National Defense: $738 billion
"National Defense: $738 billion"
This is why we can't have nice things. "The Senate Finance Committee legislation to revamp the health care system would provide coverage to 29 million uninsured Americans but would still pare future federal deficits by slowing the growth of spending on medical care...at a cost of $829 billion over 10 years."
"Railroad workers do not pay money into Social Security, nor do they receive Social Security benefits."
"The Board administers a trust fund which operates at a substantial profit. In 2007, the fund recorded a net profit of $1.4 Billion, a return of 16.38% on its investment."
Does anyone have something that allows you to try and balance the budget? Even halving defense wouldn't get you close.
Ask yourself "what are we defending ourselves against?"
The answer starts from the insight that the public policy world is full of “free lunches,” or changes in public policy that produce massive net gains for society. I will try to describe one such policy package:Raise about 7% of GDP through a VAT (and gas or carbon tax if you wish; those details aren’t important here.) Now you have an extra 2% of GDP to work with.
Abolish the income tax. I seem to recall that the income tax raises about 8% or 9% of GDP. So to get the extra 5% percent of GDP you would need another tax to raise about 6% or 7& of GDP in other taxes.
The other tax would also have to be very progressive, or else the Dems will never go along.
Increase the payroll tax on upper-middle class and wealthy American enough to raise at least 6% of GDP. Currently the tax has a flat rate of about 15.3%, and then drops to about 2.5% somewhere over $100,000 a year. Under my plan those making over $100,000 would face a marginal payroll tax more in the 25% to 40% range, although I have no idea what the exact numbers would be. There would probably be a graduated system, with perhaps a 20% rate for those making between $60,000 and $100,000. The EITC might have to be increased a bit to offset the VAT, and ditto for low income Social Security recipients. The experts would tweak the rates so that the overall progressivity of the tax system (including the VAT) is roughly unchanged. I think that would be necessary to getting any deal.
Then we need to follow Steve Forbes’ advice and abolish the income tax entirely. If we try to simply reform it (as in 1986) the bracket creep and loopholes will gradually return over time. If we abolished it entirely that would represent a pretty definitive repudiation of the whole idea. The Senate would likely filibuster any future attempt to reinstate it.
That would be enough, as even liberal economists understand that a progressive consumption (or payroll) tax is better than an income tax (which double-taxes saving.) But it would still look unfair to the average person as the rich coupon clippers wouldn’t seem to be paying much tax at all (although they actually would be paying taxes indirectly). So you change the system so that taxation of capital is done at the source. Banks would withhold taxes on interest, bond issuers on bonds, corporations would withhold taxes on dividends before they are paid out. This means taxes on capital could not be progressive, but that’s not much of a problem as the poor receive very little capital income. Any distributional effects could be offset by tweaking the payroll and EITC rates. We could also allow corporations to expense new investment, which I believe would greatly reduce the problem of “double taxation of saving.” I’ll leave the complex issue of taxing capital to the experts.What are the advantages of this deal?Republicans get rid of the hated income tax.
Democrats get political cover to expand the federal government as a share of GDP through higher taxes.
Neither side wins or losses through changes in progressivity.
Most importantly, you get massive net efficiency gains over the more likely alternative.And what is the more likely alternative? A mushy compromise. Government only grows by 3% of GDP, not 5%. The other 2% is cut through means-testing entitlements and other changes. The income tax stays in place, massively distorting health care, housing, and all sort of other sectors. In addition, using up valuable labor to deal with the complexity of the system. Also remember that means-testing is really just another implicit marginal tax rate, so no Republican that worries about high MTRs should go for a plan that slightly reduces the growth in explicit taxes, if the means-testing raises IMTRs. And means-testing means even more complexity, more forms to fill out.
By now you must think I am a John Lennon-type dreamer. Yes, but I’m not the only one...
Seriously, it is a long shot, but maybe a bit less far-fetched that it seems. There is currently near-total gridlock in government. Any deal at all would be extremely difficult to achieve. But at some point there simply must be some sort of deal.
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