Taxes, Budgets and Borrowing

The federal government, as it is currently operated, is an unconstitutional morass of power hungry narcissistic megalomaniacs bent on feeding their own personal power and position to the exclusion of anything and everything else. In a previous post, I talked about Ted Cruz’s tax plan. I was a bit hard on it, and actually refereed to it as something on which I disagree. That is not to say I disapprove of the plan, but it has to be taken as a first step in a process designed to permanently fix the problems we have with pretty much all fiscal matters pertaining to the federal government.

Any plan going forward has to be part of a longer term plan designed to prepare the economy for the next phase of policy enactment. The first phase of this reform must include several changes to how the government operates from top to bottom.

Taxes must be lowered and flattened. We do not need to enact a permanent new tax plan such as the “Fair Tax” or the “Flat Tax.” Both of these plans have many things to commend them, but it is not time for that yet. Making some adjustments to the current tax structure will do for now, and it will be easier to get them enacted than trying to rewrite the whole tax code from scratch. Remember, this is a temporary fix so other things that need to happen can happen.

My recommendation is the creation of three tax brackets. Income from one dollar up to 65,000 dollars would be taxed at five percent. Income from 65,001 dollars to 180,000 dollars at ten percent, and everything over 180,000 dollars is taxed at fifteen percent. Now I know a lot of you out there are screaming that this will not raise nearly enough revenue for the federal government, but it is alright, I will be getting to that shortly.

In addition to this “flattening” of the tax code, a number of confiscatory taxes will be eliminated completely and permanently. The inheritance tax, capital gains tax, payroll tax, energy taxes of every kind, and myriad other taxes and “fees” will be completely and permanently eliminated. I know what many of you are thinking: “This will severally cut the amount of revenue collected by the federal government.” Yes, it will definitely do that! What it will also do is cause prices on just about everything to go down. The cost of producing, shipping, storing, distributing, selling and buying just about everything will go down. Things that cost less, happen more. The result of this plan on every aspect of the economy will be to increase all economic activity.

Company profits will increase, as will wages and salaries. This will happen everywhere. With incomes going up both as individual paychecks and corporate profits, federal revenues will go up as well. This may not seem sufficient, but when you factor in the next part of phase one, it starts to make a lot of sense.

The next part of phase one is really quite simple: Dismantle the federal leviathan. This may seem like a daunting task, but it really is not. It is quite simple to do, as long as you have people in office who understand the simple fact that it must be done. I am not going to go into explicit detail here, and it is not necessary to do so. I will give just a few examples that can be applied all over the federal government to eliminate most of the current expenditures.

Let us just take a look at one program: Medicaid. Granted, that is a big program. The 2014 medicaid budget was right around $340 billion, (although I have to say, nailing down an exact figure of just how much was spent on medicaid in 2014 seems impossible, and I suspect it was substantially more than that.) Now, suppose we just shut that department down? I mean close it permanently. What do you suppose would happen? Yes, I know, every liberal and uneducated person reading this just had their head explode. Let me ask you this then, when you go to get your medicaid benefits, where do you go? Do you go to a federal office? No, you go to a state or county office. So then, why are we sending hundreds of billions of dollars to Washington? Every state has a program! Why not just close down that massive, very expensive bureaucracy and stop collecting that money? Let the states collect it. Since they do not have to pay for that massive federal bureaucracy they can collect less.

Does that, or does that not make sense? The tax payer will pay a bit more in state taxes, but that should be more than offset by the amount they are no longer paying in federal taxes. Our example of the federal medicaid program is just one item. What happens when we do the same thing with other federal programs, agencies and departments that work the same way? The Department of Education, most of the rest of the Department of Health and Human Services, the Departments of Energy, Commerce, Housing and Urban Development and many more could be completely done away with as they really serve no legitimate function at the federal level.

Here and there you would find a program that might be, in and of itself, useful and legitimate at the federal level. Once the leviathan is dismantled, you can then go back and consolidate and reform what is left. Because of the nature of these departments, particularly those like HHS and Education that have state and even local level counterparts, the transition would be essentially seamless if handled properly. Another good example is the Veterans Administration.

This department does not work. Why do we have, and have to pay for, a massive bureaucracy and actual brick and mortar hospitals and medical facilities? It costs way too much, and, as anyone who has ever been to the VA can tell you, it does not work. If we just allow our veterans to go to their own doctors and have the VA pay the bill, it would cost a lot less and serve our veterans infinitely better.

As we dismantle the excessive government and unleash the economy, we will start seeing benefits as a matter of course. Among these benefits will be our ability to stop borrowing money. Going forward, as government continues to shrink and the economy, and the ensuing revenues to government, continue to grow, we would eventually come to the point were we can not only service the debt, we can actually retire it.

We also have a couple of destructive progressive era issues that we will necessarily have to deal with. First, is the Federal Reserve. The federal reserve is a nightmare that has to go away. The constitution grants authority to congress to “coin money and regulate the value thereof.” The congress, especially under these new rules, will be completely accountable, and that is the point. Right now, with the way the Fed works, there is no accountability, none. Our entire economy, and much of the world’s economy, is subject to the whim of one person: the fed chairman. This is completely unacceptable.

The other problem we have from the progressive era is the sixteenth amendment. This amendment to the constitution does not belong there. It is at its very essence contrary to everything the constitution stands for. This is the infamous “progressive” income tax amendment. It is what has allowed our tax code to become so monstrous that no one really knows what is in it or how it works. Once our debt is under control, this less than useful amendment should be superseded by another amendment that forces accountability and sanity on the federal government. It should be this, or something very much like it:

Section 1. The federal government of the United States shall adopt only one method of internal revenue collection from the domestic private sector economy. This method shall be a consumption tax imposed on items purchased at retail in the private sector except for rental payments on a private residence, unprepared food, transportation fuels, energy and communication utilities, medicines, medical treatments and, medical consumables, supplies and appliances.

Section 2. Congress may establish by law import duties and imposts, and may provide for fines imposed as criminal sentences as the result of due process of law in part or in full as they deem appropriate. Such revenues collected by the federal government must be applied to the budget or any outstanding debt, and the tax rate adjusted accordingly.

Section 3. The rate of taxation for any fiscal year must be calculated to raise only enough revenue to satisfy the expenditure of the enacted budget for the same fiscal year based on revenues raised the previous year and the size of the national economy in that same previous year. This calculation must be taken only after any previous year surplus, or possible deficit, is applied to the budget of the fiscal year for which the tax rate is calculated, but at no time may the tax rate exceed ten percent.

Section 4. The congress must pass and the president must sign into law a budget for the federal government before the first day of the fiscal year for which that budget is enacted. For each day beyond the first day of any fiscal year a budget is not enacted all members of congress and the president shall forfeit all compensations due them as a result of employment by the federal government, and their collective staffs shall be barred from work without remuneration of any kind for the duration of the period of any fiscal year for which a budget is not enacted.

Section 5. The budget of the federal government shall not exceed the budget of the previous fiscal year by more, as a percentage, than the rate of growth of the national economy in that previous year, but at no time may the budget increase by more than ten percent.

Section 6. Each budgetary item must include language defining successful implementation and must identify milestones to be achieved at predefined time intervals throughout the fiscal year. Each budgetary item must also include language indicating from where in the constitution the federal government derives authority to engage in the activity pursued in the item in question, and data indicating financial justification for the expenditure related to the specific item.

Section 7. Any surplus of funds remaining at the end of any fiscal year must be applied to any valid debt of the federal government. If there is no debt, or if there are still surplus funds after the debt is paid, not less than ninety percent of the surplus must be applied to the budget of the next fiscal year. Not more than ten percent of any surplus may be sequestered by congress for the purpose of emergency response. Such funds, once sequestered, may only be used in the event of a national emergency, which is defined as any form of attack, insurrection or natural disaster.

Section 8. The congress may not incur debt except in response to a national emergency as defined in the previous section and requires two thirds majority of both houses of congress and the concurrence of the president. Any debt incurred may not exceed ten percent of the budget of the current fiscal year, and must be paid in full by the end of the following fiscal year.

Section 9. In the event of an emergency representing a direct and immediate threat to the solvency or sovereignty of the United States, or a congressional declaration of war, the congress may take any action with respect to debt necessary and is directed to insure the safety of the people, the survival of the republic, the authority of this constitution and, the independence, solvency and sovereignty of the United States of America including all states, territories and, lands, nations and peoples with whom there are duly ratified treatise of that effect.

Section 10. If such debt, beyond ten percent, is incurred, congress may add one percent to the current tax rate and to the tax rate of subsequent fiscal years until the debt is repaid, but at no time shall the total tax rate exceed ten percent. This additional percentage shall not be included in tax rate calculations for subsequent years. Tax rates and revenues shall be calculated without inclusion of the additional tax, if an additional tax is still required, it should be added to the calculated tax for the fiscal year in question.

Section 11. No debt incurred by the United States federal government shall be held in bond or otherwise by any foreign government or entity. The federal government may not loan, grant or give in subsidy any funds whatever to any private enterprise except with respect to not for profit, educational or other academic or scientific institutions engaged in research or other activities in which the federal government or promotion of the general welfare of the nation has a direct interest.

Okay, so what does this do? Let me take you through, one section at a time, and lay out exactly what this will do to the federal government, and the national economy:

Section one simply states that the federal government may have only one method of taxing the domestic economy, and that that method is a sales tax. It is not a VAT, or value added tax, it is a straight up sales tax on items purchased at retail. It then excepts certain specific classes of items. These exceptions have a couple of different purposes. Firstly, they will have a positive effect on commerce all over the country. By exempting energy and communications you automatically decrease the cost of everything that is produced or transported in the United States. Unprepared food is a no brainer, it is customary in the United States that these items are not taxed. Anything having to do with health care from major surgery to a bottle of aspirin is not taxed. In addition, it also exempts rent payments on a private residence. Along with benefiting the economy, these exemptions have another very important effect. What do low income households spend most of their money on? Rent, food, utilities, healthcare and putting gas in their car, if they have one. All of these things are exempted from the tax. Now, in addition to paying less for these items, they also have no tax burden associated with them.

Section two provides the federal government with authority to impose import duties and imposts on goods imported into the United States, and to impose fines for those convicted of breaking federal laws. It then requires any funds collected through these methods be applied to any outstanding debt, or to the budget, and the tax rate be adjusted, or lowered accordingly.

Section three describes how the tax is to be calculated. Once a budget is in place the first thing that happens is the surplus from the previous year is applied to the new budget, thus lowering the amount of money needed to meet the budget requirement. Then the tax can be calculated based on revenues raised the previous year. What this basically means is, you have to set the tax rate based on how much revenue you collected last year, and the size of the economy that year, in order to collect enough to cover the budget, minus any surplus brought forward. It also means that if you have any growth at all in the economy over the course of the year, you will end up with a surplus. Theoretically the tax rate should go down almost every year, though not by very much. In reality, some years will be better than others, and it is even possible to end up with a small deficit, but that would simply be added to the following year’s budget just as any surplus would be.

Section four simply states that a budget must be passed for any fiscal year before the first day of that fiscal year. If a budget is not passed and signed by the fist day of any fiscal year, the congress and President forfeit their paychecks, and their respective staffs are laid off without pay until a budget is enacted.

Section five stipulates that the budget of any year may not increase by more than the rate of growth of the national economy of the previous year. So if the economy grows at a rate of eight percent in 2020, then the 2021 budget may not be more than eight percent larger than the 2020 budget, but may not grow by more than ten percent regardless of the previous years rate of growth. If the 2020 economy grows at eleven percent, the budget for 2021 may only be ten percent larger than the 2020 budget.

Section six provides for the all important need for accountability. It forces congress to show from where in the constitution they derive authority to engage in whatever activity the given budget item engages in. It further requires congress to show financial justification for each dollar spent. It also requires congress to include standards of success with each item. This means there has to be a schedule of how often the item in question must be reviewed, and an idea of where it should be at that time. This basically means that congress has to go back and review what it does on a given time line, and have predetermined measures of success associated with the given budget item.

Section seven specifies what should be done with any surplus funds left over at the end of any fiscal year. First, any funds must be applied to any outstanding debt of the federal government. If there is no debt, or if any money is left over after paying the debt, then whatever is left can only be used for two things. 1. Not less than ninety percent must be applied to the budget of the following year. 2. Not more than ten percent may be sequestered off budget to be used only in response to national emergencies. If the ten percent is not used in this way, then it must also be applied to the following years budget.

Section eight severely limits the ability of the federal government go to into debt, and forces any debt incurred to be paid in full by the end of the following year.

Sections nine and ten provide for an additional ability of the government to incur debt, but only in the event of direct and immediate threats to the very existence of the United States, and provides for repayment of such additional debts.

Section eleven states that in the event that the federal government goes into debt, it can not, under any circumstances, be to any foreign government or entity. It also states that the federal government not loan any money, nor give any money in subsidy to for any reason, but makes exception for non-profit or educational institutions engaged in activities that would directly benefit the nation as a whole. For instance, if there is a university that is on the verge of curing cancer, but is running out of money, it would be appropriate for the federal government to step up and help them out as it would obviously benefit everyone. This is what the constitution means by “promote the general welfare.”

The only problem with this proposed amendment is it can not happen while we are twenty trillion dollars in debt. That is why we will have to enact more limited changes first. I am sure there are many things that could be done, or done differently, besides what I have here. I believe this, or something very much like it, is needed in order for the economy of the nation to reach its potential. In any case, it is critical that something be done about the way the federal government handles fiscal matters. A strict structure and accountability are sorely needed. I hope I have at least given some food for thought on the subject.