Tax Week Finale: My budget proposal

** Warning - Depressing Assessment Ahead. You may not want to read this. **

I have a straightforward goal: I want a balanced federal budget. So I looked at our current horribly unbalanced budget (where we collect $2.2 trillion and spend $3.5 trillion) and I crunched a lot of numbers. The news is very bad, as you can expect when you are overdrawn $1.3 trillion dollars.

 Revenue

Using a baseline of no income growth since 2009, I want to increase revenue to about $2.44 trillion. Due to job losses, payroll taxes will go down. We'll need to raise $1.25 trillion in income taxes, and I'd like to do it with a flat tax. As I wrote before, I think we should tax all types of income in the same way--no special rates for different kinds of income, like the bogus 15% rate on capital gains. I decided that on principle earlier, and now it saves me a shitload of number-crunching. My numbers are based on IRS statistics for 2009. By the way, personal income taxes totaled $953 billion in 2009.

Flat Tax Scenario.  Exempting income under $25,000 (adjusted for family size), we'd need a flat tax of 25% on everything above $25,000. That's so steep that it may triple income taxes on people making around $40,000, so I won't go there.

Take Two -- Mostly Flat.  My second attempt is 18% on income between $25,000 and $100,000, then 28% on income over $100,000. And all those extra deductions that help you lower your taxable income--gone except for exemptions based on family size and disability. Under this plan, my own income tax would double. I, like everyone else, will have to take the medicine.

If you think we should raise taxes much higher on upper-income folks, perhaps to 40 or 50%, please consider that many can move out of the country, and may choose that option to escape such a high rate.

These tax increases are harsh after the marshmallow-soft taxes of Bush, but my plans for spending are even more drastic. They have to be, or taxes are going up even more. I really don't want to triple my income taxes or yours.

Spending

We have to downsize our federal spending by 30%, or $1 trillion a year. That means cuts everywhere. Let's see, cut:

• Defense by 40%.............................................$275B
• Social Security (must do it) by 15%................$105B
• Medicare/Medicaid by 20%...........................$159B
• Interest on the national debt ...........................$    0B    (Can't cut)
• Mandatory by 40% .......................................$166B    (Mandatory?)
• Discretionary by 45%.....................................$295B

• Total............................................................$1000B

Note that these are yearly amounts, not the 10-year totals that make a plan look better than it is.

Implementation

I don't know whether budget contractions and tax increases of this magnitude will send us into a depression. It's certainly a scary prospect. But barring economic cataclysm, I would do the cuts over 4-6 years, and all the taxes increases in the first year. Why? To make a bigger dent in the deficit sooner, while stretching out the job losses due to the spending cuts.
 

Lessons Learned Thus Far

Blame game.  The government, which ran up our debt so much (yes, George W. Bush, I mean you), fucked us up royally. They piled on debt and sent our economy into a tailspin, necessitating even more deficit spending. All the presidents since and including Reagan deserve a fair amount of blame, but Bush deserves the king's portion. Not to exempt Congress (which deserves equal blame with whatever president), Wall Street, businesses, lobbyists, taxpayers, and the electorate.

Burden-shifting.  I'd love to borrow good ideas for increased business tax revenue that can be implemented right away. These savings can somewhat reduce the personal income tax rates. Every $50 billion more in taxes on business (by closing egregious loop holes) gives our households approximately a 1% lower tax rate. Obama's plan has some suggestions. This is real incentive to find others.

Brackets.  The second tax bracket is at $100,000 instead of the usual $200,000 because of the $1.3 trillion pot of taxable income between $100K and $200K. Our deficit is so big that we have to capture considerable extra revenue, and it has to be done there. It's not personal, it's just mathematics.

Net worth. I don't know if this plan is politically feasible (ha ha) or economically sound. I will not be offering any kind of money-back guarantee. It may be a big mistake to come up with this plan, publish this plan, and be so painfully honest about it. If this is necessary to balance our budget, we might prefer default. But even with default, we probably can't avoid changes of this magnitude. I think I should research Argentina and find out how they handled their fiscal crisis.

Obama's plan is more optimistic about how much money can be raised by limiting deductions. His plan shows $70 billion a year, or 42% of what I aim for. I hope he's right, because that would make everything else less painful. One reason to be hopeful is that he has trained monkeys economists working on his plan. But it doesn't have a money-back guarantee either. Sorry folks.

And yes, I know this plan wouldn't have a prayer in Congress. Nothing sensible will, so why should this plan fare any better?

Update: 10/1/11. If you think this post was a waste, please read my defense. Then try doing a budget yourself and put it in the comments. I'd like to see how yours stacks up to mine.

 

Tax Fairness

Oh God, is this a sticky topic. Maybe I'll just throw some major threads against the wall:

• Everyone should be paying some tax because it represents skin in the game.
• Everyone should pay the same percentage of taxes because then they're all contributing the same relative amount.
• People who earn less struggle so much already, they don't have the means to pay as much tax as the well-off, higher earners, or rich.

Each of these views sounds good and reasonable, so it will be hard to choose between them.

Everyone should pay some tax.

• Pro: Having a stake in government, at both the paying and receiving ends, is most likely to make people care what government does, educate themselves, and vote wisely.
• Con: It's hard to determine what the minimum tax should be, particularly for low wage workers with children who barely scrape by as is.

Everyone should pay the same percentage of taxes. 

• Pro: This makes scapegoating impossible, so no particular group gets soaked. Everyone has the same stake in good government.
• Con: This country has wide disparity in incomes, with a lot of people living at or near subsistence levels. A tax rate that is easily shouldered by higher-income folks is a burden to the poor.

People who earn more should pay a higher percentage.

• Pro: The tax burden is put on those most able to afford it.
• Con: People who don't pay taxes but receive services have no stake in efficient government, because the burden falls on other people. Burden-shifting epitomizes what's terrible about the current tax code.

Not surprisingly, there still isn't a clear winner. However, when I look at our tax system, I see elements that fit these categories.

Our payroll taxes are flat taxes, and they seem to work pretty well. Everyone who works pays them, and everyone benefits (or expects to benefit) from the services they provide. They are also relatively easy to collect. The burden is low enough that most people pay without trying to weasel out. These look like good taxes to me.

In comparison, our income taxes are a train wreck. We have so many groups lobbying for particular deductions and credits that the tax code is like a subterranean cavern, or a hoarder's attic, or a junkyard, or an even more arcane, disjoint, jury-rigged, unstable, unbelievable metaphor. We have separate rates for different kinds of income: dividends, wages, short-term capital gains, long-term capital gains, rents, maybe farm income, business partnerships, etc. to infinity. The whole thing is a crazy mess.

I can't believe it, but I just talked myself into supporting a flat tax!!!!??!!

That stills leaves the problem of too much burden on those who can't afford it. The best way to handle this is to give realistic exemptions for living expenses. Allow exemptions per category: adult, child, elder, and maybe a few other special cases, but not many and as clear as possible.

I would also keep the earned income tax credit (or its equivalent) because I know too many people who really need this. I don't think the earned income tax credit creates a new problem (no stake in efficient government). The working poor still have skin in the game with payroll taxes. They also usually aspire to move up the income scale to where they will be paying income taxes.

So, that's my unexpected conclusion. Yes to payroll taxes. Yes to a flat income tax with exemptions and the earned income tax credit. No to lots of deductions and credits and different types of income. Case closed. (Or is it?)

Still in shock

Addendum: I think that maybe we'll need two tax brackets, maybe one for earnings under something like $200,000, and then you pay 50% more on earnings above that.

Update: When I crunch some numbers, I ended up with two brackets at 18% and 28%, though they could be high or low. (It's hard for me to estimate the changes in taxable income when deductions are eliminated and exemptions increased.)

Update again: I think 18% is too high for a flat tax. It takes too much from low earners who don't have very much to spare. If the bottom fifth of workers are earning only 3% of income in the country, what should their tax burden be?