Thursday, December 27, 2012

To Fall or Not to Fall: The Fiscal Cliff

Should we or should we not fall off the "Fiscal Cliff"?  The quick answer is we'd prefer not to, but it really depends on the alternative.

If the alternative permanently enshrines low tax rates for the wealthy, well, then go off the cliff.  Ditto if the alternative also enshrines low tax rates for capital gains, dividends and other income that typically only the wealthy realize.  Go off the cliff if otherwise it means that the elderly will not be able to afford health care or retirement in general.  Go off the cliff if otherwise it means that the Defense Department budget is totally out of proportion to our need to truly defend ourselves.

If a partial measure is proposed that preserves tax cuts for those who earn $250,000 and under and extends the debt ceiling (or eliminates the need for it to be extended altogether) go for it but if it does that while extending the unjustifiable, forget it.

The "grand bargain" that is so often mentioned truly should be a no-brainer.  Here is what it should contain:

  1. A very progressive income tax structure - more progressive than the current structure, probably with more tax levels, such as 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, etc., as income increases.  This should be the goal: the share of taxes paid by the wealthier in proportion to their increase in wealth should increase, not decrease as it has for the last couple of decades.  Apologists for the wealthy like to point out that the rich pay a higher percentage of the total tax burden than ever before but they deliberately fail to note that the income of the wealthiest Americans has grown far greater than the proportion of the tax burden that they pay has grown.  In other words, their tax burden has increased less than their wealth.  The slack has, in the past, been picked up by the Middle Class.  This has contributed to a shrinking Middle Class and reduced demand and a more slowly growing economy.
  2. No special treatment for capital gains, dividends, etc.  Income is income.
  3. A corporate income tax that is more competitive internationally, perhaps around 28% to 30%.
  4. Tax reform; elimination of all deductions and credits except for local taxes.  This could be phased in over 10 years, with a 10% reduction in allowable deductions each year until there are no deductions.  This could be made revenue neutral by adjusting the income levels for each tax bracket.  This will also help the Middle Class if the tax brackets are done correctly.
  5. Deep defense cuts as per the Simpson-Bowles commission.
  6. Universal health care - Medicare for All which should decrease the rate of growth overall of US health care spending if not decrease the cost of health care overall as it does around the world, without a sacrifice in quality of health care.  There are numerous examples of superior health care systems around the world, including Canada, on which to base our system.  This would solve two problems at once - saving money for US citizens and covering all citizens for health care.  All kinds of tweaks are possible, such as means testing, incentives, payments based on results, not based on pointless tests, etc.  Business will finally be free from providing health care, a boon to them!
  7. Tweaks to Social Security to stabilize it for the next century.
  8. Stimulus - for infrastructure, education and energy self-sufficiency - and jobs.  If we do the above, we can easily afford this, and all of these items are necessary and productive uses of capital.
You might ask, "aside from # 5, where are the tax cuts?"

Actually, to the US citizen, #6 is a huge spending cut; it's just that not all of it is a tax cut.  Does it matter to you whether you save money by having lower taxes or having health care cost less?  Health care is not exactly discretionary unless you don't mind suffering or dying.  If you consider that total health care costs might be 40% less than what they are now if a Canadian type system is  instituted (approximately 7% to 8% of GDP saved) would you complain?  Although no one is talking about it, controlling government spending pretty much consists of cutting defense and reforming health care costs, and not simply reforming Medicare and Medicaid. 

Well I think my work is done.  That was simple.

You're welcome!