October 17, 2010

Changing Course: Twelve Ideas

by Hal Gershowitz

Comments Below

Fixing Washington, or more correctly, fixing the government for which about half of us pay and for which all of us are heavily in debt, does not require a political messiah, nor does it require a revolution.  What it requires simply is common sense and the steadfast will to apply it.  A substantial majority of Americans feel we are on the wrong course and they are correct.

So here are some ideas for changing course.  We are not economists or, as economists enjoy referring to themselves, purveyors of the dismal science, but we do know, as do most Americans, that the country in so many interlocking ways is on a downhill slope and if our politicians continue to put themselves before country, the slope will become a spiral.  The prospects for a sound and healthy future for America are eroding in inverse proportion to the wasteful, runaway spending, burgeoning growth in government and the escalation in the nation’s debt and deficits.

It seems that most everyone in the country knows that except, apparently, the people we send to Washington to represent us and the legions of staff they hire to do their bidding.  Instead of tackling systemic problems they nanny us, making choices for us as important as our health care and as trivial as our light bulbs or our toilet tissue.  We have to begin changing course now if we are to avoid forfeiting the American Dream, American leadership in the world and a secure future for our progeny.   So let’s begin to get serious.  To start the discussion, we would propose the following reforms.  They are dealt with in broad strokes.  We do not have legions of research staff and so we acknowledge that our proposals will need further refining and definition.

1. Establish a Permanent Bipartisan Commission on Debt and Deficit Reduction to identify annually those areas within the federal bureaucracy where, because of redundancy with other federal agencies, alleviation of prior need or general ineffectiveness, costs can be reduced or eliminated.  Each year the Commission would make specific recommendations to Congress for the elimination or reduction of such costs and Congress should, then, vote by roll call “yea” or “nay” on the recommendations.  Every year every member of Congress would vote for or against well-reasoned reductions in spending.  Everyone agrees that there is waste in every federal budget. Such waste invariably is built into subsequent budgets and therefore compounds year after year. Our proposal would require that such waste be identified and that Congress by roll call vote be required to vote up or down every year on its elimination.

2. Let’s change the way we tax our people and our businesses. A new tax code predicated on a combination of income taxes and a flat tax on consumption would be a good beginning.  Recognizing that others who have more economic data available to them may have alternative suggestions to accomplish the same kind of tax policy reform that we propose, let us start with a simple and largely uncontested premise.  Many of America’s problems in international trade and competitiveness are a result of our low rate of saving.  To encourage saving we should concentrate more of our federal taxes on consumption.  To do this, we need much lower marginal tax rates on income with a national flat consumption tax (not a VAT tax which is supposedly painless because it is hidden from the consumer).  For example let’s consider taxing all income and all wages ( earned income, dividends and capital gains) at the same rate — which would be much lower than our current rates.  The tax would be applied in small graduated steps ranging from 5% to 9% on income from all sources up to $100,000 and then applied at 10% on all income above $100,000 up to $200,000 and 15% on all income above $200,000.  In addition, a flat tax on the retail value of all defined purchases would be levied.  Taxpayers living at or below ten percent above the poverty line would be excused from the consumption tax.  Defined purchases would exclude food, medical costs and other necessities.  To avoid record keeping requirements, the tax could be collected by the vendors who sell the covered classes of goods.  The rate on the consumption tax would be levied so that together with the yield from the new individual income tax rates the total federal revenues would be close to the federal revenues from the existing individual income tax.  The tax on American productivity (what the people earn) would thereby be reduced and a new tax on consumption (what people spend) would be created.  All exemptions and deductions would be eliminated.

3. The estate tax exemption should be raised to $5 million (indexed for inflation) and estate taxes should be limited to 25% for estates between $5 million and $10 million and 35% for all estates of over $10 million.

4. Corporate taxes should be pegged to be no higher than two percentage points below the average corporate tax rate levied on corporations comprising the top eight industrial nations, excluding, of course, the United States, (i.e., the leading trading partners with whom we compete).  This proposal is designed to help American firms remain competitive in a global economy.  Unlike trade wars, or currency devaluations which are based on the concept of beggar thy neighbor this might set off a competition among our trading partners to lower tax rates.  Our tax laws should never place American industry at a competitive disadvantage to our global trading competition.

5. As a condition for continued federal funding for education, tenure for all kindergarten through 12th-grade public school teachers should be abolished and merit pay should be established for all public school teachers so that compensation is predicated on measureable performance and progress in the classroom.  School districts must be incentivized to terminate all poorly performing teachers.

6. Congress must change its rules to require that it not adjourn or go into recess without a federal budget being approved and all appropriations bills enacted before the beginning of the fiscal year to which the budget and appropriations apply.  No more ducking controversial votes with so-called Continuing Resolutions.

7. Senate rules should be changed to eliminate the practice of allowing “holds” to be placed on any Presidential nominations or appointments to federal office by individual members of the Senate.  Every appointment or nomination made by the Executive branch should be subject to a timely up or down vote by the appropriate committee or the entire Senate.

8. Fannie Mae and Freddie Mac should be privatized and receive no future benefit as a Government Sponsored Enterprises.   These entities should go through reorganization to divest them from government control, and they should, thereafter, be allowed to sink or swim based on the true value of their assets, and the value of the service they perform.  The implied government full faith and credit behind Fannie and Freddie’s obligations is largely responsible for the bloated asset values imputed to housing mortgages and the real-estate bubble that subsequently burst.

9. Instead of pay-go rules with more holes than Swiss cheese, each chamber of Congress should adopt a rule which would hold Federal budget increases on existing programs to the increase in the Consumer Price Index or other appropriate measures of inflation.

10. The age of eligibility to receive Social Security and Medicare benefits should be periodically adjusted for all eligible participants born after January 1, 1970 and pegged to an actuarial calculation based on ten years less than the average life expectancies at pre-determined years going forward.

11. The new health care reform law should either be repealed or suspended until the Supreme Court finally decides on its constitutionality.

12. A new means based rule for Medicare eligibility, at least for those born after 1969, must be enacted.  While the work of the current deficit reduction commission might provide an answer, a fair result must await a determination of whether seniors will be able to obtain private coverage under the health care reform bill if it survives Supreme Court consideration and/or changes to the law made by the next Congress.

We do not, of course, have any illusions that that our twelve ideas for changing course will be adopted in their entirety and we certainly believe that there are improvements that can be made to them.  We do believe, however, that each of these suggestions is at least worthy of immediate and serious discussion. The reforms we are proposing, or something very close to them, are needed sooner, rather than later; before the hole into which the nation has dug itself is harder to escape than the hole from which the brave Chilean miners were rescued – that is before we’ve dug a hole from which there is no escape.

All comments regarding these essays, whether they express agreement, disagreement, or an alternate view, are appreciated and welcome. Comments that do not pertain to the subject of the essay or which are ad hominem references to other commenters are not acceptable and will be deleted.

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6 responses to “Changing Course: Twelve Ideas”

  1. […] the rest here: Changing Course: Twelve Ideas – Of Thee I Sing 1776 More Changing Course: Twelve Ideas – Of Thee I Sing 1776 Of Thee I Sing is a weekly, on-line […]

  2. Stephen Prover says:

    Surprisingly all your suggestions have merit and should be discussed and possibly adopted. # 11 should be discussed, dry cleaned and burned. Thankfully, this blog does not conclude, as do most conservative pieces, with the canard that ridding Washington of President Obama and the evil progressives is the only road to a healthy economy and “American Exceptionalism” (code word for neocon nirvana)

    • With two of three district courts having now determined that there is sufficient merit to the multi-state, constitutional challenges to various provisions of the health care law for these suits to move forward, we see no reason “to burn” our suggestion (#11) that the Act be repealed or suspended until its constitutionality is determined. Repeal (or suspension) of a poorly conceived, poorly considered, largely and irresponsibly unread, unpopular transformative law seems, to us, to be a reasonable course of action. We do agree with the commenter’s observations, however, that ridding Washington of President Obama and the evil progressives isn’t the only road to a healthy economy and “American Exceptionalism.”

  3. steve marcus says:

    A well done piece, as usual. I have two questions as it relates to a consumption tax. First, if we tax (and thus reduce) consumption, what is the effect on the economy? In recent years it’s been the consumer that’s kept the economy afloat. And secondly, how do you implement the exemption for the poor? Do they carry some kind of card identifying them as below the poverty line?

    • We believe the lower marginal tax rates we propose for most taxpayers (as well as a lower capital gains tax, dividend tax, estate tax and corporate tax) would produce a strong net, long-term positive stimulus to the economy far offsetting reductions in spending. We would anticipate a federal tax exemption card could be furnished to all tax filers with income below a level of 10% above the federal poverty line.

  4. We believe the lower marginal tax rates we propose for most taxpayers (as well as a lower capital gains tax, dividend tax, estate tax and corporate tax) would produce a strong net, long-term positive stimulus to the economy far offsetting reductions in spending. We would anticipate a federal tax exemption card could be furnished to all tax filers with income below a level of 10% above the federal poverty line.

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