Thursday, May 19, 2011

Our Political System Does Not Reward Balanced Budget Compromises

The US Congress is in disagreement, mostly along party lines, about raising the current debt limit ceiling, raising taxes and decreasing spending in the FY2012 budget and thereafter.

In rough numbers, the US government spends about $3.5 trillion a year, raises about $2 trillion in taxes and fees per year and borrows the shortfall of $1.5 trillion per year. Of the $2 trillion in taxes and fees, less than a trillion dollars is from the individual federal income tax, about $900 billion in 2010.

The US is on track in 2011 to have another $1.5 trillion dollar deficit shortfall with more expenses than revenue. See my other post.

As I mentioned before, an individual income tax increase of 100 percent, doubling the tax revenue, is not enough to cover the yearly deficit, which means the passage of any tax proposal is unlikely by itself to solve the yearly deficit problem of spending more than revenues.

The President's continuing talk of taxing the rich is just divisive prattle that does not solve our budgetary problems. The top ten percent of taxpayers pay 70 percent of taxes, about $630 billion. A 50 percent increase in the taxes on the top ten percent, the rich, would only generate at best another $315 billion, leaving a current deficit of about $1.2 trillion and an even bigger future deficit as more people become over 65 years old.

Likewise, the overspending is so huge that the US government has to cut its spending by over 40 percent, almost in half, to balance the budget. A 40 percent cut in spending would leave just enough to pay for the current costs of Social Security, Medicare, Medicaid, unemployment benefits, food stamps, and child health programs. There would be just about nothing left for other government programs. There will also be nothing left for the expected growth in costs of Social Security and Medicaid Medicare due to the coming increase in the percent of the US population over 65 years of age. So a spending cut of 40 percent per year, by itself, will not solve our future impending budget problems. Spending on Medicare, Social Security and other social welfare entitlements has to be cut if we will ever balance our budget and live within our means.

Using a credit card analogy, imagine a household (Congress) spending (about $3.5 trillion per year) more than its income ($2 trillion per year) and using a credit card (deficit financing of $1.5 trillion per year) to pay for the extra spending over income.

At some point, if the borrowings on the credit card do not stop, the repayments and interest to the credit card lender will consume a significant portion of the household income and if the debt is not reduced, eventually the household will reach a point where the credit card company, the lender, will not raise the credit limit and the household will not be able to borrow additional funds to pay for new expenses with the credit card.

In life, in these types of situations, usually two things are done to get the household budget back into order.

First, spending is usually severely curtailed to bring it in line with income.

Second, additional income to pay off the debt is generated through working at a second job or putting someone to work that has not been generating income.

The US budget is way out of whack. Yearly income to the US government is too low. It is only about 60 percent of the amount it spends. Equivalently, the US government spends too much. It spends 175 165 percent of its income.

Neither major political party's solution to the budget deficit problem, Republicans cut spending or Democrats increase taxes, will balance the budget, currently or over the next few decades.

Both parties ideas are mandatory if there is to be a real solution to our deficit and over spending problem.

Like a household that over uses it credit card, Congress needs to both cut its actual yearly spending and increase its income that can be used for repaying debt. Spending needs to be cut to a much more realistic level and Congress needs to spend within its means. Entitlement programs along with other spending must be cut.

Likewise, much more income needs to be generated and Congress needs to raise taxes on more than just the rich if any meaningful amounts of new revenues are to be generated to balance the budget and payoff existing debt.

Unfortunately, we have a political system that does not reward compromise, especially when the choices are raising taxes and cutting individual benefit programs. Also, sadly, we have a President in the White House that likes to name call and bully the opposition party, is reluctant to promote realistic solutions and take responsibility, is willing to use the rich and the Republicans as the scapegoats for all the US budget and economic problems, and who seems to believe that there are free lunches.

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