Deficit Fix - Phase 1

The mind is a funny thing.  As powerful as it is, using it forces of logic and reason to solve some of the World’s most difficult questions, it often finds misstep with one of our most basic units of measure:  Time.  I am sure, like me, you have all found yourself at some point daydreaming about a time that invoked great emotion, positive or negative, feeling like it was a recent occurrence only to quickly realize how long it’s really been since it happened.  So, if it feels to you like the Financial Crisis that crippled our great nation only just happened recently, you’re not alone.  It feels like only yesterday that Lehman Brothers self destructed faster than Lindsay Lohan, beginning an economic meltdown of epic proportions, spreading across the globe, and successfully fulfilling its role as the first domino to fall in the chain reaction that has led us to where we are today.  In fact, it has been nearly 3 full years since those events unfolded, and the rest has been a blur.  Since that time, Lebron left Cleveland for Miami, Charlie Sheen left earth for Mars, and Maria left Arnold for anyone who won’t father an illegitimate love child with the housekeeper.  Additionally, we have seen a number of historic programs come and go, and with a price tag unmatched in American History.  As a result, we find ourselves in our most contentious political battle in recent memory—a battle over budgets and deficits, taxing and spending, and free markets and monetary policy. 

So where do we go from here?  Ultimately it will be for the politicians end economists to decide, but nothings to stop Emancipation of the Mind (and its readers) from weighing in.  Clearly, going forward with a deficit of $14+ trillion and continuing to spend more than we earn is not the answer.  Just ask Frank and Jamie McCourt.  Most of us learned that Personal Finance lesson when we balanced our first checkbook in our teenage years.  But, the programs that make this nation great cost money, and no matter how much Republicans play Nip/Tuck with the economy, something important will suffer.  It might affect you personally, or your family, friends, or neighbors; or it might not effect you at all.  In all likelihood, this is how you will vote: how does it affect me or someone I know?  And, if spending cuts are not the answer, it’s likely that you aren’t feeling any rosier about forking more of your personal monetary gains over to Uncle Sam.  So, what should we do?  Emancipation of the Mind does not pretend to have all the answers, but offers this sample strategy: Start with the low hanging fruits.

1. Fort Knox Fire Sale – If you’re like most people in America today, you might have heard of Ron Paul, you might find him entertaining or you might be a member of his cult following, but most of all, you just wonder who would win in a death match between him and Dennis Kucinich.  But, lost in Paul’s antics and demeanor are some pretty bright thoughts and plans.  One of these plans includes his assault on Fort Knox.  O.K—so calling for a bar by bar inventory audit of the Fort Knox gold supply might be going a little far.  After all, it was just audited by the Treasury, and fully accounted for.  Besides, Mr. Paul’s brick by brick audit would cost a cool $15 million and provide little (if any) benefit.  But what of those 5,000 tons of bullion?  This country abandoned the gold standard 40 years ago, and since then the gold has served little purpose.  Last time I checked, the market for Gold was surging and the world is ripe with potential buyers.  The estimated total profit from the Fort Knox Fire Sale?  Approximately $400 billion.
2. Common Cents – Anyone who knows me is well aware of my disdain for the coin.  Coins are inconvenient to carry and usually wind up accumulating in strange places like your couch cushions, cup holders, and your washer/dryer.  Of course, sheer annoyance isn’t reason enough to wipe anything from the face of the planet (see Palin, Sarah, Cook, Dane, and France, Country of).  But what about the cost?  The penny is made of two commodities: Zinc and Copper.  By year end 2008, the price of Copper had tripled while the price of Zinc had quadrupled.  By May 2010 it cost nearly TWO CENTS to produce ONE PENNY, and NINE CENTS to produce ONE NICKEL!?  In fact, it’s been over six years since the penny was a cost effective currency creation.  So what does it all mean?  Well, simple math tells us that with the current pace of annual creation of pennies and nickels, America is losing between $40 million and $100 million annually.  To be sure, there are many traditional, conservative citizens that would be lost without the penny and nickel, but in reality the arguments against elimination are thin.  From a pricing perspective, most economic studies have already proven that there would be little to no impact economically.  In fact, the only real argument against elimination of the penny is political in nature, based on the irrational emotional attachment most voters have to the coin. 
3. Joint Venture – Pop Quiz!  What federal law lasted only 13 years, cost the country over $11 billion in revenues, and cost the country over $300 million in administration expenses?  Remember Prohibition?  For 13 years this country enforced the law that criminalized alcohol at a staggering cost to this nation (remember-those dollar amounts were from the 20’s and 30’s!).  Fast forward to current times and we see a glaring example of how we fail to learn from our history.  It’s the same reason Hollywood keeps making bad sequels.  Prohibition didn’t work, it wasn’t necessary, and it was really, really expensive.  Today, we find ourselves in another prohibition of sorts, only it has lasted a lot longer than 13 years.  Marijuana remains illegal to sell and consume, with the exception of medical distribution in some states.  However, as we saw in Prohibition, the black market for Marijuana has risen into an important industry despite the law’s best efforts.  Today it is estimated that the underground Marijuana industry is valued at nearly $100 billion—untaxed, and unregulated.  Prohibition taught us that the lost revenue was costly, that lack of regulation leads to unsafe use and increased injury and death, and that crime goes up (especially homicide) any time a black market economy emerges.  Legalization of marijuana would actually improve safety across the board.  After all, scientists have proven that Marijuana is no more harmful (and likely even less harmful) than alcohol itself.  In addition, it would now be subject to excise taxes similar to those placed on tobacco.  Today, the Federal government profits about 20% off of the sales on tobacco, while state governments profit about 8% off of the sales.  What does this mean to us?  Approximately $20 billion in Federal tax revenues and $8 billion amongst the states.
4. Local Lift – Of course, one of the most contentious subjects with regards to closing the deficit is that around taxation.  Historically, citizens will fight harder to pay fewer taxes than they will for anything else.  Of course, the benefit of lower taxes to the individual are behind this behavioral norm, but the costs of tax reductions to the whole are often not felt for several years into the future.  On a local level, promises of cuts in the local tax rates are a popular platform for election, and one we have seen play out time and time again over the past 40 years, and especially over the past 5 years.  While State tax rates are separate from Federal tax rates, they do impact the Federal budget.  However, at the local level, states have been cutting taxes in a big way, and have been for some time.  Yet they continue to refuse the idea of tax increases, in lieu of job cuts, benefit cuts, and near bankruptcy.  Several states stand out including Ohio, who has cut local taxes by over 20% since 2005, and Arizona, who has cut local taxes for the past 15 years.  Additionally, states like Texas and Louisiana reduced property tax rates in 2005 which resulted in lost revenue of over $20 billion combined.  In fact, 40 years ago state and local taxes accounted for over 13% of Personal Income.  Today that figure is below 11%.  Even more dramatic are the figures on state corporate taxes, where revenues have fallen from 10% to 5% in that same time frame.  Take a look at your last local tax statement and tell me it doesn’t look a little light.  Would we not all be willing to pay a little more on that bill to avoid the devastating cuts to our local police, fire, and education professionals?  We need the tax rate paid by Archie Bunker, not Michael Scott.  Of course, tallying up the impact of this would be dependent on how far the states go, and which states go, but a rise in local tax rates could easily accomplish an additional $100 billion in revenues. 
5. Federal Fix – While we are on taxes, let’s shift to the Federal Government.  Tax cuts to the wealthy continue in place despite our economic struggles and the unhealthy growing wealth gap.  Corporate Tax rates appear high on paper, but low on actual billed revenue, and loopholes throughout the system continue to allow certain subsets of citizens to shelter their money from taxation.  The result is dwindling tax revenues coupled by increased spending, and in turn, the deficit.  Spending needs to be scrutinized and cut where it makes sense and can be afforded by the country.  But there are two sides to every coin and spending cuts alone won’t get us to a balanced budget.  Read my lips: No New Taxes means Large Deficit.  We’ve addressed the local municipalities above, but big brother needs a talking to as well.  Now before all the conservatives in the house start throwing the Earl Grey overboard, let’s think about this critically.  With all the loopholes that exist for the everyday taxpayer and for corporations, we could conceivably lower the Federal tax rates while raising revenue.  Today the U.S. Corporate Tax rate is listed amongst the highest in the world.  Of course, this appears on paper to discourage business and enterprise in our country.  General Electric begs to differ, as they effectively paid a Corporate Tax rate of 0% in 2010.  In fact, hardly any U.S. corporations actually pay the published tax rate because of the many loopholes that exists where they can hide their profits.  During the 1950’s, corporate taxes made up 32% of our Federal Tax revenues.  Today?  Less than 13%.  To a lesser extent, similar loopholes can even be found for individual citizens and individual earnings.  The bottom line is, we don’t collect the published rate on taxes.  So, wouldn’t it make sense to close the loop holes so that everyone is fairly paying into the system?  And, with the extra revenue we generate from corralling the non-compliant, couldn’t we afford to lower taxes slightly across the board, while still adding new revenue to our bottom line?  The estimated savings from closing the loopholes is over $100 billion per year.  Even if we gave a third of it back to the masses through baseline tax cuts, our savings would be close to $400 billion annually.

This list represents the low hanging fruit; the easy fixes that add revenue to our bottom line and have limited adverse impact on American citizens.  This is the kind of thinking that needs to infiltrate our representatives today: How can we generate revenue and cut costs, with the least adverse impact to our citizens?   Of course, this gets us over $1 trillion in budget balance, albeit with $13 trillion to go.  Phase two would be more difficult, and would inevitably have to address things like immigration, defense spending, and welfare.  But remember your local firefighters, policeman, teachers, and neighbor who have lost their job.  Should they be the victims of the budget crisis?  Face it; starting simple is always the way to go.