Sunday, January 06, 2013

Letter To The President: Cutting Tax Spending and Fixing Long Term Social Security Deficit

President Barack Obama
White House
Washington D.C. 20500

Dear Mr. President,

I have a proposal for how you can deal with the upcoming push to continue to get a grand bargain, hopefully outside the context of the debt limit. The Republicans want to you to focus on cutting costs, saying that taxes have been decided. You should agree but only if all costs are looked at - those that involve the Treasury writing a check and those the involve the Treasury writing a back door check by telling a taxpayer he can reduce what he owes. We must focus on cutting all expenditures, those made by directly by appropriations acts and those made indirectly through the tax code.

There is no doubt that tax expenditures have been under discussion. But I have a proposal for how to do reframe that debate and implement changes that I have never heard discussed. It is an approach which would be much easier to understand, sell, and implement.

Everyone knows tax policy is hard and complex, but it can be made easier. If you have three goals: cutting spending made through the tax code (tax expenditures); making the tax system fairer and more progressive; and reducing or phasing out subsidies that have passed their useful life, here is a "relatively" simple way to achieve all those goals.

Eliminate all deductions by converting them into tax credits, unrefundable of course. Value those credits at 10%, which is the lowest tax rate. (That gives you some room to negotiate up on some if necessary.) Doing this will achieve many important things.

* It lowers the deficit by cutting wasteful costs we are making through tax expenditure without raising rates.

* It leaves every truly middle class tax payer, those earning within 50% of the income mean, in roughly the same place or better than they are today.

* It gives every taxpayer the same subsidy for doing the same thing. The wealthy will not get a back door check from Uncle Sam for 35% of the interest cost on their mortgage, while the working guys only get a benefit of 10% of their mortgage interest expense. The same for charitable deductions and all the rest. This cures an unacceptable unfairness in the code and runs counter to any legitimate public policy interest.

* It simplifies the code, eliminating the really complicated things like the recently reinstated Pease Plan which partially limits the value of deductions in an unnecessarily complex way.

* Finally it gives you a mechanism to phase out tax expenditures that have passed their time. If those phase outs are done at 1 to 2% per year per year will be as easy to tolerate as the phased out tax benefits enacted in the Reagan years that eliminated for instance the deductibility of non-mortgage consumer debt.

Look, I know everything has complexities but those things can be worked out. I also know that institutions and people have a “not invented here” mindset that make them resistant to change. But this really can work. And once your your folks analyze it you will see that I have only scratched the surface of the benefits it offers.

* * * * * *

Personally, we hoped all the Bush tax cuts would have expired, knowing that would have cost us several thousand dollars but ones we never knew we were missing in the nineties. I have spent a career dealing with economist and their charts and tables and respect their work, but I understand the limitations of that work are real. One need only look at how they totally under predicted the effects of the great recession when folks like me, who were tying to sell a house and seeing the swift and deep collapse of the market could readily see the impact it was going to have on not just housing but the entire overleaveraged financial system. It was clear to anyone not looking at recession charts of the last three decades that we were facing something much worse than what had been seen since the depressions. Conversely, those same experts have not accurately seen that now the rate of growth is increasing faster that they thought. Since they have been burned by under prediction in the past they don’t want to burned by over prediction now.

That is a long way to say we could generate far more tax revenue without hurting the economy than is being thought, and could use it for necessary expenditure as well as deficit reduction, which is going to be the key Republican mantra over the next four year. Not only that, higher revenue, with part used for more infrastructure spending as well as long term investment and the rest used for lowering with lowering the deficit will help us grow faster.

I have one final thought on Social Security and Medicare. I think the long term Social security issue could be solved by not only lifting the the wage tax cap but by making all dividends and capital gains subject to the full 12.4% rate. A version of this was done in the ACA for the Medicare tax. You could even add a new small benefit percentage in the calculation so the the super rich would see a bit of return on these contributions. I think you will find that this change would pretty much eliminate the projected Social Security shortfall. It would also have the salutary effect of getting the total tax rate on unearned income closer to par with the total tax rates paid on wages

* * * * * * *

We live in a great country but since the eighties we have been making it less great by increasing income inequality, and living off the legacy of public expenditures made by our fore-bearers. As a consequence we are sadly seeing a less just, stable and economically dynamic country.

I am confident you are the Leader that can continue on the course to turn this around. I first really heard it in the Osawatomie speech, which was brilliant and moving. I continue to hear echoes of that speech to this day. I hope what I am proposing here will be yet another way for you to present concrete proposals that will further the necessary aims you have for our Nation.

Yours Very Sincerely,

Gary L. Norton
Durango, CO 81303

I added a small postscript inviting him for a visit to our house in a beautiful part of the country. He hasn't been here but Michelle has and he should just ask her.

No comments:

Post a Comment