Resolving the Fiscal Mess

The Christian Science Monitor notes that the International Monetary Fund, no stranger to countries in fiscal crisis, has proposed the a solution to U. S. fiscal problems which, at least, provides some idea of the scope of the problem:

One estimate, made by the International Monetary Fund, is that fixing America’s fiscal imbalance will require a one-third cut in government benefits and a one-third rise in tax revenues. The IMF should know. Its job for decades has been to force overspending nations to set their finances in order if they want its seal of approval for more foreign loans and investment.

The IMF’s tough love has worked pretty well in many nations to get them to fess up to past profligacy and then sign on to a measured pace of budget cuts, better regulations, and new revenue. Much of Latin America and parts of Asia and Africa have seen that light.

America’s current debate would benefit from the IMF’s main lesson about the future promise of fiscal discipline: A nation that takes its lumps quickly won’t regret it. Or rather, the admission of past errors and embrace of temporary sacrifice will bring out the fatted calf of economic growth.

To place that in perspective, since spending presently exceeds revenue by about 40%, the IMF’s formula would mean that 40% more of the reductions would come in the form of spending cuts than additional revenue.

There is no way that our fiscal problems can be resolved just by taxing the top 1% of income earners. The proposed increase in marginal rates would realize something between $40 billion and $80 billion in additional revenue per year. That’s a tiny fraction of the $1 trillion by which spending exceeds revenues.

What marginal rate would be required to balance the budget based on taxing the top 1% of income earners alone? I think that’s an unanswerable question. The question is what effective tax rate would be necessary? The answer to that is roughly 33%. Since the top 1% of income earners earn about 20% of the total national income and the total national income is approximately $15 trillion, one third of their gross incomes would need to go to taxes.

There are some who say that of course that can be accomplished. History suggests otherwise.

That means that either you’ve a) got to start seeking revenue from income earners below those rich 1%-ers, b) got to cut spending, c) just issue the credit for the difference, or d) some combination of the above. The president has rejected (a), the Senate Democrats have rejected (b), and (c) risks hyperinflation, IMO too big a risk to take. My preference is some reasonable combination of those measures but all reason is fled.

12 comments… add one

  • (d) Dive off the cliff and shut down the gub’ment when the debt ceiling is reached early next year. When “all reason is fled” this is the most reasonable path.

  • Drew

    IMHO the reason some “reasonable combination” is not feasible is that the Democrats, contrary to commentary here, OTB and in general discourse, have staked out a politically winning but economically impossible position: vote for me and I’ll give you goodies paid for by some other guy.

    The arithmetic just doesn’t work. Mr. Reynolds may be an economic dolt, but most people aren’t. You have to go for the volume, into the middle class, to keep taxes up to spending goals.

    This presents a problem for Democrats. Its easy to run on a soak the rich platform, but impossible to effect. Thats why I say the Republicans should call Obama’s bluff.

    I understand that with media complicity all attempts will be made to blame it all on Republicans. But its time to call bullshit. Its the only responsible, if not politically palitable, action.

    The CBO has come out with a series of those “how long can you run the government” studies. All Democrat tax proposals run the government for anywhere from hours to about two weeks. Its all bull. Obama will be flummoxed that they called him out. Economic illiterates like Reynolds will be confounded.

    The only way out will be the printing press. And yes, Dave, it could mean hyperinflation. Joe Six Pack will not be amused. But we are only digging the hole deeper.

  • Andy

    Drew,

    I agree the Democratic proposals are bull. So are the Republican proposals. IMO, that’s a pretty big problem.

  • sam

    “vote for me and I’ll give you goodies paid for by some other guy.”

    I can see that 15% carried interest scam circling the drain from my window.

  • Andy

    “vote for me and I’ll give you goodies paid for by some other guy”

    Drew, what was Romney’s purpose in making Obamacare’s cuts to Medicare a big theme in his campaign?

  • Drew

    Andy

    The Republican deal on the table is for $800 B in tax increases. This is the same figure from Simpson-Bowles, Obama’s own “blue ribbon” panel’s number.

    The Democrats haven’t even waithed for Charlie Brown to approach the football before pulling it away. Spending cuts, ill-defined, later……….way later.

    You would have to be nuts to go along with this bull.

    sam

    Your ignorance of the business, as well as your attack on capital formation and investment is duly noted. Good luck with employment, cruel man….

  • Andy

    Drew,

    The Democrats haven’t even waithed for Charlie Brown to approach the football before pulling it away. Spending cuts, ill-defined, later……….way later.

    That’s all true. But then again, Boehner’s 800 billion in revenue are vaporware too.

  • steve

    “The Republican deal on the table is for $800 B in tax increases.”

    It is not real until he says how he gets there. Simpson-Bowles also called for letting the Bush tax cuts for the wealthy go away, along with reducing deductions that would mostly affect the wealthy, like the mortgage deduction. . Are you sure you want to invoke Simpson-Bowles?

    Steve

  • jan

    I think mortgage brokers are already anticipating the mortgage deduction to either be capped or eliminated. This is implied by the current ads and words of caution they have in their advertising.

    The default position among many liberals, though, sought in rectifying our irresponsible spending seems to land at the feet of the 1-2%, or so-called ‘rich.’ This class of people are the ephemeral monied scapegoats in the average democrat’s calculations of how to fix our dismal financial extravagances. Over and above the fact that such selective taxation will do little to address our debt, one blogger’s blunt analysis only adds another layer, as to the futility of Obama’s fiscal policies:

    …. the poor won’t pay, the rich will hide their wealth from taxes, which will leave the burden on the middle class to pay all this off. And as we remove people from the requirement to pay back their safety-net handouts, we double or triple the per person debt on those stuck with the bill.

    Some of the highest profile people calling for taxing the rich, the Warren Buffets and Hollywood celebrities, ironically do all they can to shelter their own assets from the IRS, including many film companies going to Canada in order to escape the taxes and burdensome rules and regulations they cheer/embrace to have placed on others in the private sector. IMO, they embody the definition of hypocrisy, but skate free of criticism or notoriety because of the media blindfold automatically applied when investigating or reporting on people sharing the same ideological bent.

    It’s a lose-lose road we are on……

  • jan

    Don’t know how so many re-posts happened — sorry.

  • TastyBits

    @jan

    I think mortgage brokers are already anticipating the mortgage deduction to either be capped or eliminated.

    What do you mean?

    … many film companies going to Canada in order to escape the taxes …

    Some years ago, many movies had the production costs paid by foreign countries. Germany was one, but they may have eliminated the credits. There was some implication for domestic contracts – royalties maybe.

    A movie may have dismal sales in the US, but with the tax credits, the foreign sales were the money makers. There were some real dogs, but I was amazed at the amount of money some of these movies made.

  • jan

    Tastybits,

    I’m hearing mortgage brokers advertising that people should take advantage of low-interest 10-year loans, rather than going for the 30-year loans, as the mortgage deduction may be phased out with all the new fiscal provisions coming in 2013. This is the first time I’ve actually heard brokers warning people about this possibility.

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