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How to fix the budget without hurting the country; some common sense solutions.

How to Fix the Budget Without Hurting the Country

The unctuous-looking salesman in the magazine ad offers the reader a bottle labeled "Securities Transaction Excise Tax." The advertiser is Merrill Lynch, and the accompanying text warns that such a new tax on stock and bond trades "could have a very damaging effect on the financial markets and the economy." Merrill Lynch says that the tax's side effects would include "a $25 billion reduction in the Gross National Product" and "a 250,000 person increase in unemployment." In a similar effort, Anheuser-Busch is running TV ads suggesting that increasing the tax on beer would destroy all those golden moments featured in its regular commercials. These ads epitomize the latest trend in antitax thinking. "It's not that we're against increased taxes because we're selfish," the reasoning goes, "our concern is that any tax increase will hurt the nation."

This line makes for good advertising copy, but is it true that all attempts to raise revenue will wreck the economy? No. In fact, many would help it.

The federal debt is pushing $3.5 trillion. As things stand, next year's contribution to that debt, the 1991 budget deficit, will be about $170 billion. If no headway is made on reducing that figure by October, the "sequestration" procedures of the Gramm-Rudman-Hollings deficit control law will kick in, mandating across-the-board budget cuts.

But those procedures are not the answer. Rather than enforce budget discipline, as they were supposed to, they have merely added "off-budget" gambits to government's well-stocked arsenal of responsibility-avoiding accounting games. Even worse, sequestration is the ultimate example of preferring the bludgeon to the scalpel. Not all parts of the budget are equally fat; some are too lean. The only way to make gains against the deficit is to consider revenues and expenditures on their individual merits. The following proposals do just that.

*SOCIAL SECURITY--Social Security benefits are completely tax-free for couples with adjusted gross incomes under $32,000 and for individuals making less than $25,000. Even those above these thresholds pay taxes on no more than 50 percent of their benefits. And Social Security taxes are withheld at the same rate regardless of the taxpayer's total income. Out of the $10,833 in yearly income made by a typical McDonald's employee, the federal government automatically skims $765 off the top in Social Security withholdings. To the burger flipper, that's no small amount. The problem with this setup is that it doesn't discriminate enough between the needy and the non-needy. Social Security withholding really hurts the low wage earner, while the high-paid one doesn't even notice it. To those below the cutoff, Social Security income is a previous source of subsistence, while to most of those above it, it's just more disposable income.

Here's what we should do to fix all this: Eliminate Social Security withholding for low wage earners--say, on all those making less than $15,000 a year--but treat all Social Security benefits received by those above the $25,000/$32,000 cutoffs as ordinary taxable income. It's estimated that making these changes would produce $3 billion in annual revenue.

Furthermore, according to government estimates, people who retired in the mid-1980s will receive. Social Security benefits 2.5 times the value of their own contributions. Since Social Security is essentially for the living, why not take such excesses back as part of the inheritance tax when these beneficiaries die? (Out of fairness to the poor recipient and his heirs, we should establish a threshold for the deceased's total assets below which this recovery technique would not apply.) Implementing this idea in 1991 would probably generate about $15 billion.

* INCOME TAXES--"I grew up in one of those households," writes the novelist Michael Thomas, "where Roosevelt was cursed up to 30 years after his death for the high taxes the successful paid, and I had to hear, 50 times if I heart it once, now Bing Crosby worked for Uncle Sam from Monday morning until Saturday noon, but got to keep what he made Saturday afternoon, and in my time ... I suppose I did my share of bellyaching about marginal rates. . . . But, consider, gentle reader: In those days, the guys who were inspired to work, worked hard; new businesses sprang into being and created whole industries, new competition; I could never see that the tax system destroyed native initiative. Alimony's much worse on that score, believe me."

Unfortunately, the current tax structure has Thomas's point completely backwards. Citizens for Tax Justice estimates that since 1978, tax cuts for the richest one million Americans have cost the federal treasury $860 billion. Refocusing the tax code on the rich would produce revenue while helping the economy by lightening the loan on the majority of consumers.

Under the current tax law, a household earning more than $208,690 pays the same 28 percent marginal rate that governs the bulk of the middle class, while upper-middle-class Americans earning less than $208,690 pay at a 33 percent marginal rate. If the tax code was made fairer by introducing a top rate of 38 percent, the government would bring in an added $13 billion in revenue in 1991 and a total of $142 billion through 1995.

Both President Bush and Dan Rostenkowski, chairman of the House Ways and Means Committee, advocate reduing the tax rate on capital gains. And there is in fact real merit in some schemes for reducing them--such as in a sliding scale treatment that punitively taxes investors for gains made after short holdings periods (say, 100 percent tax on the profits made in less than one year) and then gradually reduces taxes (up to say, no taxes due on gains made after a holding period of five years). This kind of plan would promote long-term investment strategies without necessarily raising additional tax revenue. But as long as our focus is on finding new federal dollar, it's relevant to point out that since 90 percent of all capital gains are enjoyed by the richest 10 percent of the population, upping the tax on them--which could be done by continuing to treat capital gains as ordinary income while raising the top income tax rate to 38 percent--will raise money without really hurting anybody. And even more money could be raised by taxing the built-up capital gains on inheritance income. This new tax could be part of a package that lowers the amount of income shielded from estate and gift taxes back to pre-Reagan levels. Together with capital gains tax reform, such a package could produce $4 billion a year.

The homeowner tax deduction should be similarly modified. If we limited mortgage interest deductions to $12,000 per single return and $20,00 per joint return--for most mortgages that would mean still granting complete interest deductibility to houses worth up to $200,000 (single return) and $300,000 (joint return)--we'd produce $1.25 billion in additional tax revenue, while affecting less than 0.5 percent of all taxpayers. Alternatively, we could eliminate the deduction for the 3 percent of all taxpayers who make over $100,000, producing an extra $11.6 billion in annual tax. Eliminating it for the 0.8 percent of taxpayers who make over $200,000 would still net $3.7 billion.

Besides the big chunk of Social Security tax taken from that McDonald's employee, there's also a smaller piece of change--about $375--that the government automatically filches from him in income tax withholding. The earned income tax credit is designed to alleviate this problem by reducing or returning income taxes to low-wage earning parents in the form of year-end tax rebates. But many of the working poor use the one-page 1040EZ tax return, which can't be used to claim the credit. To get it, you have to file a 1040 or 1040A form, along with some special eligibility forms. All this takes more skill and time than most low wage earners have. (Not surpirsingly, only 50 percent of the families making less than $15,000 a year apply for the credit.) What's worse, the McDonald's guy is in effect loaning the $375 to the non-salaried rich guy, whose trust funds, stock dividends, capital gains, and inheritances aren't subject to pay-check income tax withholdings. Why should he be forced to make that loan and then have to hire Covington and Burling to get it back? The solution is to drastically cut or end income tax for the low wage earners--those making less than $15,000. This would cost the government $14.4 billion--but that's only three-quarters of what it gains from raising the top corporate and personal income tax rates to 38 percent.

* CORPORATE TAXES--In 1960, corporate taxes yielded 23.4 percent of all federal tax revenues. Today they account for only 11.9 percent. By increasing the top corporate rate to 38 percent, we could raise an additional $6.2 billion in 1991 and a total of $54.6 billion through 1995. Currently, companies can write off 85 percent of their business meals and entertainment. Dropping that ceiling to 50 percent would generate another $2 billion per year.

* FARM SUBSIDIES--In successive five-year plans, the government allocates money to farm programs that cost consumers billions in inflated food prices. In 1989 even the Department of Agriculture conceded, "Without government support, consumer prices would fall by about 12 percent." All told, government farm subsidies add about $400 to the annual grocery bill of the average family. "If the sugar price goes up, the sugar farmer reaps the upside. If the price goes down, there's a floor. Sound familiar?" asks Senator Bill Bradley. "The sugar program is the S&L [scandal] of agricultural policy."

The stated objective of farm subsidies is to protect farmers by stabilizing food prices. But the average yearly farm income is $168,000. Indeed, 60 percent of all price support money goes to farms with gross receipts of over $500,000 a year. Government spending is so out of whack that until the recent crisis, close to 25 percent of the loan guarantees in our export crop subsidy program went to--are you ready?--Iraq. Each of you had been paying to help stock Saddam Hussein's refrigerator. Doing away with this nonsense--eliminating all farm programs except for disaster relief and aid to farmers with net income less than $60,000 a year (but more than some amount that excludes hobbyists)--would ease grocery sticker shock for working families and save about $13 billion a year.

* EXCISE TAXES--Smoking costs society $65 billion a year in health care bills and lost productivity. Lung cancer and other smoking-induced fatal illnesses reduce the labor force by more than 1.3 million person-years annually. And a 1984 study by the Research Triangle Institute suggests that the true annual cost of alcohol abuse is at least $116.7 billion. Yet inflation-adjusted tax rates on cigarettes have fallen to half their 1950 level, and those on alcohol have fallen to 25 percent. Raising excise taxes on cigarettes and alcohol will undoubtedly depress sales in the long run and hence free up many of these billions for the rest of the economy. But at current rates of consumption, doubling the cigarette tax from 16 cents to 32 cents a pack would raise $2.8 billion annually, while raising the tax on a six-pack of beer from 16 cents to 63 cents and on a bottle of wine from 3 cents to 54 cents would raise $4.5 billion a year.

And the securities transfer excise tax that Merrill Lynch is so worried about would raise $58 billion in five years from people and institutions that can afford it. Moreover, it would discourage day trading, churning, and other short-term practices that are bad for the economy, and would instead encourage the stable pool of investment capital that business needs to succeed.

* SPENDING TO SAVE--"Our computer system is way outdated," complains Wilson Fadely, an IRS official. "It is absolutely essential that we revamp the system." How much would that cost? "About $10 billion over 10 years." Now, it's estimated that for every extra dollar given to the IRS on top of their current budget, the treasury receives $9.30 in increased tax revenues. So this conputer overhaul would probably net at least $83 billion. That, and additional funding for more return examiners and auditors, could go a long way towards getting back the estimated $80 billion in uncollected taxes owed each year to the federal government. In a similar spirit, the General Accounting Office says its spending/saving ratio is $1 to $26. Putting more money into these agencies could save billions.

* DEFENSE--It'd be a damn shame if Saddam Hussein's move into Kuwait becomes an excuse for avoiding responsible cuts in military spending. Unfortunately, there are already warning signs that such nonsense has begun. "Whatever chances we had for deficit reduction a couple of weeks ago," said one congressional source right afterwards, "are greatly complicated by events in the Gulf." And the first Sunday morning after the invasion, one public affairs show featured a discussion of t he topic, "iraq: A New Case for the B-2?"

Questions like that should prompt the calm voice of reason to respond with a question of its own: ARE YOU OUT OF YOUR MIND? The B-2 is the answer to Saddam Hussein the way the A-bomb is the answer to Saddam Hussein the way the A-bomb is the answer to street crime. Hussein's invasion reminds us that the post-Cold War world is still fraught with international danger, but it's no excuse for overlooking the distinction between military necessities and military frills. The world's changes mean that we should cut those weapons--like the B-2--that were designed to oppose the Soviet Union in an East-West confrontation and shift our attention instead to what we really need for dealing with today's emergering adversaries: nonaligned nuts with nukes and chemical weapons. What we want then is the cheapest mix of conventional weapons and troop strength that provides a deterrent to these new thugs on the block and the minimum nuclear arsenal necessary for maintaining peace among the superpowers.

Looking at things this way makes it clear that besides the B-2, we also don't need the "rail garrison" MX missile, the new generation of Trident missile, or "Star Wars." These systems have plenty of problems, but even if they performed perfectly, they still woulnd't add to our security among the other superpowers (in fact, they arguably would destabilize it), and none is relevant to the Hussein-type threats. The Rand Corporation, a conservative think tank, estimates that the U.S. needs only 1,000 warheads for a retaliatory strike capable of destroying the U.S.S.R. We should cut down this number, end new warhead production, and continue only enough research and testing to maintian that arsenal. doing so would save around $38.4 billion over the n ext five years.

Right now, the Pentagon is lobbying for not only the B-2, but also the Navy's A-12 carrier plane, the Air Force's Advanced Tactical Fighter, and the Army's LH light helicopter. Let's cut all these projects now and save the $286.5 billion they would cost us in the next five years. Add to these the cuts that the Pentagon has itself endorsed: the M-1 tank ($6.2 billion), the V-22 transport ($6.5 billion), the Apache helicopter ($2.5 billion), and the F-15 fighter ($3.3 billion). (We can use the technological skills that would go into these white elephants to solve the other big problems facing us: environmental pollution, mass transportation, and drugs.)

The middle East situation shows that we need some aircraft carriers. Bur do we need 14--what we have now--or 12--what the Pentagon has agreed to? The newest carrier, the George Washington, costs $3.5 billion to build. But that's just the start. There's also the 85 aircraft (cost: $5 billion), two cruisers ($2.3 billion), five destroyers ($4 billion), two attack submarines ($1.3 billion), three frigates ($1.5 billion), and supply ships and tankers ($1 billion) that carrier needs for survival. So buying a carrier leads to procurement costs of $18.6 billion.

And don't forget the operating costs. Actually putting the carrier and its entourage to sea costs between $515 million and $1 billion a year. All this means that on the Pentagon's assumption of 30-year service lives for the ships in question, not deploying the Washington, not building its support ships, and not building its two planned successors, would save $119.8 billion. Add to that the savings of $18 billion you get by cutting six of the carriers we already have--leaving us with a force of eight, twice what we're using in the Middle East crisis--and altogether you've saved $137.8 billion. Over the 30 years of expected use, these cuts save us $4.6 billion a year.

Responding to a Third World threat like Saddam Hussein's by deploying large numbers of troops overseas risks getting drawn into a prolonged overseas land presence, which promotes both anti-U.S. terrorism and escalation into a quagmire. Doesn't anybody remember Beirut? Vietnam? This policy is ultimately based on the idea that the U.S. wins its battles by attrition--a hideously inhumane strategy. Our refashioned military should reject this principle and work instead on maximizing the threat to the Husseins of this world while minimizing reliance on large troop deployments to do so.

This change in thinking implies that new hardware expenditures should be directed towards high-threat, low-risk "stand-off" weapons with conventional warheads of the sort that could scare Iraq plenty without giving it much to shoot back at; in short, better versions of the medium-range Frog and Scud anti-ground missiles that Hussein is panicking everyone else with. We already have the world's most accurate missile of this sort--the Tomahaw--but it's currently carried only on 40 submarines and surface ships. Spending some money to put the equivalent weapons on more ships, under the wings of planes, and in the ranks of the Army would make a lot of sense.

Another corollary to adjusting to the new military exigencies is that we don't need a large standing force. We can cut our current military personnel levels (now over two million) by at least 25 percent. Of course, these cuts should include severance bonuses for those who decided long ago to make a career of the military (people who've already put in at least ten years). The congressional Budget Office estimates that cutting 500,000 people from the military by 1995 would save $34.2 billion--and that's including severance payments of over $3.2 billion. In a military that has officers running health clubs and managing restaurants, we will help, not hurt, readiness by cutting the officer corps in half--and we will save $20 billion.

It's time to see how much loose change we've found in the annual federal budget: Social Security: $18 billion; Income Taxes: $6.3 billion; Corporate Taxes: $8.2 billion; Farm Subsidies: $13 billion: Excise Taxes: $18.9 billion; Spending to Save: $8.3 billion; and Defense: $121.4 billion. Taken together, these measures would save $204.9 billion next year and $1.01 trillion over the next five years, with little or no economic disruption. Let's see Merrill Lynch and Anheuser-Busch top that.
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Author:Molavi, Afshin
Publication:Washington Monthly
Date:Sep 1, 1990
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