Sunday, October 7, 2012

Consider the Budget Balanced.

I was just reading a summary of government expenditures and how to balance the budget from the Congressional Budget Office here:

Of course, the 2013 Budget is here:

So, when I looked at the budget reduction options most of them don't cover the full $901 billion deficit that is anticipated over the next year, and will overwhelmingly hurt middle class, poor, and military families. Even eliminating weapons procurement from the Department of Defense will eliminate only $100 billion from the deficit, keeping it really high at $800 billion. I once thought it was more, but actually no, not this year. Sorry liberals, that won't fix it.

Other options were to hurt college graduates with higher debt rates which will hurt their spending as young adults and hurt the economy. Eliminating home weatherizing was suggested which is a very small amount of the budget, and if expanded and it saves every household only $100 per year to save electricity, assuming 50 million households receive the credit, you would be taking $5 billion out of the economy annually as a recurring cost. Increasing health care costs for veterans just doesn't seem right and won't fill the hole. Eliminating subsidized loans for graduate students with an aging population will create a shortage of medical doctors and researchers, China is doing the opposite and look where they are with GDP growth over 9%.  Eliminating intercity rail subsidies will make us even more dependent on our cars and oil. Restricting Pell Grants will take away the best path out of poverty into the middle class we have, hurting Americans, the recipients by condemning them to a live of poverty, and all businesses by limiting their options on highly skilled employees. None of these will fill the hole, or if they were all done they would decimate consumer spending nationwide.

Adding a public plan to health insurance will help all families have extra cash to stimulate the economy, but won't fill $900 billion overnight.

In other words, there is no way to balance the budget by cutting expenditures without hurting the economy.

To get a clear picture, we need to look at he largest parts of the budget. I am going to leave out everything that gets less than 5% of the deficit, so everything that gets less than $45 billion is automatically excluded because the impact would not be enough to truly balance the budget if we took the elimination Tea Party route. Also, I am not including mandatory because by definition, they are mandatory and cannot be cut. Only discretionary is on the table in reality, so discussing mandatory spending is a moot point. So, that leaves the 40% of the $3.8 trillion budget that is possibly up for cutting, or $1.51 trillion. In order:

  • Department of Defense $666.2 billion, 74% of the deficit, 44% of discretionary spending.
  • Net Interest on the debt: $246 billion, 27% of the deficit, 16% of discretionary spending.
  • Department of Education: $67 billion, 7% of the deficit, 4.4% of discretionary spending.
  • Department of Veteran's Affairs: $60 billion, 6.7% of the deficit, 4.0% of discretionary spending.
  • Department of State: $56.1 billion, 6.2% of the deficit, 3.7% of discretionary spending.
  • Department of Homeland Security: $54.9 billion, 6.1% of the deficit, 3.6% of discretionary spending.
  • Central Intelligence Agency, $52.6 billion, 5.8% of the deficit, 3.5% of discretionary spending.
Everything other category's discretionary spending is less than 5% of the budget. These 7 categories add up to $1.2028 trillion, which is more than enough to cover the debt, and that is also 80% of the discretionary budget. The remaining 20% of discretionary is about $300 billion, so not enough to make a substantial difference in the budget. Let's look at the costs of cutting one of these.

Department of Defense would eliminate a lot of contracts for private companies, and only $100 billion goes to that from the DOD this year anyways, the rest is in operations. There isn't a lot that can be cut at this point in the political climate so discussing is hypothetical.

The interest if we put it off will have to paid later at compound interest, increasing the amount of money that will be paid later through the marvel of compound interest.

Cutting education funding will hurt future economic growth by harming the youth of America, stagnating it.

Cutting the DVA will cut medical services to veterans.

Cutting the Department of State will hurt America's ability to make a difference in global affairs.

Cutting the Department of Homeland Security will hurt the Coast Guard, and eliminate resources for customs and immigration control. Not a possible deduction in this political climate.

Cutting the CIA will hurt the intelligence of our government and ability to make decisions.

With all these extra costs, where is the cutting going to come from without negatively effecting real Americans? Sure, maybe there are some efficiency issues that can be fixed in one department or another, but most of that has already been done.

So, if you can't balance by cutting expenses you need to increase revenues. The second suggestion alone fulfills this by decreasing deductions. The CBO prediction gives predicted revenue gains from 2010-2014 by eliminating several tax breaks and we would need $4 trillion for those four years according to their prediction. I understand that this data is old, but it still demonstrates where the largest tax breaks are and if done today will fulfill balancing the budget.

  • If the government handout to the housing mortgage industry in the form of the mortgage tax was eliminated, $500 billion would be raised over 4 years.
  • If Capital Gains were taxed as regular income using the changes the CBO puts in place, another $400 billion would be raised over 4 years. Another concern I have is they are only raising them by a little bit which produces this. If they were taxed as regular income (but still calculated by subtracting the purchase price of course) the benefit would be much larger.
  • Increasing taxes on the top three brackets by 1% would yield $3 billion the first year which would grow.
These come closer than cutting costs, but not close enough. Here is what I would recommend nowadays, I made an earlier post a few years ago but there were some problems with it, and it was too complex:

  1. Radically change the tax code. Make the brackets go from 0% on all income up to the cost of living depending on the state the person lives in in 5% intervals up to 50%. Put in tax breaks for things that help the economy, education, health care, voting, local taxes, and money used to start a small business. The amount people pay for each bracket will be set to the cost of living for each state to help poorer states develop and poor people in rich states be able to get to a comfortable life style and be beneficial to the economy and improve their own lives. This is needed to balance the budget. The education discount will include scholarships if they are acquired because when students don't have to pay for school after school they have more money to be financially secure during their 20s and 30s.
  2. Tax capital gains as regular income because that tax cut makes our tax code in reality quite regressive. Why should capital gains get in effect a 50% tax break, for those people who invest well? Good investors are still going to make far more than everyone else, and in the meantime the federal government is missing a vital piece of revenue. This should cover the deficit.
  3. Keep Social Security and Medicare. Seniors and their families need to know that they won't be in poverty. To put the burden of taking care of seniors whose investments didn't pan out on their children is not a way to increase opportunity to young people in America. Social Security helps the economy.
  4. Eliminate the corporate income tax, because it is forwarded on to customers in the form of higher prices. Most economists left or right agree on this.
  5. Legalize, tax, and regulate marijuana. This will decrease state expenditures on prisons and increase revenues for the government. It will also take away a major cash crop for drug cartels. A win-win.
  6. taxing inheritance at 50% on all inheritance greater than 50 times the cost of living will discourage wealth concentration which hurts the economy.
It really isn't that difficult. You only need to stand up to the lobbyists.

Updated on October 8th.

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