Saturday, November 13, 2010

A Tax Compact – No One Will Ever Agree on One

What our country has been subject to is two political parties trying to stimulate the economy using their respective formulae for Kool-Aid.  The ideology of each party doesn’t necessarily work as advertised.  Each party should go back to the laboratory and find out what really works.  Our economy lurches this way and that way without real focus.  Republicans stimulate with tax cuts, and then the Democrats stimulate with spending, and we are in a mess.  We need a new approach.

I suggest a new compact between the citizens of the United States and their politicians.  Each party should define how much service government should provide for how much tax.  Make it simple.   For the Republicans, how about basing tax cuts on a set of tax principles, not “yang” the economy from the Democratic “ying” direction?

To create a tax compact with the citizens, the Republicans should answer the following questions.

  1. Who should pay taxes?  50% of the citizenry?  80%?  90% 
  2. Who should be exempt from taxes?
  3. How much tax is too much?
  4. How much tax is too little?  
Answer these like Reagan would.  I am going to give my take on these questions in future postings.  If we establish a baseline based on a set of principles, and if we have to simulate, then we will know the point to which we have to return once growth has been achieved.

Thursday, November 11, 2010

Timing is Everything – The Deficit Commission

The news as of late (apologies for the style, but I just finished watching my almost favorite new show, which is from Britain, and is called Top Gear.   They do outlandish things to cars while speaking dry English wit.  I just saw a tank chase a Land Rover.)

Anyway, let me start again.  I need to get back into my regular American style of writing.  Okay, I’m ready.

There is news that the U.S. deficit commission has recommended some severe cuts in Social Security.  Now that it is clear that the Social Security fund will start to pay out funds as it takes them in around 2016, there is a need to adjust the payout in benefits so that they do not exceed what is being paid in.  In other words, Social Security needs to balance the inflows with the outflows.  Cuts in benefits are being proposed to achieve this calibration. 

One proposed benefit cut is to extend the age when a person can start receiving the full regular benefits from 66 to 68 in 2050.  Of course, Eric Cantor, the House of Representatives soon to be Majority Leader has recommended that a person eligible for Social Security should be able to take a tax credit in lieu of the regular payments.  This would apply to those people who can afford to take such an option.  There are several articles on the commission’s report, but I am providing a link to the Barron’s article. 

The article also discusses fiscal spending cuts as well as ending of some of our most treasured tax deductions, including the most beloved home mortgage deduction.  Since the next two posts will be on taxes, I thought the article would serve as a good transition to the next topic.   

(By the way, for those interested, the tank caught the Land Rover and blew it up.  The host commented that the Land Rover was an excellent off-road vehicle, but was not well suited for invading a country.)

Sunday, November 7, 2010

Hey Republicans! You Can’t Get There From Here!

Besides It Was A Bad Idea Anyway.  The “it” is the Republican proposal to privatize Social Security.  Ever since President Bush based his second term on this idea, I had sincere doubts.  Since the recession started, it has become obvious to me that the idea will never work without burdening our economy with a lot more debt, and since we just celebrated an election where a mandate for less debt was embraced by the voters, well, you get the idea.  Anyone want to be a one-term hypocrite?

Before talking about debt and Social Security, lets discuss a few facts about the program.  When Social Security was adopted in the 1930’s the average life expectancy was 63.6 years.  Today it is 77.5.  In the 1930’s only 5.4 percent of the population were age 65 and above.  Today it is about 12.4 percent.   These statistics say that when Social Security was established, there was a larger population of workers supporting a relatively small number of retirees.  Today, the burden is far greater because there are not just more retirees per capita, but the average retiree is living longer, a lot longer.

So, when Social Security was established, the administrators could pay for the retirees of their time as well as pay the excess into a separate fund for future retirees.  Payments out of the fund are projected to exceed payments into the fund by 2016, and it is projected that the fund will be depleted by 2037 if no other action is taken, including the Federal Government paying back what it has borrowed from the fund over the years (remember the Al Gore “Lock Box”  - remember to say it slowly with a deep voice) after which the year of depletion will extend to 2052. 

Compare this to my previous post on creating a savings account.  We are not collecting enough Social Security revenues.  We have avoided insuring that the fund has enough inflows over time to pay out the funds it is obligated to payout.   We soon will be paying out more than we can without maintain the fund’s balances.  The amount of funds will not cover all the plan’s obligations. 

The significant thing is that beginning in 2016, the amount we pay in will now begin to go out directly to our retirement generation.  In this context, the Republicans want to come along and privatize Social Security.  That means taking the payments that are going directly out to retirees and putting them aside in investment accounts.  This raises the question of if we take moneys that go directly to retirees and divert them, how do we pay for current obligations?  The answer is debt – we borrow it. 

In a time when the public wants public debt to go away, Republicans want to increase debt to restructure Social Security, and they ran on reducing the debt.  As I said in the title, you cannot get to a place where we privatize Social Security from our country’s tenuous financial position. 

In our country, Social Security is a promise from each generation to the next.  We have a promise to keep.  For this reason and this reason alone, any idea that endangers this promise is a bad one.