The president has just agreed to a deficit reduction deal that would reduce federal expenditures by $900 billion over the next ten years beginning October 1, 2011. The annual shortfall is currently at about $1.1 trillion. This agreement would cut that to $1 trillion.
There is a provision to come up with future cuts of more than $1.5 trillion over the ten year period. That would reduce the $1 trillion annual deficit to about $850 billion. Our current $14.4 trillion accumulated deficit would be $23 trillion in ten years if these cuts take place.
Some of us may remember that we tackled the deficit in the mid 1990s. By fiscal 1999-2000, under Democratic President Clinton, we were running an annual budget surplus and headed to eliminate our then accumulated deficit by 2003. But after 2001, our Republican President cut taxes mainly helping the highest earners and got the country into two wars. The two wars costs were not considered as part of our budget which was running $500 billion in the red without these costs. Then to make matters worse, the tax cuts added no new jobs and when the housing bubble burst, so did our economy. We lost millions of jobs. With as many as 15 million Americans out of work and losing 750,000 a month, the country’s tax revenues shrank while government costs for unemployment insurance and health coverage rose dramatically.
The incoming President inherited a $12 trillion accumulated deficit and was forced to spend more than $1 trillion a year more than we were taking in to save our very economy.
Now the deficit is at $14.4 trillion and we have to stop increasing it and then must work to eliminate it. But how? We are recovering from a devastating recession and still have very high unemployment. The wrong kind of cuts could further weaken the economy.
Here’s what I would do.
First I would cut all costs which leave our country. These dollars do not circulate here and stimulate our economy. The first expenditure that comes to mind is foreign aid. The U.S. which is now borrowing $.40 for every dollar we spend, gives 51 countries a total of $50 billion a year in foreign aid. The biggest single recipient is Israel at about $5 billion. But Egypt and Pakistan are also getting billions a year. Most of the aid is misused and goes to corrupt leaders rather than their intended needy. Some of our money actually goes to fund our enemies.
I say end all foreign aid, even to Israel the country that probably deserves it the most. That would save $50 billion a year or $500 billion over ten years. It would not cost any American jobs.
Next I would look at our 700-1,000 military bases overseas.
I would bring our troops home from Iraq, Afghanistan, and Pakistan closing all our bases there. I would close all of our non essential bases everywhere else including Asia (Japan and South Korea as well as the Philippines), Western Europe defending against a Soviet Union that no longer exists, and the Middle East. Host countries that want us to stay, if any, can pay all our related costs.
The troops that are in the reserves stationed in Iraq and Afghanistan would return home to their civilian positions. The enlisted service personnel coming home to U.S. soil would be free to leave the service or stay on meaning that we would recruit fewer replacements. Over a 10 year period, this closing of foreign bases as well as ending our wars in the Middle East would save us at least $4 trillion. Remember most of the money we are now spending overseas, stays overseas.
Next, I would look to cut waste and fraud in federal programs. That is said to be $150 billion a year according to a recent congressional study. That is $1.5 trillion over the 10 year period.
That would be $6 trillion in savings over a ten year period.
But what about increasing revenue? I would eliminate the subsidies for farmers and oil companies. Then I would simplify the federal income tax code for individuals. I would eliminate all itemized deductions and replace them with a standard deduction of $15,000/$30,000 for individual/couple. I would have all sources of income treated the same and combined. So the net wages (not taxing the payroll deductions) would be added to the interest amount, the Social Security benefit payments, unemployment benefits, dividends, lawsuit settlements, bonuses, stock options etc. There would be just five tax brackets ranging from 10%, for net incomes up to $50,000 up to a maximum of 30% for income over one million dollars a year. There would be no credits like for education or “earned income.” Taxes would take minutes to compute. The top earners would see their marginal tax rates decline from about 36% down to 30%, but the 30% will be with no deductions other than the standard.
This change in the tax code would generate approximately $300 billion a year or $3 trillion over ten years
Self employed and corporate tax codes would also be streamlined and simplified producing more revenue with fewer deductions.
All told there would be $9 trillion in savings over the ten year period. It would leave us with only a $16 trillion deficit (not a $25 trillion one) which would be eliminated in another 10 years with more people back to work by then and therefore paying instead of costing taxes.
And who would be hurt by all these changes?
The rich would be paying more than they are now. Every dollar over one million would be taxed exactly 30% and every kind of income would be treated equally - no more 15% for capital gains. They would have less money to invest and less to spend lavishly, which while decadent, pays the workers well which then passes through the economy. They might be less generous in their donations to charities since they will not be deductible.
Institutions that relied on tax deductible donations might suffer, at least at first. Soon people will find that they give because they want to help, they want to give back. That is their motivation and not getting 15 or 25% of it off their taxes.
Will people stop buying homes because they can’t write them off? Most home owners do not itemize more than $30,000 on their joint returns. They would get a standard deduction of $30,000 under this new plan. Again, soon people will realize that saving a little on taxes is not a big or good reason to buy a home.
The people at the bottom of the economic scale will also suffer some. Half of all wage earners not only pay no federal income taxes, they actually receive money in the form of Earned Income Credit and Making Work Pay Credit - about $115 billion a year. This would end. And everyone earning more than the standard deduction ($15,000/$30,00) would pay some tax whereas now they would be getting money.
Tax preparers, who usually are seasonal, would lose because anyone who can add and subtract could do their own taxes in minutes. In fact in a few years the system could do it for the taxpayer. It would know every income source tied to the social security number and since there are no itemized deductions, IRS would know exactly what your tax was. Tax preparers would still be needed for self employment and other business tax returns which would also be streamlined but would have to have deductions like payroll costs and rent.
Our reduction in foreign aid will mainly hurt the corrupt government officials who build palaces, secret weapon systems or large Swiss bank accounts with our aid money. It would hurt Israel, the one country that uses the aid wisely.
Withdrawing our forces from around the globe might actually make the world a safer place and create a better image especially in the Arab world. Getting out of Iraq and Afghanistan might mean that they will eventually fail. It will be their failure as it will their success if all goes well. We must let countries succeed and fail on their own. It builds their national pride and self esteem so that they can appreciate us as friends and not as overlords.
Many of our troops fighting in Iraq and Afghanistan are in the reserves and would love to come home to their regular lives. Others, stationed overseas would like to come home and return to civilian life. They would be happy about these proposed changes. The question will be how many are left and where can they be assigned here in the States or in select strategic positions and what kind of forces do we need. The support personnel at the foreign bases would lose their jobs. The base teachers, nurses, custodians etc., many from the host country would suffer in this change.
After all these changes, America would be stronger economically and even militarily. America and the world would be safer. We will no longer be the 911 of the world.
All these recommended changes do not address the creation of more jobs, keeping Medicare and Medicaid solvent and protecting the future of the Social Security system. These issues will be addressed in a separate column.
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