate tax bracket to 28%

7. Increase the federal gas tax by 15 cents a gallon.

8. Raise the age at which Americans can get Social Security benefits to 69 by 2075.

9. Require the president to propose annual limits on war spending.

10. Gradually reduce the government’s civilian work force by 10 percent

11. Freeze pay for federal workers and members of Congress for three years

12. Eliminate all congressional earmarks

13. Change Medicare physician payment formula to reward quality instead of quantity

14. Cut congressional and White House budgets by 15%

There was a lot of fuss about the commission's results immediately after the report was released, but, as is always so apparent, our politicians are more worried about being re-elected that actually solving a budget crisis, so instead of addressing said crisis by instituting some of the commission's suggestions, they again extended unemployment benefits. Speaking of budgets, let's remember that our government doesn't even have one right now. Another political move by the democrats as that causes the republicans to spearhead the effort and be the bad guy who cuts spending, thereby enabling democrats to return to congress on campaigns that shout, "Republicans want grandma to eat catfood!" All at the expense of our national solvency.

Sorry, got sidetracked.

Anyway, as I was saying, I'm sorely disappointed in a government that, when it gets reminded of it's infrugality (somebody tell Webster I just made up a word!), instead of looking itself in the mirror and admitting it's a spending addict, it runs off and spends some more.

So, in my own passive aggressive form of protest, I propose my own deficit cutting measures:

1. Flat tax. 22% tax on everybody. If you're on welfare, you get 22% of your welfare check taken back by Uncle Sam. I'm serious. Right now nearly half of Americans (including me thanks to a myriad of deductions) pay ZERO federal income tax. That's sick. Everybody needs some skin in the game. That way, next time we decide to give people in Atlanta a heat bill subsidy to fight a 50 degree cold front, we might think twice.

2. Eliminate nearly all tax deductions and definitely all credits. The IRS should never owe you money come April. I want to say no deductions at all, but I am tempted to believe that we can allow charitable contributions to be tax deductible (thanks a lot Dad).

3. Eliminate the capital gains tax. That's a tax on money that's already been taxed. I'll refer you to Nate here.

4. Set the corporate tax rate at 22%. A flat tax is a flat tax.

5. Change the social security eligibility age to 70 by 2020. In 2012 its 66; in 2014 it's 67 and so on. Frankly, I think we should phase it out entirely or at least return it to what it was initially (assistance to the elderly needy and widows).

6. Reduce the federal workforce by 15%. That's just over a 5% reduction of the size the federal workforce was in 2009.

7. Freeze pay for all federal workers and congress for 5 years then allow the maximum of an inflation matching increase each year thereafter.

8. Eliminate all earmarks. That should have been done ages ago.

9. Cut the federal budget by 15%. Not impossible.

10. Repeal the health care bill. The bill is bringing with it immense federal spending that will only further inflate the deficit. Once the bill is repealed, we can start over with real health care reform. The last bill only changed how we paid for health care and who paid for it rather than actually making health care more affordable.

I'm sure there are many additional things we can do to balance the budget and reduce the deficit.

While both my suggestions and those of the actual committee could be seen as "drastic", real action is necessary. I have serious doubts that anything genuine will be done. As we've already seen, it's more likely that we'll only see some token efforts and the can will keep getting kicked down the road. So, hopefully, we can get somebody who has real power to get this ball rolling. Somebody tell John Boehner, "YES WE CAN get the deficit under control."