Business, Politics

Fairyland Financial Policy

10.27.08 | 4 Comments

It's a financial fairy tale to believe that taxes will be lowered and that there will be more services as a result. Grow up.

One of the major disappointments of this election cycle is the complete lack of honest discourse about our financial challenges, their causes, and practical solutions from either candidate. The notion that tax cuts will be promised and delivered even as we accumulate the largest spending deficit ever is disingenuous.

We, as a nation, are like a young person who has been on their own for a short time with a bank account, a fixed income, and several new credit cards. Not thinking about how the spending impacts the long-term, we write check after check, charge away on multiple cards and find ourselves with an overdrawn bank account and daunting debt responsibilities. This leaves us collectively with very stark choices in order to regain our fiscal footing.

Like weight loss, there is no magic way to solve this problem. It comes down to two very simple, very straightforward actions: control/reduce spending and maintain/increase income. It’s not sexy, it’s not fun, and it’s not what anyone wants to do, but it is necessary. I’m not naive, I know that’s why it’s not being discussed realistically by either candidate because that’s an invitation to not be elected.

Let’s start with control/reduce spending. I’m a big believer with begin with the end in mind. What is a reasonable percentage of gross domestic product to dedicate to national, regional, and local government needs? The answer can’t be zero, we all depend on shared services to conduct our daily lives. Even more importantly, our basic infrastructure, roads, bridges, education, health care, etc, is crumbling.

To get back to the core question, what % of GDP should we surrender for the greater good? The more we give up, the less we have to sustain our families and stimulate growth. The less we give up, the harder it is to meet our shared responsibilities. The answer is when both the government and the citizens feel uncomfortable with the amount to spend and the amount to pay respectively, we’ve probably hit the right zone.

I submit that reasonable targets are 18% for Federal, 4% for State, and 3% for Local for a total burden of 25% for citizens and businesses. Secondly, the tax code should really be drastically simplified to ensure everyone pays something and that the less a person makes, the lower the percentage burden should be, but not zero. Conversely, the more a person makes the higher percentage up to the caps listed above can and should be born. Let’s face it, $2500 paid by a worker with a $10,000 annual income has much more impact than $25,000 paid by a worker with $100,000 income. In addition to some graduation in rates to the cap, citizens should get a benefit for this contribution. Once they reach the cap, there should be no other taxes, fees, levies, or other revenue activities that take them above a 25% threshold. Period.

At these targets, the Federal Government would take in $2.5T per year, the States would collectively take in about a half-trillion dollars per year, and localities would receive about $400B per year for a total of $3.5T to conduct the public’s business which includes education, health care, defense, infrastructure, capital projects, debt service, and day-to-day operations of the government at all levels.

That takes care of the revenue side of the equation and ensures a consistent and recurring model that expands as GDP expands and contracts as GDP contracts. Inside that envelope, the government should be working to help citizens in the pursuit of life, liberty, and happiness.

Now, on the expense side, it will likely come as no surprise to understand that the collective government requires far more than $3.5T to operate. There are tens of thousands of programs with little to no efficacy which should be reviewed and generally scrapped recouping the funds to focus on areas where additional funding is needed. For example, defense now accounts for an estimated $965B (includes DoD, DoE, Nasa, Homeland Security, Veteran’s Benefits, and interest on prior defense related expenditures.)

National priorities should be: gain energy independence, rebuild infrastructure, provide basic health care, invest in education, employ a debt reduction program, maintain adequate defense, and then everything else. The Feds should take care of energy independence, some infrastructure, health care, debt reduction, and defense. The State should principally take care of education and infrastructure with some assistance on health care. The Local level should focus principally on education and physical infrastructure with healthy doses of police and fire protection.

By focusing on both the revenue and the expenses will be painful for citizens, businesses, and government will be difficult, but it’s easier than the alternative which is complete system failure requiring a hard restart. Do we have the will to do this? We shall see…