Friday, July 16, 2010

A Solution to the Federal Government Debt: End Income and Payroll Tax

American’s have become uneasy about the amount of Federal Debt that is stacking up in Washington and for good reason. This month the debt total topped $13 trillion and will reach $14 trillion within six months. Although these numbers are impressively large and hard to accept, the path to reverse them is not terribly hard.

To demonstrate that the debt problem could have been easily handled during the height of the crisis lets crunch some numbers. The cost of the government bailouts and guarantees the federal government granted was $7.7 trillion dollars. That’s what I said, $7.7 trillion and that does not include the $16.3 trillion of federal government guarantees that were made by many government agencies. After all that money was spent our economy is still weak and unemployment is still high.

Instead with that money the government could have protected the credit system with the $ 700 billion TARP fund and then canceled income and payroll taxes for two years. Sound crazy?

The world operates on incentives, especially the economy. If underlying economic indicators are weak than there is little incentive for investors to invest, for businesses to expand, and for creation of new jobs. However, if income taxes were canceled people would be able to spend and save much more rather than having to pick wither to save or to spend. If payroll taxes were cancelled corporations would be willing to risk expansion and hire more workers. Demand would grow due to increased savings rates and consumer spending. The country would experience an economic boom almost overnight.

To pay for the 50% decrease in federal government revenue a very small nationwide sales tax could be implemented and spending could be cut drastically. Ending the wars and cutting military spending, create a means test for social security and increase retirement age to 70, and deregulate healthcare which would make healthcare cost decrease. Those three tasks would cut the projected 2010 $3.7 trillion budget by 50 percent.

Alas that is not what happened, instead we received a stimulus package that has done little and spent a lot, bailouts of corrupt and greedy bankers, and no major decrease in unemployment. Since hindsight is 20/20 what could be done now? The answer is still the same one as above but just a little different.

Use the $700 billion TARP funds, use the remaining 45 percent of the stimulus package, end the wars and cut military spending, cancel the $800 billion dollar healthcare reform, and cut social security spending. Take all of that money and cancel the income tax and payroll taxes.

I am 100 percent confident that there would be unintended consequences but this plan would create positive incentives on the individual level rather than a trickledown effect. In a complex organization such as the economy solutions have to be regulated to the individuals in the free markets. With less federal government spending and nationwide sales tax there would be no real reason to bring back the income tax but if we did, it would be much lower and go directly to paying off the debt. America would once again become the greatest economic power in the world instead of coming in second to the social European Union.

Think Twice, Michael J Mauboussin

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