12-5-12 - The Fiscal Cliff

First of all, let's talk about the general structure of the laws that are causing this problem. Our federal government, like a large number of states, now has a sort of one-way ratchet towards smaller government. These laws have been slipped in by Republicans with little attention paid, but they are very powerful and will drastically change American government in the future. Basically, the Republicans have already won and we can't stop them.

The structure of all these laws is basically the same : 1. allow tax cuts to pass by simple majority. 2. make tax raises difficult to pass (many states now require 2/3 super-majority for taxes increases (and they were already politically nearly impossible)). 3. set a debt limit and force mandatory cuts to balance the budget (many states actually have a debt limit of 0, every year's budget must be balanced, which is manifestly absurd given the variance of economies and the resulting receipts and costs).

They claim that this produces "fiscal responsibility" but of course they know that's a lie; the goal is small government and that's all it produces. If you wanted actual fiscal responsibility, you wouldn't cut taxes in flush times, instead you would require that governments save during surplus times to provide a cushion for recessionary times; you would also require that any tax *cut* is matched by spending cuts in order to pass. If you were actually fiscally responsible, you would allow defecits during recessions, but require them to be matched by tax raises in boom periods.

The result of these laws is obvious : a simple Republican majority can pass tax cuts when they are in power (and the dumb voters will love it), then it's almost impossible to put the taxes back where they were, and then you inevitably run out of money and have to cut spending. Particularly if you hit a recession and have to keep the budget balanced, you will have to slash government drastically.

(whether or not government should be minimal is open for debate, but the duplicitous method of acheiving it is incontrovertibly scummy)

So first of all, let's recall the source of the fiscal cliff. It is not the growth of entitlements, which is sort of an unrelated long term issue that people love to mix in to any financial discussion. The primary causes of the short term deficit are the Bush tax cuts and the recession. (the other major factors are the war spending and TARP spending (etc)). This is not a fundamental problem of the way the US government is run, it's the combination of cutting taxes and increasing spending that happened under GWB.

The other major issue that we must keep in mind is that we are still currently deep in a recession. Tiny amounts of GDP growth may hide this, and the unemployment numbers look better, but I believe the reality is that the American economy is still deeply sick, with no real growth of industry and no prospects. Essentially we are propping it up with the free money from the Fed and the super-low taxes. Any attempt to return to a sustainable Fed interest rate and tax rate would show the economy for what it really is. Trying to tighten the belt now would certainly look bad; I don't say that it would "lead to a recession", I believe we are in a recession and are just hiding it with a candy coating.

Now, briefly about entitlements. The Republicans love to make entitlement growth seem really scary, but it's not true. Social Security can be made solvent very easily : simply make the SS tax non-regressive. The current SS tax is regressive because it's a flat percentage but has a maximum. If you simply remove the maximum, Social Security is solvent for the next 100 years (CBO numbers).

Medicare is a bigger problem, but not because of the increase of the number of elderly - rather due to the corruption of doctors and the medical establishment. With increased productivity and technology, the cost of health care should be going *down*, instead it rises at an obscene rate, because the insurance complex has cooked up a system where we have no control over the cost of our care. Unfortunately Obamacare has perhaps made this worse than ever, locking the corrupt health insurance system into law without taking any steps to limit private profits.

How do you actually fix the American economy and get some real growth that's not just an illusion propped up by free Fed money?

1. Legally require open systems. Make net neutrality law. Open up the cable-TV lines. Perhaps the best option is a national open broadband system on some new super-fast fiber (unrealistic). Make the Apple Store type of computer lockdown illegal. Openness and free competition for small business is what will really save this country.

2. Make it easier to start small businesses. Remove the favoritism for big business. Tax loopholes and breaks massively favor big business - eliminate them all. Eliminate all development and "green" subsidies, which again massively favor big business. Simplify the tax code (see below) and then perhaps even simplify it more for small businesses, like provide a super-basic flat tax option for businesses that make less than $1M a year.

3. Make it cheaper to hire Americans in America. Eliminate payroll taxes. Eliminate employer-run health care (or provide a national group option for small businesses). Increase taxes on corproate profits and aggressively go after offshoring of money.

4. Long term we're fucked no matter what. What would you say are the prospects for a country where the education system sucks (the cost of education continues to rise way faster than inflation, and most of the "educated" can't actually do anything useful), the IT infrastructure sucks, and the cost of labor is sky-high? You would say that country is doomed to poverty, and that it is.

A few proposals for real government taxing & spending reform :

O. Get corporate money out of politics or everything else is hopeless.

O. Stop the revolving door between government and private industry. eg. if you work on the Texas Railroad Commission, then you are not allowed to go work for the oil/gas industry (and vice-versa). Treasury secretaries shouldn't be allowed to rotate in and out of wall street. It's totally absurd and like corporate speech, everything else is hopeless until it's stopped.

O. Return defense spending to 1999 levels ($300 billion from the current $700+ billion). And then cut it even further. Never going to happen since defense is the biggest pork item in government (by far).

O. Stop all farm subsidies and tax breaks. They're a sick farce. The small family farmers that are trotted out for political purposes don't exist in the real world; farm subsidies go to large agribusiness and to rich people with vineyards. They're actually very bad for small farmers that are trying to legitimately compete because they massively favor big business. Not only does it make the American farm economy sick, we're destroying the entire world food economy with our export subsidies.

O. Stop all direct aid for ethanol, electric cars, etc. They're a sick distortion of the market that isn't helping anything except corrupt profit. Let the market find solutions to problems.

O. Stop sending federal money to leech states. (need to get rid of the ridiculous over-powering of small states caused by the Senate)

O. Eliminate all payroll taxes. Fund medicare, SS, unemployment, etc. from the general tax revenue. This massively simplifies the tax code, removes the regressive SS tax, and reduces the cost of employment.

O. Don't cut Medicare spending or fake out the inflation rate for COLA. Instead go after the reason why medical costs are rising out of control. Don't reimburse doctors for unnecessary procedures or scans. Don't reimburse for unnecessary MRI's. Don't allow any medical practitioner to pass on the fee in excess of the negotiated rates to the client. Require up-front pricing for all medical treatment. Force the AMA to stop its corrupt limiting of the number of doctors. etc. etc.

O. Eliminate capital gains tax. I don't mean reduce it, I mean treat all profit as profit - tax it as normal income. Eliminate the dividend loophole. Stop letting the super rich pay 10-15% tax rates.

O. Eliminate all tax deductions. Nothing is deductable (but raise the standard deduction so that a majority of Americans actually get to deduct more). Alternatively : raise the AMT and remove exceptions from the AMT.

O. Remove foreign residency as a way to avoid US taxes. If you do business in America, you pay US taxes. Same for corporate taxes. Remove non-income benefits as a way to avoid taxes; eg. company cars, apartments, dinners, etc. all count as income. Pass new laws so we can be more aggressive about going after holding companies or "consulting firms" as ways to hide personal income.

O. Make US companies pay for our foreign spending on their behalf. eg. if you're Chevron and want to run a pipeline through Afghanistan, fine go ahead, but then you pay for the Afghanistan war. etc. Almost all of our defense and foreign aid spending should be paid by the companies that do business in unstable countries.

1 comment:


lol :) I agree, but lets be honest. If any of this happens it will be after a collapse and not before. Unless of course you find a billion dollars and have the ambition to not retire and instead run for president.

old rants