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What do we REALLY Need from Washington?

According to a recent Washington Post article entitled: “Beyond the tea party; What Americans really think of government,” authors John Cohen and Dan Balz point out that: “Nearly six in 10 say they want their congressional representatives to fight for additional government spending in their districts to spur job creation; fewer (39 percent) want their member of Congress to cut spending, even if that means not as many local jobs. This is a turnabout from September 1994, when 53 percent said they wanted their representative to battle against spending and 42 percent were on the other side. Despite evident public dissatisfaction with the growth of the federal deficit, 50 percent of those polled say they would prefer more government spending to try to boost the economy. Forty-six percent say avoiding an increase in the deficit should take precedence.”

When it comes to specifics about what to cut if cuts are made, the differences between Republicans and Democrats remain stark, but frankly so do the differences of perspective even within the two parties. Generally, the greatest consensus seems to be around spending more on veterans’ benefits, combating crime, defending against terrorism, and public schools. The only reasonably broad consensus today on an area to cut spending seems to be aid to the world’s needy.

The American people have always wanted it both ways. As my grandmother would often say, we “want to have our cake, and eat it too.” We want more services and benefits for our local communities, and ourselves but think that the ”other guy” should cut back on his spending. In that sense, we’re all liberals, I guess; Take from the rich and give to the poor – we just substitute the word “me” for the words “the poor”. But can we have it both ways? Can we have better and more government services and benefits, and reduce Federal spending at the same time? On this nice clear pie chart reflecting 2011 US Government spending, you will see that the macro level distribution of spending breaks down as follows:

  • Defense – 24%
  • Pensions – 21%
  • Health – 22%
  • Welfare – 15%
  • All Other – 18%

In the “All Other” category, the single largest expenditure – by quite a stretch – is interest. At $250 billion a year, the US Government is spending about 6.5% of our annual spend on Interest. That’s almost twice as much as we spend on Education, and well over twice as much as we spend on Transportation.

In 1970, at the height of the Viet Nam War, the breakdown looked like this:

  • Defense – 48%
  • Pensions – 15%
  • Interest – 7%
  • All Other – 30%

Welfare represents 16% of the “All Other” category, and only 4.6% of the total annual spend.

So looking at the change between the Viet Nam War era and today, when we have a war in Afghanistan going forward after many years, we see that Defense Spending as a percent of our total spend has been reduced by half, and our spending on Welfare has dropped by almost two thirds. Interest payments on Federal debt have actually diminished slightly. However, Pensions have grown from 15% of total spend to 21%. And that infamous “All Other” Category, which includes things like “General Government Spend” and “Protection” has decreased markedly (from 30% of annual spend to 20%), even though selected items such as “Protection” have nearly tripled (from ½ % to 1½% in that interval.) As spenders, the United States has shifted its spending pattern far more toward domestic programs (Welfare and Retirement) and far less toward military spending even in this era of Afghanistan and Iraq military engagement.

But let’s assume the position of the “I want more” side for a moment. Let’s say that we want to double the amount of Welfare benefits made available; $557.3 billion in this case. (By the way, Welfare in this context breaks down as follows for 2010: Family & Children Services – 18%, Unemployment Benefits – 35%, Housing Programs – 14%, and Social Exclusion (Foster Care, etc. including Earned Income Tax Credits, which represents $49 billion) – 33%. So we want the US Government to do more for us – provide additional benefits and service at a level of 24% of our spend rather than 12%. Where would that come from? The favorite target of the liberal side of the aisle in Congress is, of course, Defense spending – until it becomes clear that programs like BRAC which consolidates and closes military bases reduces employment and commerce in the districts of the Congressional representatives involved. Well, what about those big weapons programs then – you know, the fighter jets and tanks and missiles; can’t we just cut back on those? I remember a discussion I had with a Liberal friend on Facebook not long ago about this. His position was that we already have enough airplanes, and don’t need any more. As a former A&D guy myself, I pointed out that it’s not enough to say you have “enough airplanes”. They aren’t interchangeable for the most part. Long range interdiction fighters like the F-15 perform a different mission than slow-moving ground support aircraft like the A-10, and they both perform different missions than the refueling aircraft, and still different is the mission of the carrier-based F/A-18. They have different weapons systems, armament, avionics, and payloads to accomplish those different missions, and you can’t just send a refueling tanker in to take the place of a fighter jet for air born “dog fights” in hostile territory over the middle of the ocean. The GAO, DCMA, and other government agencies have worked together to cancel a number of poorly performing programs over many years (ATF and FCS are two examples that come to mind), and so there is scrutiny of the efficiency and effectiveness of these programs. So while there undoubtedly more efficiencies to be wrung out, my perspective is that there isn’t a $557.3 billion opportunity here; that would represent over 60% of total Defense spending. So we see that – as a percentage of total spend, US Defense spending is already down to half of what it was during the Viet Nam era, it seems unlikely that we can get to less than half of half, and remain even marginally safe in a world of terrorist threats.

What about the other obvious area, then? Let’s consider Pensions; after all, this spending category represents 15% (or $774.3 billion) of total annual Federal spending. Hmm. If we took $557.3 billion out of the $774.3 billion Pension spend, Pension funding would be reduced by 72%. $721.5 billion of that $774.3 billion is Social Security. How likely do you think it is that we will simply eliminate all Social Security benefits as we move into the peak of the baby boom retirement years? Not very likely.

So what do we do? We don’t seem to be able to pare enough money out of existing spending to fund a substantial increase in social programs, so the only recourse is, of course, to…. RAISE TAXES. Ah yes. If you can’t afford your spending habit at home, that’s what you always do, right? You go and get a second job. Right. Let’s take it from the rich, and give to the poor! Hmm, this sounds vaguely familiar. Doesn’t it?

In 1970, there were 203.3 million people in the United States, and the US Income Tax brought in revenues of $123.2 billion. That’s $606 per person (remember this includes all household members, including children), or 1.8% of their household income per person. Today, with 308.7 million people generating $1,092.5 billion in Federal income taxes, that’s an average of $3,539 per person in income taxes, or an average of 8.2% per person. That means average Federal income taxes per person in the United States have risen 8 fold (800%+) since 1970, when expressed as the percent of household income paid in taxes. (One other important note here is that in 1970, only about 17% of all families were dual-income earning families. Today that number is about 42%. So we now have a much higher percent of the population with twice as many people working to earn a not-much-greater standard of living.)

But what about those rich people? Can’t the very wealthy pay more so that the rest of us can get more services and benefits from the government? According to recent tax distribution records, the top 1% of income earners (those with annual incomes over $380,000) in the United States paid 38% of all Federal income taxes in 2008. The top 10% of income earners (those with incomes over $113,000) paid 45.7% of all Federal income taxes. The top 25% (those with annual incomes over $67,000) paid 86.3% of all Federal income taxes paid. So how much more would we take from the wealthy, when “wealthy” is defined in these terms? Is $67,000 a year in household income to be considered “wealthy”? People with $67,000 per year in income already bear more than 86% of the tax burden. How much of the other 14% that is spread across the rest of the tax paying population should they be responsible to bear?

No. The answer is not additional taxes – not even on the wealthy. So if the answer is not dramatically reduced spending in some categories to fund others at a dramatically higher level, and the answer is not additional tax burdens for those of us who have already seen incredible tax increases over the last few decades, and the answer is not to add income earners within each household (which would basically put the kids to work) then what is to be done?

Are you ready? Here is the answer – or at least one answer, so brace yourself.

  1. Increase employment (or conversely decrease unemployment) by 50%. There will always be unemployment, but if we can bring it down from its current (and long-standing) levels of 9% to 10% to levels of 4% to 5%, consider what would happen. First of all, current unemployment benefits paid by the Federal Government amount to $195 billion. We would see an annual savings of half, so that’s $more than $97 billion per year. Secondly, assuming that the people employed earn an average annual income of $50,000, they would pay in another $15.2 billion in Federal income taxes (at an average tax rate of 15.7%). Combining the $97 billion saved with the $15 billion earned, the impact on the Federal Government, in the form of additional services and benefits it can provide, is $112 billion per year. Easy to say, but hard to do, right? Bear with me – I will describe the device for increasing employment near the end of this article.
  2. Kill selected Federal programs. Over my last 35 years in business, I have discovered that trying to simply reduce spending across multiple programs and agencies is like to cut off a dog’s tail one inch at a time. You may eventually reach your goal, but in all probability either you or dog will not survive. We have to identify entire agencies and programs that – while they may be well intentioned, and even providing services of value, can be eliminated without adverse impact to the primary missions of government. Here are some that I would look hard at killing: Earned Income Tax Credit ($49 billion), Child Credit Exceeding Tax Liability ($23.4 billion), Federal Aid to Highways ($40 billion), Farm Income Stabilization ($21 billion), Housing Development ($55.7 billion), and Community Development ($28.5 billion). Total reduction in expenditures: $217.6 billion. Now there are complexities here; Without Federal funding, there will be a temporary hit to the highway construction industry if highway development isn’t picked up by states and local communities (which is where it really belongs). And yes, many of those jobs will still need to be done. So, in these cases, the improvement in the overall tax burden will only partially improve because some of that tax burden will shift to states and municipalities. The sad fact is that many of our states such as California and Illinois also do a horrendous job of balancing their budgets, and so a similar exercise needs to be done at the state level. So even though areas like Highways provides immediate Federal level spending reduction, only a percentage of that reduction will actually flow through to tax payers when states and municipalities pick up the still-necessary part of this work, and pass that cost along through state and municipal taxes – or reduce their costs in other areas to compensate. So let’s say for purposes of our back-of-the-envelope calculation here that we will only net real savings to the taxpayer of $150 billion.
  3. Move to a flat income tax for both individuals and corporations, with no exemptions. A great article validating this approach appeared in The Economist back in April of 2005. Then eliminate the bulk of the IRS (reducing its budget by 75%, or $7 billion), and make income tax evasion primarily the responsibility of the FBI. By setting individual flat tax rates at 17% with no exemptions, Tax revenues would actually increase by $145 billion or 8.7%. (We would also never have to file individual tax returns, since our employers would simply deduct the taxes from our checks.) The net impact of all of these changes on the Federal budget would be $152 billion. But well beyond the simple math involved here, According to Harvard economist Dale Jorgenson, tax reform would increase national wealth by nearly $5 trillion. It would do this in part because all income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate. (Note that I am not including the $5 trillion positive benefit projected by Jorgenson in my calculations here.) Here’s an excellent article describing one approach to adopting a flat tax model in the United States. However, personally I prefer an approach where no W2 is involved at all for traditional employees – the employer simply deducts taxes from the wages of all employees – and no exemptions based on family size or anything else. In this scenario, only businesses and the self-employed would be required to complete a W2, and the W2s for self-employed people should be about as simple as the “post card” type of W2 shown in this article.

These three changes would amount to a combined positive impact to the Federal budget of $414 billion. It would enable us to get 80% of the way toward our stated goal of doubling the services and benefits provided by the Federal government. We spent $557.3 billion annually on Welfare of various kinds, and here is an added $414 billion to distribute. Not bad, right? So there you are – for all you “This is just too hard, too complicated, too big a problem” types. It is hard, because it’s radical change and that involves making people angry and frightened – change always does. But it doesn’t have to be nearly as complicated as politicians often portray it to be.

However, this is where my personal philosophy enters in. What if the answer really isn’t a bigger Federal government? What if the better answer is really a diffusion of wealth and power to states – or better still, to local communities? What if we took the $414 billion and distributed it to states on the basis of their population, or better still to cities based on their population, allowing them to decide what to do with it? $414 billion divided by the population of the United States (308,700,000 people) equals $1,341.11 per person. Now just as an example, let’s take the city of Moline, Illinois. Population: 43,000. Let’s say the city council in Moline, Illinois just received their first annual dispensation of $1,341 per resident, or $57,667,730. And they know it’s going to keep coming in every year. Their normal annual operating income of $115.6 million, so this would amount to a roughly 50% increase. I would expect some civic improvements from an infusion like this, wouldn’t you? (Perhaps the city would repave it’s roads, which have been in horrendous shape for years! Sorry – pet peeve.) Or build a new hospital or work out a deal with Bettendorf, Iowa to replace the I-74 bridge over the Mississippi River. Whatever the city fathers did, they would probably create jobs – a lot of jobs – and restart the engines of commerce in Moline. Now imagine all the “Moline”s all over the United States, suddenly starting to invest again – in their infrastructures their medical facilities, their institutions of higher learning, their neighborhood renovations, and so on. Imagine the surge in employment, the improvements in local (not Federal, but local) services and benefits. Imagine what could be done by using that money at home where local leaders actually know what’s needed in their communities, rather than by Washington bureaucrats.

So there you have it. We cannot raise taxes or cut spending in “wasteful programs” enough to get us out of this situation, and we will not (and of course should not) put kids to work to improve average household income. But of we take the three steps listed above, we will reduce the size of the federal government, increase the funds available, shift the responsibility for disbursing funds to the lowest possible levels of government, and put control back in the hands of the people closest to community needs. Isn’t it about time we started looking at the world this way?

What do you think?

One Response to “What do we REALLY Need from Washington?”

  1. Carl Burney says:

    The solution to Federal nanny state government is not local nanny state government. It is not a proper function of government to “create jobs”. I’ve seen our local governments dump hundreds of thousands, if not millions of dollars into local tif districts,business incubator programs and other useless crap. Most of the business’ fail and renege on their loans leaving the taxpayers holding the bag. Just get the government out of the way and private investors will step in and create the jobs and wealth. Government over-regulation, over-taxation and litigation laws that discourage business and drive up costs is what must be done away with. We must encourage business to stay in the U.S. and discourage them from moving to other countries. That requires smaller non-intrusive government on all levels. I would start by firing every tree-hugger global warming nut employed by the EPA.
    Changing our system to a flat tax may be a good idea. Whatever tax system we use it must be one that is fair and encourages success. what we have now punishes people who are successful by taking ever increasing percentages of their income.
    Lastly, everything that happens throughout this entire planet, good or bad, is not the financial responsibility of the American taxpayer! The world effectively rapes and pillages America (financially) at every turn. Liberals promote the false notion that we should not do what’s best for our interests. For example, we should be receiving free oil from Iraq until every dime we spent buying and fighting for their liberation and the rebuilding of their country is repaid.

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