The Dog Days of summer have come and are almost gone. It is just about time for vacations to come to an end and the reality of work to creep back into our lives. Many Americans did not take a vacation this year due to a tenuous employment situation. Out of work or underemployed, the last thing they need to be is out of sight and out of mind amidst this persistent economic decline.
Not so for our nation’s leadership, such as it is. Congress has been on recess since August 2 and is not expected to return until September 7. The President, presumably exhausted from being humbled on his armored bus tour, has headed to Martha’s Vineyard for yet another bike ride and ice cream cone. I must confess that even I took a holiday this past week but at least I produced this essay.
What our leadership is telling us is that our very real problems in earning a living, making ends meet and paying our bills are far less important than their problems in orchestrating an electoral victory in November 2012. It is about power more than progress and I, for one, am tired of waiting on government to be the savior of the economy. All I really want government to become is less of an impediment.
When it comes to regaining control of government there are only so many levers to pull and buttons to push to align spending with revenue. Let’s review some of them.
On the revenue side, taxes on personal income and on payroll account for more than 80% of what the Federal government takes in. Six levers to pull here: two large, one medium and three small. Not quite half of the rest comes from taxes on corporations and the rest from customs duties, excise fees and estate taxes. Reducing income taxes at the personal or payroll level, the large levers, assists those who are employed already and assists in increasing consumer spending to some degree. We already have a temporary payroll tax reduction in hand. On an individual basis, it is not small potatoes but it is diluted and does not stimulate job growth. The small levers of customs duties, excise fees and estate taxes provide better headlines than real leverage. I should point out that levies might be effective in leveling the playing field against unfair competition on many grounds without risking a debilitating trade war on the scale of Smoot-Hartley Tariff of 1930.
That leaves the medium sized lever of corporate taxation as the one revenue source that is directly tied to the one community that can directly create jobs: business. Large and small, businesses create jobs, not government. Furthermore, we are in a global economy and businesses large and small will source materials and labor from any corner of the world that will maximize their profit. Therefore, our corporate tax rate must be made competitive with the rest of the major economies and competitors of the world. On this point, both parties seem to agree. So let’s get on with reducing them by twice what extending unemployment benefits for a year would cost. That should reduce the corporate tax by about 25%, enough to show that the government is serious about making US business competitive across the globe and provide enough visibility to see the positive effects on employment and job retention and even job repatriation.
But here’s the rub: if you reduce the corporate tax rate, all of the special interest benefits need to go with them. Across the board reductions must be met with the termination of costly special interest perks. Characterize this shift as you will, it is fair.
Now, onward to the buttons that affect government spending. Here we have eight buttons: 4 large, 2 medium and two small. Let’s take a look at the four smaller ones that account for less than a quarter of the budget first. Interest on the debt is what it is. Today it accounts for 6% of total spending and certainly will rise as we borrow more at increasing interest rates. Other discretionary spending accounts for 12% and includes roads, tunnels, space exploration and the occasional Bridge to Nowhere, to name a few. The other 5% is split between foreign aid and education. We can make ideological arguments on both but nips and tucks but will not yield too much real reform.
The eight hundred pound gorillas are in Social Security, Medicare/Medicaid, Income Security and Entitlements and National Defense. All told, a whopping 58% of spending is contained in these four areas. For both parties, these represent the Holy Grail and third rail of politics. The only person in either party, including the President, who has taken aim at any of these, is Rep. Paul Ryan. Most have taken aim at him. But even he fell short of making recommendations on the defense budget.
I’ll take a stab at that. I am a veteran and come from a long line of veterans. My son is becoming a veteran in two weeks. I have no interest in placing our armed forces in harm’s way without proper equipment and support. But even I know there is waste and redundancy in that budget. Defense budget processes mirror those of the rest of government and are atrocious. The heavy hand of Congress is everywhere in appropriations and results in high ticket items being forced upon the Generals and Admirals for sake of political reputation more than necessity. That has to stop. There is gold in that budget.
Social Security never anticipated a life span of 80 plus years, 15 beyond retirement age. It is time to slowly, I repeat, slowly increase retirement age towards 68 years. This has tremendous positive effect on spending.
Health care spending must be capped. The Ryan Plan is a good place to start the discussion. Remember, nobody is throwing anybody under the bus. Responsible plans call for changes in Medicare for those 55 years of age and younger. If you are 56 and older, you’re grandfathered. No pun intended. Let us choose from an unfettered market of care options. I think most Americans are capable of making these choices.
Income Security and other entitlements account for the remaining 18% of the budget and are rife with opportunities. Americans are tired of supporting no-loads who are too lazy to work and are scamming the people. That is an easy choice. But there is a lot of opportunity in this budget chunk for all classes of people. This area ought to be publically debated and we don’t have enough time here to elaborate.
So, Mr. President, Speaker Boehner, and Senator Reid, here is my plan to stimulate the economy and simultaneously grab hold of our budget. It contains 6 levers and 8 buttons, not all of which are even in play. I am on vacation this week as are you all. I hope you have something equally meaningful to show for your time on holiday.
Press on.
the american century 
Great essay Tom. If only people in Congress were willing to make the tough decisions you outline here.
Very interesting article. Thanks for explaining it so well. Bonnie
A common sense approach! This is why we need Tom Wesley in Washington!
Thanks Tom for your thoughtful essay. I think Congress gets it but no one is willing to do the tough job. Most will only do what will help them get reelected.
Michele