We Don't Need More Taxes, We Need More Taxpayers One Tea Party Plan for the Deficit

No one can deny that growth of the federal debt is exploding under Obama's Presidency, and indeed started to climb after Democrats took control of Congress in 2006. The question before us, with the debt limit about to be reached, is what spending could be cut as part of a deal to increase the debt limit. Michele Bachmann, who is well like by many tea partyers, has said that she would vote against increasing the debt ceiling no matter what deal was cut.

I have to respectfully state that her position is folly, because there is not enough current spending cuts available to balance the budget instantaneously without vast cuts to social security, medicare, unemployment and defense spending. One might desire such cuts, but immediate and massive cuts in these areas are such political suicide as to be beyond reasonable expectation. This is why most tea partyers are going to be disappointed with whatever deal gets cut. A little about the numbers. Total federal receipts are estimated at $2,170 billion for fiscal year 2011. Medicare, Social Security (including their costs of operations) and income security account for $1,870 billion. Income security includes civil service retirement and disability, railroad retirement, unemployment insurance, food stamps, and other public assistance programs. Defense is the next big ticket items at $770 billion, which does not include another $180 billion or so for the ongoing costs of war. The current budget deficit is about $1,500 billion, with total outlays projected at $3,800 billion. Defense and entitlements more than eat up all current spending. This information comes from my analysis of spreadsheets at the government's budget website. A graph that shows this from 2010 follows, the pattern is not very different in 2011.


This hole is too deep to get out of with short term gimmicks. But long term solutions need teeth to ensure that future politicians can't easily revert to form. Spending must be cut, and that is a long term problem that absolutely must be addressed. But what about revenue? It seems clear to me from these facts, heresy that it may be, that federal revenue needs to increase. How do we increase revenue without damaging economic growth?

The first and most important observation is that any policy change must be permanent and stable to be effective. For example, the temporary reduction of social security withholding rates has been a disaster. It was intended to provide a hiring incentive, but because it was not permanent, businesses discounted the future social security tax into their current plans and haven't hired. Further, it has deprived the federal treasury of much needed revenue.

The secret to increasing revenue was discovered by Ronald Reagan in the 1980s, lower tax rates with fewer deductions, and hence a simpler tax code. This concept applies to both individual income taxes and corporate income taxes. This is where the money really comes from to fund the federal government. I created this chart from the same federal budget site:





Unless you increase the payroll tax for social security and medicare, individual and corporate income taxes are where the money comes from. But increasing the tax rate for zillionaires doesn't really raise more revenue, despite the President's rhetoric. Nor will taxing corporate jets. The public knows this. The problem with both the corporate and individual tax codes is the complexity results in huge disparities. Most large companies pay nowhere near the published 35% tax rate. The tax attorneys at these large companies are considered a "profit center," seeking ways to legally game the system and allow companies to retain more profits through tax avoidance strategies. Individuals are also affected. The tax advantage of owning a home provides an additional incentive that leads people in to home ownership who perhaps shouldn't make such a decision. Wouldn't we all be better off the tax code were simple and didn't distort economic decisions. Simplifying the tax code would increase revenue by stimulating the economy. Further, lower marginal tax rates would encourage more people to enter the work force. Here is one example, a married couple where the husband earns enough to be in 33% bracket, but the wife stayed home as the kids grew up. Re-entering the work force, she can not initially earn a big salary. But her marginal tax rate will include the 33% income tax, California tax of 9.55%, FICA tax of 7.65%, SDI of 1.2% for a grand total of 51.4%. If she went to work full time at a relatively low wage of $15 an hour working full time, she might increase the family take home by only 10%. Why bother?

But what about those Social Security taxes? Can we increase that revenue item without harming the economy? Of course we can. Any number of Obama's policies, from Obamacare to the NLRB suing Boeing to prevent the hiring workers in South Carolina are damaging businesses' ability to hire workers. Additionally, the tax code is in continuous flux, with Bush era tax cuts only temporarily extended. How can business gauge the profitability of investments when future tax rates are unknown? Growing the economy will grow social security revenue.

But wait, there's more. The other way in which we can both grow the economy and increase the number paying social security taxes is through legal immigration of a skilled workforce. I have discussed this before, but doesn't our fiscal crisis deserve fresh thinking. Look at these demographic curves, because I consider India a possible source of large numbers of skilled immigrants:

Note the U.S. baby boomer bulge moving into retirement causing strain on the economy. India, by contrast has a large, young population, facing no such challenge.

So here is what is needed to increase revenue, and what I meant by the title.

• Simplify the individual tax code, eliminate deductions and lower marginal rates. This will increase the number of taxpayers in the three ways. More people will enter the work force. Rising economic conditions will bring taxpayers who do not pay income taxes now to levels of income where they do. As the unemployed enter the workforce, they will pay FICA taxes.
• Simplify the corporate tax code by lower marginal rates to and eliminating loopholes. This will increase the number of corporations paying taxes and actually bring in more revenue as corporations change behavior. Profits will increase, even if tax attorneys are laid off, which will also generate revenue.
• Vastly increase legal immigration of skilled workers and professionals. This will grow the economy, while at the same time add new taxpayers to the rolls, increasing revenue from social security and income taxes. It is important that they be skilled workers, because there is a question as to whether unskilled workers don't consume more in public services than they pay in taxes.
  

Spending cuts are still needed, because these supply side reforms aren't going to solve all of the problems, and if we don't cut spending, politicians will just find new ways to devour the revenue we might get from these reforms. Here are some quick hitters of both a short and long term nature that I find attractive. Many of these have been discussed by Boehner, the President or others.

• Repeal Obamacare, the cost estimate of which, just keeps rising. Ok, so that's a non-starter until 2013.
• Across the board cuts to all federal agency budgets back to 2008 levels.
• Cut farm subsidies.
• Cut medicaid.
  
• Increase eligibility ages for Medicare and Social Security.
• Means test social security and medicare.
• End Libyan operations.

That is one tea party proposal to deal with the deficit. I hope some of this catches on.