Cleanup, Aisle Six: The 20-Year Plan

In my last post, I stumbled over the fiscal solution I've been seeking since I started this blog.

The fiscal problem is to reform the tax code, institute a fair tax code, eliminate deficits, pay off the government debts, make the safety net safer, take care of those unable to care for themselves and reset government functions back to the originally intended functions of Justice, State/Intelligence, Defense and Treasury; everything else goes or is funded by user fees. This brings the cost of government to a little over 10% of GDP.

Federal         3.75%
State             1.58%
Local            5.25%

Total            10.58%

Details on this can be found here; I compare my budgets to federal & state budgets and I use my city's budget as a template for local spending; except for public schools where I use my own unrefuted number of $6,660 per student.

Total government spending was $6.1 trillion and GDP was $15.68 trillion in 2013.

So, the cost was 6.1/15.68 = 38.9% of GDP.

Cutting it to 10.58% puts $4.18 trillion back in play after subtracting the federal deficit of $680 billion and the state & local deficits of $253 billion. In my previous post, I neglected to subtract out the annual government deficits and I also double-dipped on FICA.

This $4.18 trillion can be used for the cleanup operation as follows.

The Cleanup

Debt
To pay off the debt, we allocate $750 billion/year. This is sufficient to pay off the entire $20 trillion national debt (federal, state and local minus the $5 trillion we owe ourselves) in about 20 years.

I cancelled our self-debt as a means of forgiving ourselves for being stupid for so long. However, I'd apply the proceeds of the sales of the $4 trillion in securities held by the Federal Reserve to the debt and call 80 cents on the dollar a win; considering the black hole that is government fiscal irresponsibility.

Safety Net
To strengthen the safety net, we proceed on three fronts;

Retirement Income & Health Pay current Social Security and Medicare benefits ($1.3 trillion/year) for the next 20 years. This happens while the 15.3% in current FICA taxes are directly deposited into individual Roth IRA accounts for every worker. The 15.3% stays with us forever, not as a tax but as a self-pension; half from employer and half from employee as before but with no government as middle man. The money earns interest.

Seed all of the individual Roth accounts with (at least, for 145 million workers) $3,140/year as an incentive to work and to help those 45-and-up meet their needs; they deserve it since they got ripped off most of all in the current workforce. The money is only available at age 65 or with disability, as with Social Security. Any portion not used can be left to heirs. The principal and all capital gains are tax-free (Roths are this way because they are funded by post-tax dollars). Given that the 11 million illegal immigrants make up 7.5% of this group, there should be a bit less than 7.5% more for citizens.

Cut a check for $15,000/year for each of the 50 million poor. This is the 'living wage' idea except that no effort is required and no strings are attached beyond the 10.58% tax. This would give the poor an entire generation (beyond the 2.5 generations since LBJ's Fair Deal) to haul themselves up. Given that the 11 million illegal immigrants make up 20% of this group, there should be 25% more for citizens.

Combined with the new and improved retirement benefit, I can't see how they'd fare better. Parents can buy insurance for themselves and their families and get about $7,000/year in cash. Children can be well-fed, well housed and can have school choice. 

Tax Reform
All corporate and social welfare and insurance programs are replaced by radically lower taxes on individuals and businesses (a combined federal, state and local flat tax of 10.58%). 

All overseas profits are repatriated at the new, lower rate.

All tax deductions, exemptions, breaks and credits are eliminated. All sales, sin, fuel and property taxes are also eliminated. Anyone or anything that benefits from defense, police, firefighters pays tax, even non-profits and religious groups.

Fund transportation with targeted taxation on users; basically 5 cents per ton-mile on the big stuff like trucks, buses, ships and passenger/cargo planes. Cars are exempt since they produce little wear and tear on roads.

All other taxpayer-funded insurance goes away except FDIC and unemployment which shall be funded by banks and employers, not taxpayers. How much? FDIC needs to cover all depositors up to $250,000/each suggesting an impractical fund of $50 trillion for 200 million depositors. Unemployment should cover, say 10% unemployment for, say 6 months suggesting a fund off $400 billion. Problems here.

This is a tax scheme that harms everyone equally.

Deficits
Government will not borrow any more money without a plan to pay it back without taxpayer funds; we are capitalists, after all. If we want a new road, we have to raise the ton-mile fee to pay for it. If we want to fight a war, we have to raise the flat tax to pay for it. If the rest of the world wants the safety of our treasury notes, we can charge them to buy it instead of paying them interest on a loan we don't need; like shares in Corporation America.

The government employees who deliver welfare can reorganize into private businesses or join the poor since their jobs would no longer exist.

Government buildings and the millions of government vehicles can be auctioned off with the proceeds used to offset taxes.

Take Care of Those Who Can't

One thing that irks me in our state budget is the inordinate funding we give to the state university system.

We subsidize them with $2.8 billion/year but tuition keeps rising. An out of state student pays nearly as much to attend UCONN as Harvard when subsidies are applied.

By contrast, there are 1.7 million long term care beds nationally with an 85% occupancy rate. These 1.45 million beds cost $67,525/year each (for full private care) or about $0.5 billion/year for my state based on population and demographics; less than we currently pay for prisons.

If we manage to get rid of Medicare/Medicaid, we still have to do this.

Summary
After 20 years, America will have restored itself;

• Debt-free.
• Taxes will be 10.58%, no exceptions, starting tomorrow; the rest is a 20-year fine for being stupid.
• Public schools in impoverished cities will have to compete like other businesses since poor kids will have $15,000/year at their disposal.
• Lifetime savings can be passed to heirs.
• People will have ~30% more of their gross pay in their pockets or retirement accounts.
• Charities will do much better with so much freed up cash.

Follow-Up on Free Trade Agreements
I had a conversation with my brother Kel about free trade. He was surprised when, in my last post, I said "The erosion of the middle class was caused by free trade agreements that forced jobs abroad".

He correctly pointed out that free trade was a bastion of fiscal conservatism and my statement was at odds with my claim of being a fiscal conservative.

I've given the conversation some more thought.

First and foremost, my statement was aimed at the liberal reverence of the Clinton administration; that it was a liberal who began the trend of ending protectionism; a bastion of liberal policy.

Second, I don't believe trade is free if it causes a net outflow of $480 billion from our economy; two thirds of the deficit is with China. I have to believe that we still produce something of value to the Chinese; except that they routinely ignore intellectual property rights and produce our inventions for themselves for pennies on the dollar.

I've said before that there really isn't a middle class in the US...not sure there ever was. That said, $500 billion/year would still create more than a few jobs; far more than the equivalent amount in government handouts.