Future Massive Federal Budget Deficits is the largest threat to the United States of America's position as the world's largest economy. In general Federal Budget Deficits hurt the economy in three ways.
First, they represent a system of Generational Larceny where current taxpayers push deficits onto the shoulders of future generations, their children and their children's children. For example under former Presidents Ronald Reagan, George H. W. Bush and George W. Bush, over a 20 year period, the United States Government ran up $9.5 Trillion of Federal Budget Deficits. Many of us were still Children or perhaps College Students when Reagan began to run up these deficits. Some of us weren't even born yet. Yet, we all are responsible for paying the interest on this Debt to the tune of over $300 Million per year and will continue to do so until the Reagan-Bush-Bush Deficits are paid off. Plus we still have to pay the Reagan-Bush-Bush Deficits Off. [By the way, all other presidents over a 204 year period prior to Reagan had only accumulated a Federal Debt of less than $1 Trillion. During the 8 years of the Clinton Administration in the mist of the Republican Deficit years, Bill Clinton only ran up a Deficit of about $1.4 Trillion. And although Barack Obama has run up $3.2 Trillion in Federal Budget Deficits in just 2 years, his is the situation that he inherited along with the Great Recession.]
Second, the estimated $400 to $500 Billion in interest that we will have to pay on the Federal Budget Deficit for each of the next 10 years represents tax dollars that we pay that will never be used to provide income or medical care for the elderly, build roads, teach children, or pay the soldiers who protect our nation. It's just interest. Its money that is gone and represents just that much more of higher long term taxes that we will all have to pay.
The third and the most important reasons why Federal Budget Deficits hurt the American Economy is because IN NORMAL TIMES, when the Federal Government runs Deficits the Government has to borrow that money. The Federal Government will always get to borrow that money, but in the process interest rates will rise and the Federal Government will crowd-out other institution from obtaining that capital. Those intuitions include individuals who would like to use that capital to purchase new homes, new cars, go on vacation and send their children to college. But more importantly those institutions include businesses that would like to use that capital to purchase new plants and equipment, train new workers, and invest in Research and Technology. These are the types of investments that result in faster economic growth, higher income and a higher standard of living for all Americans.
That is why we must work to reduce our Long Term and Mid Term Federal Budget Deficits.
Now, I break down the federal Budget Deficits into three components, Long Term Defects, Mid Term Deficits and Short Term Deficits.
LONG TERM DEFICITS:
Long Term Deficits are those Deficits covering periods in the future, 10 years out and further. These Deficits are rooted in Age Demographics related to our nation's Baby-Boomer Generation reaching retirement age. Beginning in 2011 the oldest of the Baby Boomers turned 65 and are now eligible for Medicare. Next year they will reach the age where they will be eligible for full Social Security Benefits. Ten years from now, in 2022 the majority of the Baby Boomers will reach the point where they will be eligible for Medicare and full Social Security Benefits. In addition, the oldest of the Baby Boomers will reach age 76, the earliest of the high cost medical years. From there on Entitlement Cost will begin to explode.
It is these long term projected Federal Budget Deficits that present the greatest threat to the American Economy and our long term high standard of living. If not properly addressed these long term projected deficits will either threaten the vitality of the Social Security and Medicare Benefits of Baby Boomers and younger generations or cause our economy to collapse under the weight of unsustainable Federal Borrowing.
What to do about it. Republicans want to allow younger citizens to opt out of Social Security which will leave the system with even few resources to fund the program. They also want to turn Medicare into a voucher program for people born after 1956 by giving these people a $7,000 voucher to use to go out and purchase a health insurance plan. Now exactly what kind of Health Insurance Policy can a 65 year old person purchase with just $7,000? What do you think that person can purchase with $7,000 when they turn 75? How about 85? On the other hand many of my fellow Democrats want to only increase taxes on the top 2% of Americans. Though the top 2% of American Income Earners make a lot of money, when you do the math you are not going to raise enough money to properly fund these entitlement programs by just taxing the rich without charging them a top marginal rate significantly impeding economic growth.
What is needed is a broad based increase in the FICA Taxes that fund Medicare and Social Security.
Medicare: In my plan, the Medicare portion of the FICA Tax is going to have to be slowly increased over 16 years from the current combined rate of 2.9% [1.45% on the employees and 1.45% on employers] to a new combined rate of 4.5% [2.25% on the employees and 2.25% on employers]. This represents a 55% increase in the Medicare Tax rate which no one will like but it is necessary because the ratio of retires to every worker is going to increase by 55% from the current ratio of 1 retiree for every 3.3 workers to 1 retiree for every 2.3 workers. Those are just the demographics. Those are the facts. I didn't make them up. And as much as we want to wish them away, it's not going to happen.
The reason why I say increase the rate slowly is that if you increase the rate slowly, by a combined rate of .1% [.05% on the employees and 0.05% on employers] is it will barely be noticed. The medium salary or wage for a full time worker is $50,000 per year and will receive a $1,500 per year raise on average over each of the next 16 years in 2012 dollars. The annual increase in his or her Medicare tax will be only $25 per years. [To be economically honest, the increase would be $50 when you include the employer's share because essentially employers will pay employees less when their share of employee related taxes increase.]
Social Security: In my plan the Social Security Tax portion of the FICA Tax is going to have to be slowly increased over 4 years from the current combined rate of 12.4% [6.2% on the employees and 6.2% on employers] to a new combined rate of 15% [7.5% on the employees and 7.5% on employers]. This represents only a 20% increase in the Social Security Tax rate, far smaller than the 55% increase I suggest for Medicare. The reason is, the Social Security System is not facing as severer future deficits as the Medicare system is. In addition, this plan includes reducing Social Security Benefits for reciprocates born after 1949 that are paid out of the Social Security Transfer Payment System and allowing taxpayers to invest the entire increase in the Social Security Tax in private accounts. The higher Rate of Returns on those accounts will more than offset the reduction from the Social Security Transfer System. Therefore the Social Security FICA Tax Rate increase can be much smaller than the increase in the Medicare Tax Rate.
In short, the private Social Security Accounts will be insured by the Federal Government for the entire principal and a minimum rate of return equivalent to the average rate of return of U.S. Treasury Obligations. The default investment for these private Social Security Accounts will be U.S. Treasury Obligations. However if individuals wish to invest in other securities, they will have to purchase an insurance policy that will cost approximately 1% of the amount of such investments per year plus 10% of any annual gains. There is one other factor that the Federal Government will insure and that is this: under no circumstances will the combination of the reduced transfer payments plus the rate of return from the private accounts be less than the Social Security transfer payments under current law.
The reductions to the Social Security Transfer payments will be 1% of each year after 1949 for the first ten years [1950 to 1959]. [For example, a person born in 1950 would receive 99% of the Transfer Payments under current law, a person born the year I was born, 1957, would receive 92% of the payments under law. A person born in 1959 would receive 90% of the payments under law.] For the next 10 years the reductions to the Social Security Transfer payments will be 10% plus an additional 2% less for each year after 1959. [For example a person born in 1960 would receive 88% % of the Transfer Payments under current law. A person born in 1969 would receive 70% of the payments under law.] For the next 10 years the reductions to the Social Security Transfer payments will be 30% plus an additional 3% less for each year after 1969. . [For example a person born in 1970 would receive 67% % of the Transfer Payments under current law. A person born in 1979 would receive 40% of the payments under law.] Everyone born after 1979 will receive 40% of the Transfer Payments under current law. But this 40% of Social Security Benefits under current law plus the income earned on the Social Security Privet Accounts will far exceed 100% of Social Security Benefits under current law.
By 2019 workers born after 1979 would begin to see a larger portion of their Social Security Taxes going directly into their Private Social Security Accounts. [More Details will be provided upon request.]
Mid-term Deficits are those deficits that are projected over the period from about 3 years to about 10 years in the future. It is going to take about 2 to 3 years for the American Economy to get back to normal or technically speaking, to begin to approach capacity. When that occurs, Federal Budget Deficits will dramatically shrink from trillion dollar plus deficits of 2008, 2009, 2010 and 2011 levels, primarily because of revenue increases from: 10% more people working; average hours worked per week will increase: wages and salaries will begin to rise again: more businesses will be created; more businesses will become profitable; and overall business profits will rise. Although this is all great news, these conditions will still leave the U.S. with Structural Federal Budget Deficits in the range of $100 to $200 billion per year. Although these types of deficits would be music to our ears today, as I stated in the Introduction above, Federal Budget Deficits in general are harmful to our economy, primarily because in normal times large Federal Budget Deficits result in the Federal Government crowding out American Businesses from obtaining capital for business expansion. Therefore, these projected mid-term deficits need to be addressed.
What to do about it. In order to eliminate our Structural Federal Budget Deficit that would exist even as the American economy approaches full capacity, I propose that we implement a 1% increase in the Income Tax Rate on the first $150,000 for individuals and $300,000 for married couples, and a 5% increase in the Income Tax Rates on income for individuals that exceed $150,000 and $300,000 for married couples. In addition I propose that the corporate Income Tax rate also increase from by 5% from the current 35% rate to 40%.
Although I call for increased income tax rates for corporation and for small businesses [only small business that are owned by individuals that earn more than $150,000 or married couples that earn more than $300,000 of taxable income per year will be subject to the 5% tax increase] that are taxed at the individual level, I am not proposing an aggregate increase in taxes on American businesses. I also propose a permanent 2% Wage Income Tax Credit on all wages that are subject to Social Security FICA Taxes for all businesses. In the aggregate effect of this credit will offset the Income Tax Rate Increase for Businesses.
The purpose of these proposed changes to Business Taxes is to bring down the After Tax cost of Labor. These changes will bring down the after tax cost of Labor by 11%. And like any other commodity, if you bring down the cost of labor, businesses will hire more people.
In addition to the 2% Wage Income Tax Credit that will offset the 5% increase in the Income Tax for Businesses, I also urge the passage of a number of other pro-growth tax reduction measures that will encourage businesses to expand their operations and reward businesses when and only when they expand. These measures are:
First: I propose an Increased Employment Credit: This would be a permeate credit equal to the percentage increase in a company's annual employment head count times the wages that that company pays during that taxable year that are subject to the Social Security Taxes. For example, if a company had an increase of its employment head count for year ending 12/31/2013 of 3% and that company's wages and salaries that are subject to Social Security is $10,000,000, that company would receive an Increased Employment Credit of $300,000. If that same company had an employment head count increase of 10% the Increased Employment Credit would amount to $1,000,000. The credit would be limited to 10% for any given year but an additional 10% could be carried forward to the next year. In order for the company to retain the entire Increased Employment Credit, the head count levels for that company would have to be retained for 10 years. If employment head count levels fall, the credit will be reduced by 10% of the credit for each year of the head count level is not met over the ten year period. For example, in the first example above where head count increased by 3% in 2013, if that company 3 years later, in 2016, reduces its head count by 2% the taxpayer will have to recapture its 2013 credit by $140,000 [2% [reduction in employment] of $10,000,000 [total 2013 total wages and salaries] times 7 [the number of years from 2023 minus 2016]].
Second: In order to encourage businesses to expand their investments in production assets, I propose that we make permeate the 100% immediate depreciation expense on the purchase of all Tangible Personal Property Assets. This was a great policy that was implemented by President Obama and a Bi-Partisan vote of the Congress for 2011. In fact the majority of both parties support this in 2011, and I see no good reason why this tax preference should not become permanent.
Third: In order revive and expand the U.S. manufacturing and other sectors, I propose a 10% Investment Tax Credit on all Assets used directly in manufacturing, Construction, Agriculture and Natural Resource Production. These credits would not be subject Depreciation Expense Reductions which simply make the credit a timing tax preference, but rather this credit will be a real and permeate 10% reduction in the cost of these assets to companies in these sectors of the economy.
All of these measures will work as incentives to encourage American Companies to expand their production operations and will greatly reward them when they make these investments in production assets in employment increases. This represents a superior method of growing the economy when compared with the Republican's plan of reducing top marginal tax rates by 10% from 35% to 25% and provide those companies that make the types of investment in America that will grow the economy with much larger overall tax reductions. The short fall of the overall rate reductions proposed by the Republicans is that companies will receive the benefit of the tax rate reductions whether or not these companies expand their operations. In addition, lower top marginal income tax rates increase the after tax cost of investments and employment cost which causes companies to invest less and hire fewer workers.
I favor these smart tax preferences over top marginal income tax rate reductions.
SHORT TERM DEFICITS
Short Term Deficits are those that will occur currently and over the next 2 to 5 years. While the U.S. is still trying to rebound from the 2007-2009 recession, the U.S. Government needs to run large budget deficits in the short term. This is a time for stimulus spending on the part of the Federal Government, and not a time austerity measures, at least not in the short run.
As I mentioned in the Introduction above, the third reasons why Federal Budget Deficits are bad is that IN NORMAL TIMES, when the Federal Government runs Deficits the Government has to borrow that money. The Federal Government will always get to borrow that money but in the process interest rates will rise and the Federal Government will crowd-out other institution from obtaining that capital. Those intuitions include Individuals who would like to use that capital to purchase new homes, new cars, go on vacation and send their children to college. But more importantly those institutions include Businesses that would like to use that capital to purchase new plants and equipment, train new workers, and invest in Research and Development. These are the types of investments that result in faster economic growth, higher incomes and a higher standard of living for all Americans.
The problem is: THESE ARE NOT NORMAL TIMES. In normal times, the United States economy operates at near capacity levels. And the only times that the United States economy has not operated at near capacity levels since the Great Depression has been when the Federal Reserve Board has intentionally created a recession in order to either slow the level of inflation or to avoid the potential on slot of inflation by increasing interest rates.
But again, these are not THESE ARE NOT NORMAL TIMES. The United States economy is not operating at near capacity levels and the Federal Reserve Board is doing everything it can to bring the economy to near capacity levels. The Federal Reserve Board has reduced its interest rates to just about ZERO and has embarked on two rounds of Quantitative Easing to the tune of $2.6 Trillion by purchasing U.S. Securities. The Federal Reserve Board has done everything it can to stimulate the U.S. economy. But more must be done, and it must be done on a fiscal basis by the U.S. government.
The American Consumers, who have money or access to credit, have reduced their purchasing levels. American Business who have money or access to credit, have reduced their purchasing levels because of American Consumers. Because Banks have tightened up their lending requirements, many more American Consumers and Businesses have been denied credit and as a result, have reduced their purchasing levels. Some institution somewhere must pick up the slack. That institution must be the United States Government.
The United States Government must run federal budget deficits until the American economy begins to approach capacity levels again. As the American economy approaches capacity, those deficits will need to be slowly reduced. Therefore, I support a plan to reduce Federal Income Tax rates by 5% on the first $150,000 of income for individuals and $300,000 of income for married couples for 2013 and then phase those rates down by 1% over each of the following 5 years until they are phased out. Thus the 33% rate would drop to 28%; the 28% rate would drop to 23%, the 25% rate would drop to 20%, the 15% rate would drop to 10% and the income that is not subject to federal income tax would be reduced to -5%. This would place an enormous amount to money in the hands of American Consumers offsetting the reduction in American Consumer Spending due to the lack in consumer confidence and the credit crunch experienced by sub-prime debtors. The will provide incentives for American Businesses to expand their operations and increase hiring, creating jobs and increasing American Consumer Confidence. As the rate reductions are phased out over the following 5 years, normal consumer spending will more than replace the tax reduction stimulus.
The major problem with my plan is that every time the American Economy begins to improve, Oil Exporting Nations begin to increase the price of oil. This leads to the double whammy of hundreds of billions of additional dollars leaving our nation for the Oil Exporting Nations and psychological depression that Americans experience when they once again see $4.00 and up per gallon gas-o-line prices. It just saps the life out of the American consumer and slows the growth of the America Economy. It happened in the spring and summer of 2008 and it happened again in winter and spring of 2011.
Therefore, these short term tax cut stimulus measures must be accompanied by Oil Import Taxes that are discussed in the Oil Import Tax Section of this Web Site.