Issues 8: Budget III--Solutions from the Income Side

     In his State of the Union speech, the President made clear his desire to simplify the tax code. While this is certainly a good step, it wouldn’t hurt to also bring the Federal notion of taxation back into line with the Constitution while we are at it.
     Let me start with a brief history of one of our most contentious taxes, our income tax. The Constitution says that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” In 1894, Congress passed a graduated income tax on various sources of income. The next year, in Pollock v. Farmers’ Loan & Trust Co., the Supreme Court held various parts of the income tax Unconstitutional. Rather than removing the individual clauses that violated the Constitution, the US Government instead decided to amend the Constitution with the 16th Amendment, saying “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
     When the Constitution is not keeping up with changing times, it should be amended. Our Founding Fathers were intelligent enough to build in a mechanism of change, but that change should be applied to broad principles, not to creating loopholes to push an agenda. Making an amendment to say that in a certain instance the government need not abide by the Constitution is certainly an abuse of the amending power. Repealing the 16th Amendment and striking down any portion of the tax code that would then violate the Constitution would be a good start to simplifying the tax code and respecting the Constitution and its intent for governance.

     As I mentioned before, cutting the four programs of Social Security, Welfare/Unemployment, Medicare, and Medicaid would cut 56% of Federal expenditures. As they disappear, so would the need for much of the income the government currently takes. As the graph shows, 45% of Federal revenue comes from personal income tax, which could eventually be done away with. This income tax should be kept until the commitments to those programs are met, but be amended to be a flat percentage tax on all incomes, without credits, exemptions, or graduations; 10% would be an admirable middle goal. When the obligations for the dying programs are met, the income tax would expire altogether.

     In addition to personal income tax, payroll tax on business, corporate income tax, inheritance tax, and any other tax associated with Americans becoming more prosperous should also be done away with. An interesting academic publication, “On the folly of rewarding A, while hoping for B,” highlights the potential for unintended consequences in taxing prosperity. All of these various taxes should instead be replaced by a national sales tax. This tax would tax everything that a person or business buys in proportion to the price. I would graduate this tax, with essentials such as the sale of food, shelter, and clothing not being taxed, while basic items (toys for children, books, etc.) are taxed at perhaps a 10% rate, luxury items (jewelry, cars, yachts, etc.) are taxed at perhaps a 25% rate, and finally, harmful items (alcohol, tobacco, etc.) are taxed at perhaps a 50% rate.
     This national sales tax in place of income tax has several benefits. First, it gives every individual more control over how much of their money they keep and how much they pay in taxes. In an income tax, you are taxed a certain rate as you try to prosper, without recourse. In a sales tax, especially one where necessities for life are not taxed, a person has complete control over how much of their money they keep (useful if you are saving for a certain goal) and how much is surrendered through taxation.
     It has the added benefit of indirectly having those who can afford to do so pay more taxes. The more you can afford to buy, the larger share of the tax burden you will shoulder. Additionally, businesses will still pay taxes as they purchase items to keep their business running.
     There are also ways to generate income outside of taxing honest citizens. Some ideas include using the Justice system to generate revenue through more fines and less jail time, creating the dual benefit of more income and less expense. Other Justice adjustments may make it possible to generate government revenue. I will expand on these ideas in a later posting discussing the criminal justice system and how it also may be improved to be more of a benefit to society.
     Even without the Justice system modifications, the tax changes that I mention in this entry serve multiple purposes. First, they are fairer to all citizens. Second, they give every individual more control over how much of their money is kept and put toward ends they deem beneficial compared to how much is taken by the government. Third, it does all of this while ensuring that those who can afford to pay a larger share of taxes do so. Finally, it simplifies the tax code to be straightforward without the loopholes that many people use to pay less in taxes or to not pay taxes at all. The best part is that we can accomplish all of this while still maintaining the libertarian principle of limiting government’s involvement to bare minimums, allowing each individual the most freedom, and still supporting the necessary government functions through some taxation. Let’s be honest; no matter how taxes are distributed or collected, they suck. This way just sucks the least.

Issues 7: Budget II--Solutions from the Expense Side

     When discussing how to balance a budget, there are only two options. One can increase revenue, or decrease spending. As a proponent of libertarian ideas, I would suggest cutting spending to the point where all spending is supporting one of the necessary purposes of government without undue excess. When this point is reached, it is time to increase revenue, because a government without a budget is not a viable government. Since four out of the top five programs, totaling over 56% of the budget, are not in the federal government scope of protecting people’s liberties and opportunities from force and fraud, I think it is obvious where we must start, although the specifics do get more nuanced.

     Without mincing words, I will say it—Social Security, Unemployment/Welfare, Medicare, and Medicaid should be done away with at the federal level. These programs are outside of both the libertarian idea of government, as well as the US Constitution’s outlined purpose of the federal government. No responsible government can, however, leave promises unfulfilled. Many retired people were promised Social Security, and have planned their lives around this government support. People have also made life plans on Unemployment, Welfare, Medicare, and Medicaid and to remove these pillars from beneath honest Americans would be a travesty. The best solution to both promote liberty and maintain integrity is to honor these commitments to their conclusions, while not making any new commitments.
     Retired people need to keep getting social security, while those who have paid into social security in any way need to be compensated at the expected rate, calculated from when they started paying to when the program is legally “disbanded.” No new social security obligations should be made. This will almost certainly require temporarily increasing revenue in order to cover the cost of meeting the obligations already incurred, but connected taxes would expire as the commitment to the program comes to an end, much like I discussed in the last entry. This solution would in the long run correct an overstep by federal government and reduce the federal budget. The same principles should be applied to other federal programs that overstep the reach of the government.
     Despite the lack of support to the American people by the federal government that I propose, I am not heartless. Depending on the Constitutions of the individual states, these functions could be resumed at the state level depending on the people’s wishes at a lower level of government. With greater person-to-politician representation and easier transit between states, this lets state government be more responsive and diverse in dealing with contentious political issues. This, in turn, lets programs of support continue in some areas while others maintain a greater measure of liberty, all the while allowing Americans to easily live under a local government that they support and believe in.
     Additionally, many social practices can fill the void left by these programs. Many churches and communities regularly come together to support overwhelming medical bills. Medical insurance itself could change to a form more like car insurance, where people pay for routine visits (oil change or physical examination), and insurance companies cover only major problems. Social Security is a program that could be all but done away with solely by intelligent personal financial decisions and stronger family cohesion. Many cultures around the world have multiple generations of family living in a single house, the young supporting the old just as the young were themselves supported in childhood. My point in saying these things is not to suggest that they are a reason to get rid of federal programs or that people should change the way they live, but that when the federal support net is not available, human ingenuity finds ways to survive and prosper.
     Another behemoth within the budget is the defense allocation. While defense is unquestionably one of the functions of government, the budget for defense does not necessarily need to be as large as it is, either. When a private company comes to the end of the year with unspent money, they proudly show that they have done more with fewer resources and boast how much money they saved their customers (in the military’s case, the public). On a fixed budget, the leaders instead rush to spend the remainder of the budget. The reasoning is simple—when you have unspent money, it means you are budgeted too much, and you lose money the next budgeting cycle. In an environment where brothers-in-arms contend with each other for their portion of the budget, not spending your money is akin to losing money. It is possible for even the DoD to get by with less (though previous stipulations about increased spending during a time of war bear further investigation).
     This principle of getting by with less can be applied to any Federal department that falls within the bounds of the Constitution (i.e. that does not deserve to be cut completely). Businesses who do not have the option to print money and consequently must spend within their limits have developed many ways to do this effectively. The government, if they do not do so already, should hire business analysts with the sole function of finding ways to make the government more efficient—a practice which should become an investment. Systems like Lean Sigma can be taught and used throughout our departments. No matter the department in which you work, Justice, Defense, etc., one of your main jobs outside of your defined and unique role is to safeguard and wisely employ American resources.
     I know that these issues are contentious and I will not win many supporters by espousing these views. That is why they are known as the “third rail of politics”—to touch these issues is political death, so they are left to fester by today’s politicians. This is not likely to change without either a change to the way congress does business (like term limits), or the way people vote (like sacrificing short-term gains for the long-term benefit for both themselves and country). These are separate issues which I will not address in this post, but hope to tackle later. The next post, however, will be a discussion of Federal income, ranging from how to simplify and Constitutionalize the current tax code to which taxes and income sources best support individual liberty while providing government with a reasonable amount of income.

Issues 6: America's Most Dire Problem--The Budget

     The most pressing single problem that America faces today is its unbalanced budget replete with soaring spending, pitiful tax structure, and habit of kicking the problem down the road in favor of political expedience now. The budget for 2010 totaled $3.55 trillion dollars, while the CBO estimates that the average deficit for each year between 2009 and 2012 will be $1.21 trillion. I am not a national budget guru, but I believe that means that less than 2/3 of the US government expenditures are being accounted for in some sort of revenue. This sort of fiscal irresponsibility on an individual level is a large part of why so many people were hurt by the recession, and on a national level is dangerous and unsustainable. One need only look to our European neighbors to see the dangers of writing checks you can’t cash.
     This is a large and complex issue; in order to keep the posts manageable I will break this particular discussion into three parts. The first will discuss the theory of government spending and the budget as we know it. The second will be analysis and suggestions for solutions from the spending side and the third will do the same from the revenue side.
     Consider the following example: a country has 100 citizens, each making $100 per year through private efforts. With no government, each citizen keeps that $100 and has a commensurate quality of life. As discussed in earlier Foundations, government is necessary and has purpose, so this country creates a small government. One man constitutes the government and gives up his job to do so. In exchange, his efforts are supported by each citizen being taxed an amount to create an equity between private and government quality of life. Now there are 99 people working, making $100 per year, and being taxed $1 each. This means they take home $99 per year, and the government makes $99 per year. The effect is minimal, but there is a government.
     Now, consider a larger government. In this new example, 50 people work for the government. The remaining citizens still make $100 per year, but are taxed 50% to pay for the government. Now, each privately employed citizen takes home $50 per year and each member of the government makes $50 per year.
     Although the latter example is extreme, it is intended merely to provide a point, that being that the same country will have a lower standard of living and productivity as the size of government increases. This is the part that is unsustainable and that is leading to problems around the world. A country can support a small and necessary government without much inconvenience, but as the elephant in the room gets larger, eventually someone must notice.
     So how does the US budget actually break down? It is easy to get mad at congress and blame things like pork and bailouts, but looking at a budget breakdown is incredibly revealing. The five expenses that account for 75% of the budget are, in order:

     1) Social Security (19.63% - $696.8B)
     2) DoD (18.74% - $665.2B)
     3) Unemployment/Welfare (16.13% - $572.6B)
     4) Medicare (12.79% - $454.0B)
     5) Medicaid/State CHIP (8.19% - $290.7B)

     The other quarter of the budget, roughly $871B, is split among 26 other categories, to include everything that makes the government actually work. With only 66% of the budget actually paid for, congress could, under the current structure, cut the entire Federal Government with the exception of these entitlements and still not be able to afford to keep them running. So much for using a scalpel.
     Many solutions for dealing with this problem are politically charged and may mean political suicide to the person who tackles them. This is one reason the problem is proliferating. However, there is a first step that is applicable to any specific implementation and also politically palatable: Congress should pass a law stating loosely that in no period (say, 2 years) could expenditures be greater than income, except in a time of declared war or declared national emergency. If these exceptions are used to create a debt, that debt must be paid off in 3-5 years (or some other reasonably stated time) per year that debt was incurred (for instance, a deficit is run for 3 years for a war, it must be paid off in 9-15 years).
     This type of legislation would force Congress to answer some of the difficult questions that they choose to ignore for short-term political gain. It would circumvent the direct need to cut popular programs and instead allow Congress a freedom of action on how to implement a balanced budget subject to the wishes of their constituents. If Congress needed to raise taxes in order to cover temporary paydowns, it is important that these taxes be denoted as temporary and tied to a particular deficit that would cause them to automatically expire once that debt was completely paid down.
     While I think that this first step is both universal and essential, there are many specifics that still need solutions. The next discussion will focus on solutions for the expenditures side of the house and discuss not just what and how much to cut, but how to proceed honorably and continue to meet all commitments into which we as a government have already entered. Following that, I will make suggestions for income based not only on following the letter of the Constitution, but also respecting what it tried to create. The President mentioned his desire for a simplified tax code in his State of the Union Address, and I will include my vision for how that can be accomplished within the principles of Liberty. I hope that many of you comment on these entries and we can enter into an intelligent, rational discussion with sights set on solutions to problems.