The Whole Picture

I have been writing about various institutional inefficiencies. Although I complain about tunnel vision in reporting by mass media, I find myself guilty of viewing these institutions through a soda straw and making it hard to see the whole picture.

My brother Kel suggested that it might be a good idea to summarize the highlights of this blog. I agree with him; he's been a sounding board on some of my ideas and I've covered a lot of ground. My writing skills were never that great and I'm concerned that the key points may get lost in the muck and mire of the seemingly endless details.

I'll apologize in advance for the size of this post; I thought it necessary.

So, from the top but with a re-ordering of topics.

Preface

I am in favor of social liberalism (http://en.wikipedia.org/wiki/Social_liberalism) except where it interferes with fiscal conservatism (http://en.wikipedia.org/wiki/Fiscal_conservatism). To me, this means that we should be at liberty to pursue happiness until it causes harm to our neighbors, especially their wallets.

The cost of the national government is roughly equal to the cost of the governments of all 50 states combined: this year we'll spend more than $3 trillion on the federal government, $1.5 trillion on all 50 state governments plus another $1.6 trillion on local governments.

This adds up to 40% of GDP.

I think that if a survey were taken of the founding fathers regarding this possibility, the poll would reflect nothing short of incredulity. If they were further polled regarding a federal government debt larger than seven years of total government revenues (not GDP) they'd petition George III to come back and brand the grand experiment an abject failure.

Now, a discussion of the causes and some proposed solutions.

Public Education

This is the single largest taxpayer expense. We spend about $800 billion per year in direct costs, $200 billion in retirement benefits, $150 billion in overhead and $80 billion in school bonding (debt).

More than $1.2 trillion and that's just K-12.

Between what my local school district spends and what local taxpayers pay in state and federal taxes for publicly funded K-12 schools, 5,137 kids cost $142 million/year. Less than half is spent on local kids and the rest is spent in failing school districts so that they can continue to fail but with equal funding!

There are 15,000 taxpayers in my town of 40,000 so we pay about $9,000/year each for publicly funded education. Given that SAT scores haven't budged in 40 years (despite making the test easier; re-centering) while costs have skyrocketed, this is not right.

What is also evident is that teacher pay is less than half of what's spent even though, in my town, there are 23% more teachers than classrooms.

Money is not the problem. To prove it, let's try an Einstein-style thought experiment;

• Imagine the best and worst schools in the country. 

• Imagine transplanting the students of both schools, one to the other.

• What happens?

To my knowledge this experiment has never been tried but the probable result should not surprise anybody except for those who proclaim money to be the answer; the students who excelled will continue to excel and those who failed will continue to fail. Money is only involved to the extent that people who have it know it comes in large part from being educated and they instill this philosophy in their children. Those parents tend to co-locate and take an active role instead of being bystanders. 

My proposal is to deliver publicly funded education efficiently by focusing on the classroom instead of the school system as a whole; deliver education dollars where they really count. The effect is that we will spend less than the failing school districts and we can stop subsidizing their failures, consequently reducing taxes for all.

I have a classroom-centered school model for which $6,660/student/year is sufficient, including special education that, according to our superintendent, costs twice as much for 11% of kids; the model is $6,000/student plus 11% or $6,660/student.

At this cost level, the redistribution of funds from here to Hartford, New London and Bridgeport becomes unnecessary; they can pay their own way. The federal government should butt out except for providing constant reminders that unless schools improve, unemployment is unlikely to improve either. My model also fully funds the employer side of retirement pay and healthcare at 7.65% to combat the persistent problem with public employee pensions.

My model requires a teacher, students, teaching tools (books, computers, etc.), classroom space and utilities (heat/air, electricity, transportation, internet, etc.) and school staff. 

My model does not provide food since Welfare programs exists elsewhere (SNAP, WIC) and should not be duplicated with educational dollars.

Assume that an average class size of 25 is chosen: one more than the federal recommendation to make the arithmetic easy. This would provide $166,500 in funding per year per classroom for the 206 classrooms (5,137 students) needed in my town; far less than the 299 we have and even fewer than the 384 teachers we have.

I’m an admitted Baby Boomer. Class sizes were rarely (if ever) smaller than this for me and I, arguably, turned out fine. Since the mean SAT score is virtually unchanged since 1975 (the year I graduated from High School), I am unconvinced regarding the impact of class size on educational outcomes.

My Budget

Pay the teachers well at $85,000 per year (average): much more than the current average of $60,000 since they will become entrepreneurs running their own “businesses”. Even more than the $79,000 average Shelton pays now.

Let’s look at teaching tools (books) first. The range is from $40 for high school English to $120 for high school chemistry. Let’s go for a conservative $100 per text with 5 texts needed per student per academic year. This costs us $6,250 for 25 students with new books for all every other year. I chose high school texts as a benchmark because they cost more than elementary texts.

Internet access is virtually free compared to this; I have a DSL WI-FI connection for $45/month with more than 5Mbps of external bandwidth and 52Mbps of WI-FI (internal) bandwidth; the (much) lower cost of elementary textbooks can fund it. Same goes for Microsoft Office 2010 at $88; the textbook costs for elementary school students can easily fund this software for all students in grades 7-12 and their teachers. 

We can also buy 25 new computers for each class for $10,000 every other year ($5,000 per year cost to classroom).

Now let’s look at rent. A classroom for 25 students needs about 16 square feet per student or 400 square feet. At $28.5 per square foot per year (utilities included), this would cost only $11,400 per year and since it is leased, the landlord is responsible for maintenance & upkeep. Leased space avoids the costs of city-owned schools. Of course, the property is in Westport, CT, one of the most expensive markets in the country. Of course, we already have school buildings but my point is that if we pay more, we’re doing something wrong.

Most towns have a library, ball fields and a Recreation Center.

As for transportation, Shelton pays $2.1/ride; $18,900 per class per year.

Teacher                                          $91,503 (includes 7.65% payroll tax like normal businesses pay)

Classroom & Utilities                      $11,400

Computers                                     $  5,000

Books, Software & Internet            $  6,250

Transport                                       $18,900

Total                                             $133,053

We can conservatively have teacher, classroom, utilities, computers, internet, books and transportation for $133,053 per year out of $166,500 available. For all 206 classrooms plus 11% extra for special education, this is $30.35 million.

You might ask: what about guidance counselors, nurses, maintenance, etc.? Let’s call them the overhead.

Well, if these are spread out cost-wise over say, 206 classrooms (Shelton’s required capacity), we have $3.86 million left in our budget for them. The fact that there are 8 city schools with small populations does not help; we should probably close two of them.

However, if each of the 8 schools has a principal, nurse, counselor and two year-round maintenance people we have:

Principal                               $120,000

Nurse                                   $  75,000

Counselor                             $  75,000

Maintenance (2)                    $120,000

Total                                     $419,835              (includes 7.65% payroll tax like normal businesses pay)

Or $3.36 million for all 8 schools.

This gives a grand total of $33.7 million out of $34.2 million in budget (5,137 x $6,660). Closing two schools due to the unneeded classroom capacity and save more than $838,000; a $1.5 million/year surplus.

I think we should be focused on English, math, science and history at 20% each; one full day per week for each. The rest of the teacher population and the school week should be based on student interests (electives) and vary from year to year.

Parents should be required to attend at least one of every one of their children's classes and sign off on all homework assignments and test/quiz scores, active parental involvement being a necessary ingredient for success. Parents should also be involved in teacher evaluations.

The structure I suggest would cut the total taxpayer cost from $9,000 per student (with state expenditures included) to about $2,250 with no sacrifice in quality. The result is a $4.5 billion cut to state spending (22%) and a $30 million cut in local spending (27%).

Healthcare

I'm torn on this one.

I know that a single pool, single payer system is the most cost-effective way to do this.

I also know that if we nationalized the healthcare system, the stock market and millions of retirement plans containing health care securities would get shot to hell.

Further, I know that using the government as an insurer is a bad idea since government is essentially a managed bankruptcy; we pay health insurance premiums, then the government immediately spends the money elsewhere and gives us an IOU that the government pays for with money borrowed (with interest) elsewhere.

However, I also know that those with Medicare get better pricing than those with traditional plans and both get better prices than the uninsured. The Time Magazine article "Bitter Pill" suggests that a harmonized cost structure with published prices would go a long way toward making this industry more transparent and competitive.

I think government would be better utilized as a cost regulator than as an insurer; the best part of Medicare without the worst. Shutting down government-subsidized insurance (Medicare, Medicaid and the new and untested Obamacare) would be best but that will take time. In the 1950's, medical costs were 4.5% of GDP and have grown to nearly 20% of GDP. Note the huge acceleration of costs (from the YouTube costs video clip above) after 1965; thanks LBJ!

The other issue is that nobody can be turned away from medical care for lack of means to pay. This is not bad in itself but it forces the uninsured to emergency rooms, the most expensive care on earth. According to the AMA, uninsured and uncompensated health care cost about $54 billion in 2008 (the year in which Obamacare began). There are about 50 million uninsured so the cost is only a bit over $1,080 each.

The fact is that these costs are only 1.8% of the total $2.7 trillion spent every year on health care. A 1-2% loss should be easy to bury for a competent accountant.

Spending three times as much to subsidize the purchase of insurance by folks who can't afford it even with a subsidy (because they're poor in the first place) as Obamacare seeks to do seems, well, stupid. 

Public Employee Pensions

This one just irritates me.

Not because of the defined benefit nature of the pensions and not just because the government spends the bulk, if not all, of the employee contributions elsewhere and not just because the government borrows (with interest) to pay the benefits.

All three are major sources of irritation.

While the private sector moved to defined contribution plans like 401(k) long ago and Social Security is neither a defined benefit or a defined contribution plan (it is a Ponzi scheme), the public sector has steadfastly resisted changing to something affordable and responsible; can you say 'government employee unions'?

This problem, like government-subsidized heath care and government debt will take time to fix without causing more harm than good.

Except for military pensions, the rest of government should be treated like us until we can throw off the whole net in about 40 years.

Taxpayer-Funded Insurance

The idea of a large risk pool is ideal for insurance but allowing the government to put us all in every insurance pool is wrong and also provides an unneeded temptation.

The temptation lies in the fact that any premium revenue is spent immediately not for the intended purpose but, more often than not, for totally unrelated purposes. Then, when claims are made, government must borrow the money to pay them; and pay interest on both the debt and the misappropriated premium monies.

This is quite obviously a bad thing, using FICA as an example but then I thought, this problem is much more extensive than FICA.

FICA is an acronym for the Federal Insurance Contributions Act tax and this got me thinking about government-funded (taxpayer-funded) insurance in general. There are lots of taxpayer-funded insurance plans beyond FICA.

• Welfare/Medicaid/Obamacare
• Unemployment Insurance
• Flood Insurance
• Bank Deposit Insurance (FDIC)
• Crop Insurance
• Worker's Compensation Insurance
• Life Insurance (for government employees)
• Federal Pensions
• Military Pensions
• State Pensions

One third of the national debt, about $5 trillion, is from raids on the premium trust funds.

Distribution of $5 Trillion US Owes Itself 

More than three fourths (76%) of Connecticut state debt is from raids on (or non-payment of) trusts.

State Debt

I started with the idea of FICA, Social Security in particular, because people talk about it going bankrupt as if it wasn't already bankrupt. They talk about the Social Security trust fund as if it actually had some money in it; it doesn't, it only has IOUs from Uncle Sam. The trouble is that Uncle Sam is us; we pay the premiums, we pay the interest on the IOUs and we also pay the interest on the bonds we sell to pay claims.

Raise your hand if you think this is bad practice.

Of course, bankrupt is the wrong word since the federal government is forbidden by law to borrow money to pay FICA benefits (claims). We must have really good lawyers since the government borrows money to pay FICA benefits every week.

This kind of mismanagement that makes Detroit look good.

So, how do we fix it?

FICA (Social Security and Medicare)

By the time most of us retire at 65, we have about 15 years left. With an average working life of about 45 years, we need to put away about one third of our earnings to make sure we don't go broke in retirement.

In my plan, I suggest continuing FICA as-is for those aged 45 and older. The idea is to keep the promise of these programs for those 45 and up since it's too late to play catch-up. Those folks will continue to pay FICA as will their employers (7.65% each to fund Social Security and Medicare...aka Payroll Tax); these are the maximum earning years for most of us.

For those below 45, they will no longer pay FICA although their employers will. Thus, the net program loss of revenue will be small since these are the lesser earning years. The average 44-year old earner (salary average in US is $62,000) can save well over $300,000 in 20 years starting with 7.65% of pay (the amount no longer paid in FICA) in a safe 3% government bond along with another 10% of wages. These monies can be directly deposited in individual trust accounts.

Saving 17.65% of $62,000 in a 3% Bond for 20 Years

The point is that this will pay the same as the current Social Security payout ($1,250/month including $50/month for a catastrophic health insurance policy) over 20 years and still have $119,000 left. This is living on $15,000/year but it doesn't count what that person may have already saved.

Since the government spends 40% of our earnings, we must save about 20% and live on 40%. For the average income of $62,000, this means living on $24,800/year. So hopefully, there is additional savings because this will only last 12 years withdrawing at $24,800/year.

Withdrawal @ $24,800/Year

A 22-year old has much more potential; starting at minimum wage and working up to a $62,000 salary (or more with college degree) will net more than a half-million dollars toward retirement.

Any money left after death can be passed to heirs, unlike Social Security.

With Social Security, if you live beyond expectations, the rest of us pay. Of course, when Social Security began, there was no life expectancy after age 62.

Welfare/Medicaid/Obamacare

Welfare and Medicaid aren't really insurance since no premiums are paid. This is really taxpayer-funded charity.

Medicaid is so inefficient it makes me ill; no pun intended.

There are 700,000 medicaid recipients in Connecticut; 20% of the population! The number of Medicaid recipients is about 180,000 higher than the expected number of poor people for our population; further research reveals that most of these are folks with disabilities (10 to 13% in Connecticut).

This is a useful result because it explains the seemingly unchanging 13% poverty rate that I discussed in my last post; people are not really poor as much as they have a disability!

It is also fairly shocking to me. I obviously know that disability happens, I just never knew the extent. The numbers are similar around the world, it's not just Americans feeling entitled. We are a much more fragile species than I had ever imagined; easy pickings for you Darwinists.

I think that even the mean-spirited conservatives might be more willing to support this stuff if it was marketed that way; a sick child or Grandmother in a nursing home will gather much more support than the proverbial welfare Mom; why did I have to expend so much effort to discover this?

Obamacare makes Medicaid appear reasonable because it currently expected to be just as bad and everyone except the liberals (and some of them too) know it will get worse.

Do as I suggest and get the government out and the costs will drop. Here'e the costs video again.

Unemployment Insurance

This stuff is great when you need it but it can be a drag on a state's economic growth since the premiums are paid by employers; new companies will likely look elsewhere if rates are too high.

There is also tax trickery here; new employers get preferential treatment. This generally means that long-term employers pick up the tab when the new guys leave town for greener pastures.

Personally, I'd rather have the Connecticut employer pay me directly. If not, I'd rather attract more industry with lower taxes, er, premiums so I'd have more options after a layoff.

Extending it with the funds provided by good employers or worse, taxpayers, after the financiers loot the market is the wrong way to go; I say we should jail the wrongdoers, confiscate their ill-gotten gains and fund the unemployed with the proceeds for as long as possible.

Flood Insurance

I wrote to the local paper to express my outrage over the federal government's need to borrow the money to pay flood insurance claims. We charge about $3.4 billion/year in premiums, but just Katrina and Sandy cost over $140 billion in eight years.

Worse, if the predictions made by the global warming crowd are right, it will only get worse. I think they're right, regardless of the causes.

Having grown up on the water, I can appreciate the desire to live on the water despite the risks. But insurance premiums need to go up by a factor of 10 or more to cover the damage. Taxpayers should not subsidize questionable decision making by homeowners, businesses and utilities.

Folks living in flood plains should be paying it and paying a lot more!

Bank Deposit Insurance (FDIC)
In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. Beyond the funds in the Deposit Insurance Fund (DIF, a single-digit percentage of deposits paid as premiums by the banks) and the FDIC's power to charge insurance premiums, FDIC insurance is additionally assured by the Federal government.

I don't like this one bit; especially after John Corzine recently got caught with his hand in the till.

According to the FDIC.gov website (as of March 2013), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this claim is less than clear.

I like that the banks pay for the DIF but given that the Federal Reserve Bank was required to pay commercial banks 6% interest on their reserves as a part of the 2008 Emergency Economic Stabilization Act, this seems wrong; I think the depositors are insuring themselves against risky bank behavior.

The Federal reserve has to stop paying the banks anything and the DIF has to get funded by the banks to an amount at least sufficient to cover a failure of the largest megabank.

Crop Insurance

Between 1980 and 2005, the Federal Crop Insurance Corporation (FCIC) recorded $43.6 billion in total claims, averaging approximately $1.7 billion in losses per year. Three-quarters of FCIC claims result from three weather-related disasters –drought, excess moisture, and hail – with the remaining claims divided among 27 different causes, including crop-damaging frost and tornadoes.

Taxpayers pay about 62 percent of the insurance premiums which are set to cost more than $94 billion over the next 10 years, according to the Congressional Budget Office. The policies are sold by 15 private insurance companies, which receive about $1.3 billion annually in total from the government. The government also backs the companies against losses.

These subsidies drive up the cost of the program, with farmers buying higher levels of coverage than they otherwise would. Without the subsidies, crop insurance payouts during last year’s drought for the two largest crops, corn and soybeans, would have been just over $6 billion, about half of the $12 billion that the government actually paid.

This is a leftover from the dust-bowl days of the depression. Farmers’ net income for 2012 is expected to be $114 billion, down 3 percent from 2011 but still the second highest in 30 years. Let them pay for their own insurance.

Government Employee Unions

Before talking about the other taxpayer-funded insurance plans, this needs to be addressed.

I am opposed to unionization of government workers; in the private sector they make sense as protection against evil capitalists but in the public sector, the employer is the protector. I think it's a conflict of interest; imagine if the armed forces were unionized and you'll see my point.

The full-time pay of all Connecticut state employees is $4.2 billion and they're unionized; this, without counting the teachers who are also unionized and receive $2.8 billion in salary (not to mention retirement benefits). They also provide heavy financial support to politicians affiliated with the democrat party; spendthrift liberals who love big government. My point should be coming clearer.

In the private sector, workers represented by a third party are called contractors, not employees. Contractors are paid under IRS Form 1099 and they receive wages only; no benefits.

Being provided wages and benefits as a contractor is like having your cake and eating it too.

I was a contract engineer for many years. I bought my own insurance, paid both sides of FICA (15.3%), had unpaid vacation and no holidays to speak of.

Nearly 36 percent of public-sector employees are union members, while only 6.6 percent of private-sector employees are part of a collective-bargaining group. Local government workers unionize at a higher rate than federal employees, with rates of around 42 percent and 27 percent, respectively.

Worker's Compensation Insurance

This is essentially disability insurance except that its primary purpose is to shield employers from litigation.

Be that as it may, I'm a big fan of disability insurance; everyone should have it. The difference here is that the insurance premiums do not all get paid to the government; it's mostly private and the employers pay the premiums.

The exception, as usual, is for government workers and it's expensive with outlays in 2004 in Connecticut of $18 million/year and the state is self-insured (self = taxpayer).

Since there are unions, the unions are essentially the employers so the union should pay the tab (0.4% of all wages), not the taxpayers.

To make matters worse, the state Worker's Compensation commission costs $3 million/year. The unions should pay for this function too.

Life Insurance for Government Employees

In fiscal year 2010, the total amount of Federal Employees Group Life Insurance (FEGLI) coverage in force was $824 billion, and the balance in the plan’s financial fund totaled approximately $38 billion. In addition, throughout 2010, FEGLI paid out approximately $2.6 billion in insurance claims to beneficiaries of federal employees. The program also involves substantial premium costs to enrolled federal employees, who pay two-thirds of the premium for an initial amount of Basic life insurance.

Of course, the FEGLI fund also contains nothing but IOUs.

The rate paid by all 4 million covered employees, regardless of age, for each $1,000 of Basic insurance is $0.150 bi-weekly or $0.325 monthly; so, for the average federal salary of $66,667, the premium is $260/year. This amounts to about $1 billion leaving taxpayers on the hook for $1.6 billion/year. Raise the premium to $0.845 and stop the subsidy.

States have similar programs and their unions should be paying for this too.

Federal Pensions

I've already covered this above. I'm concerned that the payout is one third of the Social Security for one sixth of the number of beneficiaries: it pays out nearly 100% more per person. What a racket!

Military Pensions

See entry above for federal pensions.

You know what, I'm OK with that for the military or anyone routinely in harm's way and not a union member. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.

State Pensions

I'm not OK with the state and local pensioners taking an average of $26,860 in yearly retirement benefits; Social Security pays an average of $15,000.

State and local governments employ 14.4 million people full-time and 4.8 million people part time for wages of $840 billion ($768 billion for full-time). This gives an average full-time wage of $53,334 so pensioners are pulling down a bit over 50% in retirement.

In addition this represents nearly 14% of the entire workforce. Government is essentially management so why is it 14% when, in the private sector, it's 4.28%? Think about it.

While I'll admit the average wage here is 14% lower than the average wage in America, I don't think it justifies the higher retirement benefits. See Fact #2 here.

Some local governments are allowing themselves to be bankrupted by these ridiculous retirement benefits; this is childish behavior since everyone suffers for the benefit of a few. Some state and local governments are changing their laws to deal with the reality of the fact that these benefits are simply not sustainable without increasing government spending beyond the existing 40% outlined in the preface of this blog.

Fire the unions and give government employees what the rest of us get.

Energy Infrastructure

Low cost energy has fueled us since the industrial revolution but it is no longer cheap.

I am a proponent of solar energy because once it is installed, the power is free.

The big argument against it is that the cost of the power plants outweighs the free power they produce; they can't compete with fossil fuel power plants. This is poppycock.

The Energy Department’s Argonne National Laboratory found that air conditioning demand in the West will require 34 gigawatts of new electricity generating capacity by 2050, equivalent to the construction of 100 power plants. The cost to consumers will exceed $40 billion, the lab said.

This represents a plant cost of $1.17 per watt whereas the Energy Department expects solar plant costs to reach $1/watt within seven years. It's about $1.50 now...and the power produced is both free and non-polluting.

We tax cigarettes at a rate of more than 200% in some states because they are unhealthy; well so is air pollution on a VAST scale. Put a 100% tax on new fossil fuel plant construction and watch solar grow and, perhaps, watch the sea level recede (doubtful).

This is a solution tailor-made for the folks in Washington; a new tax that nobody will pay!

Government Regulation of Business

This sounds like an oxymoron since business and labor unions essentially own the government.

However, a few suggestions are in order.

• Health Care
• Medicare should continue compiling a price list for common procedures
• The list should cover all care providers
• The list should cover more (all?) procedures
• The list prices should be justified
• Government should otherwise butt out
• Energy
• Tax new fossil fuel plants and build solar
• Financial
• Megabanks should be broken up
• The Federal Reserve should stop paying member banks for anything
• Big investment banks should be broken up
• Glass-Steagall should come back
• Fannie & Freddie must go
• Banks must service their own loans
• When the Federal Reserve sells off the $3 trillion in toxic mortgage securities, the profits should go to those who did not default on their mortgages but instead took a 30% hit on their biggest investment 
• Government
• Reduce public education costs
• Reduce thyself to Justice, State, Defense, Treasury (Education/Transportation included)
• Pay off thy debts
• Get rid of tax trickery and reduce taxes for all
• Phase out of health care, pensions and welfare
• Fire the government unions

The Bloated Pig

As I noted above, in my town we pay $142 million for K-12 public education when it should cost no more than $33 million. The state is also borrowing $500 million per year for it.

Similarly, in my state we budget $610 million for transportation when it should be no more than $85 billion. We also borrowed $600 million more this year!

As a third case, in my state we dole out $6.2 billion in safety net benefits while the budget is for $9.5 billion; a 53% overhead.

For the clincher, my state safety net overhead of 53% almost looks good compared to the national average overhead of 263%; since the reported cost of safety net programs outside of Social Security and Medicare is 9% of GDP, with this overhead the real cost is 2.8%.

This is what happens when we let the politicians, bureaucrats and unions run amok.

I've offered solutions for education and transportation, now poverty.

How to Fix Poverty Outside of Government
So, we now know that it really takes just 2.48% of GDP to cover the current (and apparently, forever) costs of poverty.

The big problems are:

• How do we deliver the cash with less than, say, 1% overhead?
• How do we verify that the beneficiaries are eligible?
• How do we verify that the charges of service providers are valid?
• How do we keep the government's hands off the cash?
• How do we protect the personal information of the beneficiaries?

The Treasury already knows who the poor people and service providers are and its all set to accept and deliver cash by Social Security number or Vendor ID so that takes care of the first two problems.

Medicaid (through Medicare) already has a list of acceptable charges for services and the state rules for Welfare benefits are written down; use them (after fixing conflicts) to develop and test an automated process and require validation by the recipients over the Internet with DoD-level encryption. That would address the third and fifth problems.

The cash could be donated to a blind trust accessible by only a program proxy at the Treasury, only for this purpose and only by the verified automated process. That would address the fourth problem.

Taxpayers could enable the IRS to deliver a taxpayer-selected percentage of their income to the fund via an entry on the tax return. The liberals who brought this down on us can easily and happily pay for about half of it with the 3.5% tax reduction proposed below in lieu of the charitable deduction. They can pay the rest with the other 5.5% I just saved them by paying attention.

The Peter Principle

The Peter Principle holds that in a hierarchy, members are promoted so long as they work competently. Eventually they are promoted to a position at which they are no longer competent (their "level of incompetence"), and there they remain, being unable to earn further promotions.

Peter's Corollary states that "in time, every post tends to be occupied by an employee who is incompetent to carry out its duties" and adds that "work is accomplished by those employees who have not yet reached their level of incompetence."

"Managing upward" is the concept of a subordinate finding ways to subtly manipulate his or her superiors in order to prevent them from interfering with the subordinate's productive activity or to generally limit the damage done by the superiors' incompetence.

Having reviewed the budget proposals from the (republican) house, thee (democrat) senate and the (socialist) executive, it occurred to me that this must be the principle at work in our nation's capital. Only such a group could look at what's happening here and around the world and produce a set of budget documents so blind to reality.

Government needs to get out of the safety net business.

• They promise retirement cash and we stop saving.
• They promise subsidized healthcare and costs skyrocket in unfathomable ways.
• They promise subsidized college education and tuition goes up.
• They promise minimum wages and prices go up.
• They promise subsidized housing and the housing market craters.
• They promise regulation and the frequency of financial meltdowns increases.
• They promise free food and the number of recipients increases.
• They promise union support and now unions dominate the government workforce.
• They promise more investment in K-12 and we fall further behind in world standings.

I could go on but I expect that the pattern is quite visible; most government-designed solutions

cause more problems than they solve. In addition, the failures occur most often when the government strays from the Constitution (Article 1, Section 8; every case listed strays from it).

In a previous post I showed a way to keep government spending flat while paying our way out from under the promises made by the previous groups of leaders in Washington. The plan I proposed ends with a flat federal tax of 3.75% of GDP and a national debt of zero or better.

Manage upward folks.

Targeted Government Program Funding

The notion of a general fund should be done away with to prevent our spendthrift legislators from diverting resources to projects intended to boost reelection chances or fill campaign coffers. The same should go for local, state and the federal governments.

Using the federal government model I have espoused in prior posts, I suggest that these are the government entities we ought to be funding:

• Justice
• State/Intelligence
• Defense
• Treasury
• Transportation
• Education

Not all entities need exist at all three levels of federal, state and local government. Sorry for the use of scientific notation for the big numbers ("E+13" means 10 trillion).

The total is less than 10% of national GDP and can all (except transportation and education) be flat-tax funded at a per-capita cost of  $4,715, far less than the current cost of about $19,303 for each of the 316 million of us.

Given the current employment of about 135 million, this is $11,037 each versus $45,185 each. For the average $62,000 /year earner, it's about $6,200. For a minimum wage earner, it's $1,500 and for a 1-percenter, it's $30,000 (minimum at 10%).

Transportation should be funded by a ton-mile tax on ships, trains, buses and heavy trucks.

K-12 education should be funded locally only at $6,660 per student, scaled for geographic locale. Cities should provide the most efficient living conditions but corruption and/or mismanagement are pushing more costs into the surrounding areas and this is especially true for education and it has to stop.

Here is my federal budget after removing the safety net (my version of Executive budget); $594 billion versus about $3.2 trillion; 3.75% of national GDP.

Here's my state budget after the same treatment; $3.96 billion versus 20 billion. 1.58% of state GDP.

State Budget Before & After Plan

My city budget reduces from $111 million to $63 million by funding education as I suggest. 5.25% of town GDP.

The net result is a government that costs 10.3% of GDP, not 40%.

Government Spending Deficits

While I'd like to say budget deficits, the federal government hasn't had a budget for a long time. Federal revenue will be $2.7 trillion but Washington will borrow at least $500 billion more; sadly, that is an improvement over the last 10 years when $1 trillion deficits were common.

Even in my state where we pretend to have a budget, we borrow for ongoing expenses like public employee pensions every year. We even have a spending cap that the legislature circumvented by carrying the $6 billion in federal funds off the books; even though we arguably provide that $6 billion in the form of the $50 billion we pay in federal taxes!

The federal government has a debt equal to 6.2 years' worth of tax revenue.

My state government has a debt equal to 4.1 years' worth of tax revenue.

By way of contrast, Texas has a debt equal to 1.6 years' worth of tax revenue.

Deficit spending is bad and my examples of public education and government-subsidized health care are illustrative of the causes; the regulator does not regulate itself (primary and secondary schools are a virtual government/union monopoly) and subsidies bias free markets (slope change in medical costs since the 1965 advent of Medicaid/Medicare).

When my wife and I signed the mortgage on this house 15 years ago, we signed up for a debt equal to 1.5 years' income and I was really worried. Now, we're nearing the end but we have something to show for it; despite the real estate cratering of the last 5 years.

Government is not even trying to pay off the debts. We hear only about deficit reduction; slowing the rate at which debts grow at least until all of us conservatives die off.

Also, since government borrows to pay ongoing bills, there is nothing to show for the accumulated debts.

The problem looks us in the face every day; us. Most of us have either never tried or have given up trying to set a new course and the politicians know it. Those in office will never be responsible unless those of us who fund it force them to be.

Government Debt

America needs to eliminate our $16.9 trillion federal debt.

The yearly cost of the federal debt is $285 billion.

Our elected officials talk about deficit reduction like it's a good thing to allow the debt to continue to grow without bound. I'm talking about becoming debt-free.

With the debt repaid, the Social Security trust fund will receive $2.7 trillion (the amount “borrowed” by congress when times were better), ensuring its solvency.

We also get back the $2.3 trillion congress has borrowed for other stuff we couldn't afford to pay in cash.

I talk about federal debt above because national debt implies the entire debt of the nation and it just ain't so. There is nearly $3 trillion more debt owed by state and local governments; about 1.2 years' revenue on average; more like my largest debt.

Clearly the state governments are more responsible than the federal government; why is that?

I'd say it's because there is much more representation per dollar spent even though local government has a higher percentage of debt than state governments do; local government should be the most expensive because of schools, roads and police, fire and emergency services so the marginally larger debt is understandable though still unacceptable.

The lesson here is that we can exert control if we speak up and we don't need 5,000 congressmen to do it.

Debt to GDP Ratio

The fiscal liberals have begun a debate on the 'acceptable' level of debt we can have with respect to GDP. The purpose of the debate is to cajole lawmakers into spending more money.

The debate is misleading since the process of government spending (and the borrowing that precedes it) increases GDP. The method used by the Bureau of Economic Analysis (part of the Department of Commerce) is:

GDP = C + I + G + (E - I)

where;

• C is consumer spending
• I is investment (by industry, not as liberals define it)
• G is government spending
• (E - I) is exports minus imports

Debt is not in the GDP equation but debt-driven spending is.

Let's say we have a country of one frugal taxpayer who spends, invests, imports and exports nothing. The government taxes him $1 in the first year and spends it. The GDP is $1.

The following year, the taxpayer once again spends, invests, imports and exports nothing. The government taxes him $1 again but also borrows $1 and spends them both (no surprise there). The GDP is now $2.

The liberal spenders would have us believe that if the taxpayer spends $1 in the third year while the government taxes him $1 again but borrows $1 more and spends them both, the increasing GDP is a good thing and a debt-to-GDP ratio of 2/3 is acceptable.

It's this kind of reasoning (Keynesian) that leads to the condition of the European Union. I'm no economist but it seems to me that Keynes primarily advocated tinkering with interest rates and big government spending on infrastructure during the depression. He did not advocate government spending of 40% (49% in the European Union) of GDP forever.

Entitlements Defined

My old friend asked me what my definition of an entitlement is. He said that something you pay into over time and then get paid back later is not an entitlement. He went on to say that since he's been paying taxes all these years, if he were to fall on hard times and avail himself of welfare and medicaid, these would not be entitlements either.

As he correctly points out, the majority (if not all) of Americans contribute tax dollars to directly fund things like Social Security and Medicare (FICA) and, as a result, they feel ‘entitled’ to receive benefits.

I think that’s the etymology of the moniker. In general, that's not true with welfare and medicaid so I'd say that he's confusing actual entitlements with what some might call the simple (and wrong) redistribution of wealth.

Traditional entitlements are outside the proper role of government as defined by the US Constitution in Article 1, Section 8. Social Security was born in the cradle of a worldwide depression and while it may have made sense then it no longer does. Medicare was born in the 60’s; this was also the camel’s nose in the tent of nationalized health care.

My friend also correctly points out that government also gives free money to corporations and individuals who did not contribute tax dollars to directly fund the handout. I call these things tax trickery to separate them categorically although I think that they even more abhorrent than traditional entitlements.

Medicaid and welfare are like corporate handouts; and they are equally wrong.

Instead of government picking winners and losers, this is government subsidized charity; not altogether horrible but, nevertheless, a violation of the US Constitution in Article 1, Section 8.

I think these programs have been lumped together with actual entitlements because some recipients now feel entitled to them instead of being grateful for the (enforced) charity of their fellow citizens and actively trying to get off the dole. A study by the University of California (Davis) suggests that welfare dependence is inter-generational.

So I told my friend that while I have no doubt that he has paid enough taxes to earn a free ride on this bus, I was certain he'd agree that if all of us who’d paid also rode, we’d all be looking up at broke; because that’s where this bus goes.

I’m opposed to all of this stuff because the cost of being an American is simply too high to make for an inclusive society. We pay more than $6 trillion/year for our government. This puts the annual cost at about $19,000/year for every man, woman and child. Shedding these programs (and fixing public education) would bring that figure down to around $5,000; low enough to be covered by an inclusive flat tax of about 10% on everyone as I describe below.

No more "47 Percent" crap from the right, no more cries of unfair from the left; a far better environment for working together on common problems. In addition, it puts 30% of everyone’s gross income back in their pockets so folks can fund the charitable institutions they want, not have it dictated by a government under threat of imprisonment.

In addition, we'd be spared the sometimes daily headlines about our government as purveyor of condoms and abortions or cheerleader for homosexual behavior. I am socially ambivalent with regard to condoms, abortions and homosexuals as but some folks are distressed by one or more of them and I don't think that they should be forced to pay for such things with tax dollars.

Liberals will say they're opposed to guns and war and therefore shouldn't have to pay taxes for them; wrong, read the Constitution.

Tax Trickery - Tax Reform

I noted that the government also gives free money to corporations and individuals who did not contribute tax dollars to directly fund the handout. I call these things tax trickery to separate them categorically from entitlements and government-mandated charities (Welfare & Medicaid).

I think that these are even more abhorrent than Entitlements since the giveaways represent government favoritism, they bias the affected markets and they should be eliminated in favor of lower taxes for all.

To focus in on any one of these tax tricks would be like hand-wringing about tornadoes against a backdrop of hurricanes, typhoons, blizzards and tsunamis. They all need to go.

Here's a list of a whole bunch of them and the associated federal tax revenue losses:

The list adds up to $4.122 trillion over 5 years or $824 billion/year. There are also some smaller ones.

Highway subsidies                                                                 $   35 billion/year
Accelerated depreciation                                                       $   24 billion/year

R&D tax credits                                                                    $     7 billion/year
Farm subsidies                                                                      $     6 billion/year
Federal Reserve interest payment to banks on reserves          $     9 billion/year
                                                                                             $  81 billion/year

These bring the total to $905 billion/year but there's more.

These bring the total up to $979 billion/year (above table covers three years).

This doesn't include the 6% dividend that the Federal Reserve pays to member banks; this number was $1.2 billion in 2008 and doubles every 4 years or so.

Related Connecticut state tax trickery of $358 million is quite modest by comparison. Extrapolating by population, this is another $30 billion/year; roughly 1/33rd of trickery at the federal level.

The sum of all this trickery exceeds $1 trillion/year excluding the costs of management. All this favoritism also smacks of backroom deals, campaign contributions and general corruption.

Don't get the idea that I'm arguing for more taxes because I'm not.

However, I do favor getting rid of all of this tomfoolery in exchange for cutting corporate and personal income taxes equivalently.

I would except income from Social Security since we already pay income taxes on the amounts withheld and taxing it again is double taxation; credit my cousin Suzanne for pointing that out to me.

Reform Details

State
For state tax trickery, most is corporate handouts (see table below) so elimination with a corresponding reduction of the 9% state corporate tax rate should be better than a wash; this stuff invites tax fraud and costs money to implement and verify.

CT Tax Credits 1995-2007

Total corporate tax revenue in Connecticut is about $400 million/year so the average trickery of about $130 million should wash out with a rate reduction to 6% for all corporations.

Federal

Health Insurance
Federally speaking, of all of the tax trickery that goes on, the biggest by far is that employer-provided healthcare is not taxed like wages are; there is no equivalent to a payroll tax. I think this is a subsidy for the biggest, most profitable business on earth. I'd wager that if companies paid tax on it, there'd be a lot more push-back on health care costs by folks with clout; that could not be ignored.

Taxing this with FICA (payroll taxes) ought to focus industry on the 30% profits of insurance companies and the 40% profits of hospital conglomerates; at least until Obamacare entices all employers to stop providing $12,000 coverage for all in lieu of the $2,000 tax. When that happens, we'll buy our own and be glad the corporations stepped up to the fight first.

That is the only tax I would add but it is mostly an attention-grabber since I will propose halving corporate and personal taxes as I progress through this mess.

Retirement Savings Deductions
If we look at the Retirement Savings breaks (mostly 401(k) tax deferrals) and the Reduced Capital Gains Rate, getting rid of them in exchange for lowering all tax brackets is basically a wash at the low end and better than a sharp stick in the eye at the high end.

The average retirement savings deduction is $2,733/year so the tax break would be $684 in the 25% bracket so reducing the bracket from 25% to 23.9% makes it neutral. More on Capital gains later.

Social Security savings are taxed, why not this stuff?

Mortgage Interest Deduction
I think the mortgage interest deduction is huge dollar-wise but I think that all it really does is non-linearly inflate the cost of housing; like Medicare and Medicaid inflate the cost of health care; like government funding inflates the cost of education; etc..

It is also unfair to renters.

Given a debt-to-income recommendation of 36% and the assumption that 85% of debt is for real estate ($1,581/month), the average $62,000 earner can afford a $300,000 home with a 30-year fixed rate of 4.475%. The $10,000 in interest represents a $2,500 tax savings in the 25% bracket, or 4% of gross. 

Reduce taxes by 4% more and it's a wash.

Children

The Earned Income Tax Credit and the Child Tax Credit are essentially Welfare duplication and should be abolished. They also encourage foster care fraud and cost even more money to implement and verify. If you can't afford kids, I suggest celibacy, condoms or the liberal's favorite; just not on my dime, please. There's also a morning after pill now.

There's no excuse to have unaffordable children.

Besides, we already get a deduction for dependents.

State and Local Tax Deductions

State and local tax deductions should also go. Given that, of the 40% paid in taxes 20% is state and local tax (sales tax too), dropping the 25% bracket by another 5% makes it even again.

Capital Gains Rate versus Inheritance & Gift Taxes

Now that the 25% bracket costs just 14.9%, eliminating the preferred Capital Gains rate in favor of the regular tax rate makes the average $62,000 earner tax neutral while the 1-percent group pays 29.8%; better than a sharp stick in the eye and probably what a liberal would call more fair although I'd say anything but a flat tax is unfair.

The trade-off should be the abolishing of the inheritance tax (aka the death tax) and the gift tax; we should be able to do as we please with our earnings.

Tax Deferral on Foreign Subsidiary Income

To fix the problem with this (can you say Apple?), the corporate tax rates need fixing. The chart below shows the magnitude of the problem and would show $1.7 trillion for 2013.

Given the average 17% actually paid in tax by corporations (see chart below) on $2.2 trillion in income, this seems a reasonable compromise; compress the corporate tax brackets so that the top bracket becomes half of what it is now (35% -> 17.5%) and tax this money while allowing no deductions for tax paid abroad; incentive to come home to the most politically stable business environment on earth.

Other Corporate Payola

As part of this deal, abolish the deductions for Accelerated Depreciation of Capital and for R & D. Regular people can't depreciate their stuff so businesses shouldn't either; if you need it to turn a profit, why should taxpayers finance it?

Same goes for R & D; innovate or die and don't burden taxpayers with your problem.  

Charitable Deduction 

The deduction for charitable giving should also be abolished in favor of another reduction of 3.75% allowing for the private funding of Welfare, Medicaid and whatever as I suggest above.

Liberals love to give their money away and they can afford to pay all of this so confiscation under threat of imprisonment is not needed.

This is promoting the general welfare as intended by the Constitution.

Transportation

Highway Subsidies to states, largely funded by fuel taxes, are the wrong way to go. Taxing fuel is dumb, especially for this purpose. We end up giving lots of it back for the LIHEAP Welfare program as well as taxing farmers, landscapers and boaters for highway improvement. It also raises the cost for home heating.

Given the more than 1.2 trillion ton-miles driven every year, a tax of a 3 cents per ton-mile would produce $36 billion/year.

Of the 47,908 interstate miles, Connecticut has only 346 so we'd get $405 million/year from the federal levy; far more than we need. No cabinet department needed, just a ton-mile tax on the interstate operators since large vehicles deliver the most wear and tear to our roads. Every dollar received is automatically distributed to the states by mileage ratio so congress can't touch it.

Do the same with ships and pay to keep the harbors dredged by the Army Corps of Engineers.

A similar approach also works for air transport although in this case the cost is largely to be borne by passenger tonnage (air cargo is prohibitively expensive already).

Farm Subsidies

This brings us to Farm Subsidies. This is an anachronism from the depression of the 1930's.

Given $440 billion in revenue and the tax reductions proposed herein, this subsidy can go. Additionally, removing fuel taxes will shave production expenses.

The reduced tax burden helps all businesses grow and hire workers.

Preferential Corporate Tax Rates

Similarly, all of the preferred industry rates shown in the third table from the top can go since corporate rates are halved by the tax reductions proposed herein.

The biggest losers (dollar-wise) are Energy, Telecommunications and Information Technology Services (whatever that is); I have no doubt they'll be fine without having me subsidize them.

Summary

I have proposed ending all tax trickery favoring the few with broad tax reductions favoring all. This swap is essentially revenue neutral and causes no pain for the average earner; the middle class.

In reducing the 25% bracket to 11.15%, this plan:

• Makes retirement more affordable while eliminating the 401(k) deduction
• Enables the funding of Welfare and Medicaid outside the auspices of government confiscation while eliminating the charity deduction
• Eliminates the mortgage interest deduction
• Eliminates the state and local tax deduction
• Lays the groundwork for my proposed Grand Bargain below

In chopping the corporate rates in half, this plan:

• Repatriates foreign dollars
• Ends corporate handouts
• Promotes the growth of all businesses
• Adds a wake-up tax on employer-sponsored health insurance; due to Obamacare, companies will soon stop providing this benefit (in lieu of the penalty tax) so using (forcing) the corporate lobby to drive down costs first will be helpful

In eliminating the preferred Capital Gains rate, this plan:

• Reduces the top bracket to 25.75% (same 13.85% reduction as for the 25% bracket)
• Taxes the real source of the 1-percent's income and takes 10.75% more of it
• Eliminates inheritance and gift taxes, compensating for higher taxes on high earners

In replacing the fuel tax with a ton-mile tax on heavy vehicles, this plan:

• Taxes the real source of highway wear and tear
• Reduces farm production costs
• Reduces heating oil by about $1/gallon and gasoline by $0.63/gallon in Connecticut
• For me, this is worth nearly $2,000/year
• Funds the Army Corps of Engineers if also applied to ships
• Funds airports, FAA and air traffic control if applied to air passengers

The Grand Bargain

Fellow Taxpayers,

We've covered a lot of ground. Discussions with some of you suggest it's time to put it all together and show what a real Grand Bargain looks like.

The most important discussion has focused on government spending which, at 40% of GDP, is way too high.

The second-most important discussion has focused on the national debt which, when including the money we owe ourselves, is more than 110% of GDP.

The third-most important discussion is the measure of GDP itself; a tainted measure since it includes government spending making our Nanny-State programs look good.

The fourth-most important discussion is mandatory spending since it leads federal government spending at 62%. These are the well-known federal Social Security ($773 billion), Medicare/Medicaid ($732 billion) and Welfare ($411 billion) programs. They also include pensions for government and military employees.

Overall, Medicaid ($390 billion) and Welfare ($700 billion) costs include state expenditures.

The fifth-most important discussion is public education since it leads state and local government spending at 26%. This number grows to more than 70% when teacher pensions, teacher retirement health benefits, state/local board of education, state/local school construction bonds, retirement bonds and federal education spending are rolled in to what the local school districts spend.

The next most important discussion is the notion of a General Fund approach to government finance.

Part of the problem here is that as some of us have forgotten the proper role of government, politicians are able to freely pander for votes; they promise wonderful new programs that won't cost a dime because they'll be paid for by someone else. This fallacy of fiscally liberal thought, of course, is that we do pay for these things but we pay with a different check. 

Another problem is that it leads to bizarre and never-ending taxation schemes; sin taxes, fuel taxes, payroll taxes, corporate taxes, estate taxes, income taxes, tolls, capital gains taxes, fuel taxes, sales taxes, fees (for licenses, registrations, travel, hotel occupancy, energy, communication, etc.) and property taxes. In short, we're taxed when we earn, we're taxed when we spend and we're taxed just for owning stuff. Oh yeah, we're also taxed when we die with an inheritance tax.

Yet another problem is that this leaves to door open for yet more political pandering in the form of taxation trickery; tax deductions, tax credits, tax deferrals, tax loopholes, tax abatement, tax amnesties and a personal favorite, government investment of tax revenue in private industry.

Then, the ultimate in pandering, the government bailout of private industry because legislators are afraid to truly regulate their benefactors.

The Republicans say they want to cut spending and taxes to grow the economy but the Republican-led house budget does neither. The Democrats want to increase spending without bound and give our money away to those who have been programmed (by the Democrats; FDR & LBJ) to expect a free ride. I give the Democrats credit for being more honest about it but I still object. They haven't passed a budget in years and they appear to like it; sucking us dry as we move from one crisis to the next. The current president is a democrat.

The final important discussion is government employee giveaways: public employee pensions and retiree health benefits. These happen at all three levels of government; federal, state and local. We already have Social Security and Medicare, why would we need to duplicate these programs? It's because Social Security and Medicare, while good enough for us are not good enough for the government elite.

OK, so those are the big issues. How do we fix them?

The solution is not easy if it is to be fair. It will take time to implement without causing chaos and ruining people's lives by taking away the government teats too abruptly. It has to have something for both the liberals and the conservatives to like so they'll make it happen. It has to make sense.

Right-Sizing Government
First, we cut the roles of government back to Justice, State/Intelligence, Defense and Treasury; pretty much what Lincoln had. The education, interior/parks, transportation (with targeted funding) and local functions are assumed by Treasury except for air traffic control and the FAA going to Defense (with targeted funding).

At the federal level, by also reducing defense spending back to the levels of 2001, and ending the ground wars in the middle east and closing bases in Japan and Germany, this reduces the cost of government to about 3.75% ($600 billion of $15.8 trillion GDP) of GDP from 22% ($3.5 trillion). This also increases the unemployment rate back to about 8%; a fair trade.

At the state level, this reduces the cost of government to about 1.6% of state GDP ($3.96 billion of $250 billion Connecticut GDP) from 8.8% ($21.5 billion). This will also increase unemployment by a small amount (nationally).

At the town level, by also restructuring public education as I describe in my post on the subject, this reduces the cost of government to about 5.2% of city GDP ($63 million of $1.2 billion Shelton GDP) from 9.4% ($111 million). This will also increase unemployment by a small amount (nationally).

The result is that government spending drops from 40% to 10.3% of GDP with taxpayers pocketing the difference. This puts about $4.5 trillion back in the hands of taxpayers...every year.

Targeted Funding
As I discussed above on this subject, we fund some services by taxing those who use them. If the users are unwilling to foot the bill, the service goes away. Simple.

This applies most readily to transportation of all sorts and also to taxpayer-funded insurance but it also infers a flat tax structure for services enjoyed equally by all.

Education should be funded from the bottom up per my example; we currently pay way too much for far too little.

Cut up the Credit Cards
Now that we've reduced government to the essentials and streamlined the funding, we have much more income than needed so we take the scissors to the credit cards; no more deficit spending.

If it absolutely makes sense and there's a return to be had and, say, 90% of the electorate votes for it, fine. Otherwise, no. This makes it possible to rebuild after disaster strikes, for example; a purpose-defined tax can be levied to repay the debt incurred to rebuild an airport or a road (with user fees increased to pay back the loan from government). It also makes it possible but difficult to wage war, if attacked.

On disasters, private insurance is assumed to cover private property; no more government-backed flood or other insurance.

No more tax trickery or bailouts; break up the too-big-to-fail banks, disband Fannie Mae & Freddie Mac and let the car companies fend for themselves. Investors and workers have to start paying attention and head off these disasters before they get out of control. Replace tax trickery with lower taxes for all.

Divide and Conquer
The tall pole in the tent is entitlement, enforced charity and pension spending. Into this group falls Social Security, Medicare, Medicaid and Welfare programs as well as public employee benefits (including teachers, police, firemen, etc.).

To start, we'll divide the entitlements by payer;

• The federal government takes Social Security, Medicare and federal employee benefits.
• The states take Medicaid, Welfare and state employee benefits and teachers benefits.
• The cities/towns take town employee benefits.

Slowly Throw Off the Nanny State
We have to take advantage of the birthrate lull that arrives in 20 years to fix this thing. These entitlement schemes were born when we allowed population to grow boundlessly; always more payers than beneficiaries. That all changed in the 60's and exposed the biggest design flaw the social engineers had made.

The graph below shows the rates through 2005 (add 65 years to the baseline to see where we are now and why this is so scary).

US Birthrates 1930-2005

And the more recent data show flat rates near 4 million/year.

I propose that we use the excess revenue gained by reducing the scope of government to finance entitlements for the next 20 years then slowly cut the safety net and tax rates over the following 20 years. Nobody gets hurt, people get a 20-year warning of what's coming and the country regains sound financial footing for our grandchildren.

Here's how we can do it.

Federal
Both the White House and the House of Representatives project revenue this year (2013) of $2.7 trillion.

I showed above the 2013 federal budget at $600 billion for the Grand Bargain.

Congress costs about $4.5 billion and the Supreme Court costs are a great deal smaller (not in budget) so I used these as-is.

So, after subtracting the $594 billion cost (in today's dollars) of the optimized government, we have $2.1 trillion to pay entitlements and also to pay off the tremendous debt.

Federal Spending through 2052

We start with 22% for our $594 billion government, 60% for mandatory spending and 18% to pay down the debt; no borrowing. In 2032, we start reducing taxes by an overall 2% per year. All tax trickery is assumed to be gone.

We continue shelling out $1.6 trillion for Social Security and Medicare for 20 years then slowly drop what we pay as dictated by the birthrate demographic as we nearly finish paying off the debt.

Bringing the debt down to $1 trillion actually means a $4 trillion surplus since, of the $16 trillion debt, we owe ourselves $5 trillion (by congressional appropriation from the entitlement trust funds which now contain only IOU's).

This will finance entitlements for any of the folks who are now 45 or older who live beyond 85 years. It also smooths the (average ~15%) bump in the demographic over the first 20 years by paying ourselves back first.

The idea is to keep the promise of these programs for those 45 and up. Those folks will continue to pay FICA as will their employers (7.65% each to fund Social Security and Medicare...aka Payroll Tax); these are the maximum earning years for most of us.

For those below 45, they will no longer pay FICA although their employers will so the net program loss of revenue will be small since these are the lesser earning years. The average 44-year old earner (salary average in US is $62,000) can save well over $300,000 in 20 years starting with 7.65% of pay in a safe 3% government bond along with another 10% of wages; see graph above.

So, by 2052, the debt is gone, entitlements are done and we are taking care of ourselves.

After 2052, taxes can start dropping even faster until they are gone after just a few more years. We could also build a small surplus in this time.

No chaos, no pain, optimum government, no debt. All federal taxes and tax tricks can be replaced with a flat tax of 3.75%; everyone pays, no exceptions. Fair as fair can be. Balanced too ;-)

State
Since Connecticut is one of the worst-managed states in the union, it serves as a good example of how my plan works at the state level.

Connecticut's state revenue is expected to be $23.1 billion in 2013. However, the state receives about $3.5 billion in federal grants and that will not happen with my plan so the net revenue is really $19.6 billion.

The cost of the streamlined government of Justice, State, Defense and Treasury is $3.96 billion including targeted funding of transportation and the $2.8 billion cost of the state university and research system.

I have removed all funding for K-12 (shown as the General Fund on page A44 of the state budget) as this would be paid for locally with no state or federal money needed by using my Public Education plan. I also removed all pension and health care spending since I'll lump this all together and call it Entitlements.

I showed the revised state budget above.

This leaves $15.64 billion to pay for Medicaid, Welfare, state employee and teachers retirement and health benefits. Same deal as for the federal version; everyone 45 and up is covered and will still pay their current share into the retirement 'fund'. The rest of the state's employees and teachers will save for themselves as described and shown under the federal (self-serve) plan above.

The state debt is about $80 billion but that includes unfunded pension liabilities of $60 billion.

To me, this whole idea of unfunded liabilities is an overly polite misnomer. What it really means is that our state government has spent or otherwise mismanaged the money that should have been socked away on a pay-as-you-go basis; much like Congress' raiding of the federal trust funds. The real debt is more like $20 billion and I'll treat the unfunded liabilities of the pension funds the same as the other state entitlements.

Nationally, Medicaid cost $390 billion in 2010 and Welfare cost $700 billion in 2012. Connecticut should pay it's share by population. Since Connecticut has 3.5 million people, we get 3.5/311 or 1.125% of the burden. This amounts to $12.26 billion/year, more than the $10.9 billion we actually spend on welfare and healthcare but that is our lot in life as one of the richest states.

I suppose we'd have to give the difference of $1.36 billion to the poorer states to keep the socialist promise alive for the duration of this plan. It sounds like a lot but left unchecked, it would be a lot worse; Connecticut taxpayers currently pay about $50 billion/year in federal taxes (20% of state GDP) but only get $3.5 billion back. The spending in Washington will double that in 10 years if we don't change course.

We also pay out $3.2 billion/year in state employee benefits but the good news is that we have $20.5 billion in the retirement and health funds for teachers and state employees (see pages A-26 and A-26). This money can be used to wipe away the state's debt and $2 billion yearly debt payments in a single stroke! By this measure at least, Connecticut is better-managed than the federal government (assuming that there really is money there, not IOUs).

So, our total entitlement nut is $15.46 billion ($12.26 billion+$3.2 billion) and the cost of government is $3.96 billion for a total of $19.42 billion. This means we can be living within our means and debt-free with a $180 million annual surplus right out of the gate!

Connecticut State Spending through 2052

As with the case of federal spending, taxes (of all kinds) start reducing after 20 years by 2% overall every year for 20 more years until the 45-and-up crowd has been laid to rest.

Note that the ~30% drop in entitlement spending follows the population demographic.

After that, they can reduce much more quickly until the $13 billion in revenue equals the cost of optimized government; $3.96 billion in today's dollars. At that point, we should have a surplus of more than a few billion dollars and an open door to a scheme of targeted funding and a flat tax.

Post-Plan Welfare
The prison system costs $750 million for 17,000 inmates with a workforce of 7,000. This seems exorbitantly high to me in terms of both manpower and cost. It seems to me that 1 worker per 10 inmates is plenty and this would reduce the cost by $108 million.

I live a comfortable, middle-class life on about $120/day. We're paying more than $93/day for inmates? I should think that $30/day would suffice. This would reduce cost by another $96 million for a total of $649 million. That's what I put in the budget even though I think it's still too expensive; I'm thinking tents in the desert.

The state University system costs $2.8 billion and has a current enrollment of 30,000 at UCONN and about 36,000 at the other four regional facilities. This means that taxpayers are paying a subsidy of $36,000 per student!

This much on top of the $11,000 to $40,000 paid by students at UCONN or $4,000 to $11,000 at the regional campuses. This seems absurd so I suggest reducing the subsidy to $0.8 billion and holding the feet of the administrators to the fire.  That's what I put in the budget.

Poor people get two more generations to get their acts together; after that, they're on their own like us. Hopefully, they'll be fine but they can always fall back on liberal largesse.

Hopefully, we kick the illegal immigrants out because I have allocated exactly zero for them. Here’s the thing: taxpayers shell out more than $6 trillion/year for government when federal, state and local levels are added up. Subtracting out Social Security and Medicare, which
illegal, undocumented immigrants (hopefully) can’t get without a Social Security number, leaves over $4.4 trillion.

A government costing $4.4 trillion divided among a population of 316 million is $13,924 per year each. The 11 million illegal immigrants are costing us $153 billion/year.

No chaos, no pain, optimum government, no debt. All state taxes and tax tricks can be replaced with a flat tax of 1.6%; everyone pays, no exceptions. Fair as fair can be.

Local
Since I used poorly-managed examples for the federal and state government reforms, I've decided it would be best to use a well-managed example for local government since, in a practical world, local government should have the highest cost as a percentage of GDP (because of education). I'll use my city of Shelton, CT.

The city takes in about $111 million in revenue but gets about $7 million from the state which won't happen with this plan. So, the net revenue is $104 million.

The city's biggest expense, by far, is education at $63.7 million for 5,137 students. Using my plan for Public Education, this becomes $33 million.

The rest of town government, excluding debt service (which the Mayor called to tell me will be gone in 10 years) and revenue from local (non-property tax) sources costs $30 million.

The grand total is $63 million for a population of roughly 40,000 with 15,382 taxpayers and a city GDP of $1.2 billion. A flat tax of 5.25% should cover it nicely; this works out to an average tax of $4,095.

Summary
As Washington and the states continue to apply band-aids and political posturing to the problems and solving nothing, this is a real solution. They constantly seek to expand government when we really need to redefine its role for our society.

• Roles defined; Justice, State, Treasury and Defense.
• Government spending reduced from 40% to 10.3% of GDP but still serving their required roles.
• Entitlements fulfilled for all those aged 45 and up. Self-entitlement for everyone else and a plan to do it.
• Publicly funded education at a price we can afford that still delivers the same or better service in the classroom.
• Targeted funding of services by those who use them. A flat tax for services that benefit all equally. In the vernacular: a fair and balanced approach. No more us versus them, just us.
• No tax trickery.
• No taxpayer-funded insurance.
• Low-overhead charity for the disabled.
• No debt, no deficit spending, no elite treatment for government workers
• No pain, no chaos and a steady path to a government the founding fathers would approve.
• Political pandering put in check by raising the threshold for incurring new debt.