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Author Topic: The Fix: How To Get The Debt Under Control  (Read 1591 times)
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Pi
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« on: November 13, 2012, 02:12:26 AM »

Let's keep the name calling out of this one please.  I don't want anyone using that as an excuse not to participate in the discussion.


Tackling the Deficit First

Let's start here to see where we are at:
http://www.usdebtclock.org/

US National Debt: 16.255 Trillion
Yearly federal budget deficit: 1.117 Trillion

Federal Spending (this year): 3.548 Trillion
Tax Revenue: 2.431 Trillion
Yearly federal budget deficit: 1.117 Trillion

Interest payment: 450 billion (estimated)
http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

First off, we have to come up with the 1.1 Trillion difference between spending and tax revenue.  So let's list the ways that could happen:

1. Increase tax revenue
2. Decrease spending

Let's take increasing tax revenue first, because that is after all what Obama campaigned on, i.e. raising taxes on the "rich" so that they are paying their fair share.  Obama and many of his supporters talked about how much the Bush tax cuts added to our debt.  But if in fact the tax cuts were not extended to the rich in 2013, and were only in effect for the middle class, how much tax revenue would that generate?

The answer: 80 Billion a year, which gives us 800 billion over 10 years.
http://www.washingtonpost.com/business/economy/ending-bush-tax-cuts-for-rich-would-save-just-28-billion-in-2013-analysts-say/2012/07/19/gJQAW0m0vW_story.html

Obviously, letting those tax cuts expire for the top two brackets isn't enough.  80 Billion a year is a start, but it is a drop in the bucket.  So how much more could we tax?  How about the capital gains tax?  That's a "rich guy" tax for sure, so how much would raising it give us in additional tax revenue?

The answer: 40 Billion a year if rates go up 5%.
Have a look at 2007 when the nation’s capital gains totaled $924 billion, and the revenues raised for Uncle Sam were $118 billion– and that was the all-time record year for capital gains since 1954 according to records of the past 58 years I consulted. If the capital gains tax were to be raised from 15% to 20%– a rise of 33%– then, the tax collected on the record 2007 revenues (by no means available today) would rise to about $155 billion or net increase of $40 billion.
I can’t see how this increased tax is going to make enough of a difference in getting the nation’s finances under better control. Moreover, its doubtful we’ll have another year of almost $1 trillion in capital gains from the sale of securities and other assets. So, I recognize that other loopholes will have to be closed partially or wholly to raise the tax rate on the ordinary income of the nation’s wealthy. I know this is sacrilege at Forbes– but it is the reality about the challenge. Do we mean business or not?
Going higher to a 25% tax- which I think would never be approved– because it would raise the tax bite by two-thirds- would under the best of circumstances raise an additional $80 billion in revenues for Uncle Sam or almost $200 billion.


As you can see, we're not really getting anywhere.  120 Billion is about 20% of the interest accrued via the debt.  That's not going to cut it.  So what if we just raised taxes on income for the top earners?

If we look at the chart here:
http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0

We can see that the top 1% of earners paid a total of 318 Billion in 2009.  The top 5, 4, 3 and 2 percent earners combined paid 189 Billion in 2009.  I might add that the top 5 percent would include a household income of about $188k.  This interactive map shows some interesting information on that:
http://www.nytimes.com/interactive/2012/01/15/business/one-percent-map.html

So just to clarify, Obama is talking about raising taxes on those with a household income of $250k.  That would be something like the top 2 or maybe 3 percent of earners.  But let's start with the combined number for the top 5%.

2009 revenue from the top 5% (income taxes): 318 Billion + 189 Billion = 507 Billion.

In order for us to close the deficit gap, and please understand that this assumes that the GDP remains somewhat stable, we would have to DOUBLE the tax revenue from the top 5%.  That would bring the tax rate for the top 1 percent from 24% to 48%.  It would bring taxes for the top 2-5 percent up to 32%.  That is a massive income tax increase, and I really don't think we could pull that off without severely damaging the economy.

And again, all that would do is solve the deficit issue.  It would do nothing to address the debt we've already created.  That also assumes that entitlements costs aren't increasing, but we all know that with the Baby Boomers reaching retirement age, it will do nothing but go up.

But what if, somehow, raising taxes like that didn't cripple our economy and we could somehow bear it.  What could we do to pay down the deficit we already have?


Paying Down What We Already Owe


One other way of increasing tax revenue is to increase GDP.  I'm not going to cling to Hauser's Law quite literally here, but the fact remains that tax revenue usually sticks to about 19% of GDP.  Here's Hauser's Law explained a bit for those who are curious:
http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html?KEYWORDS=hauser

So let's look at GDP in 2011.  It was 15.094 Trillion.  Tax revenue then should have been about 2.8 if we use the 19% rule.  Turns out that's not too far off the mark as we took in 2.3 Trillion in 2011.  Source: http://www.heritage.org/federalbudget/federal-revenue-sources.  Again, the 19 percent is really an average over time.

What if we could grow GDP by 4% instead of 2%?  That would double our revenue, right?  Well, actually, since tax revenue is typically a set percentage of GDP, you would have to double your GDP in order to double your tax revenue.  If we look at where 2% year to year gets us, we find that:

Total revenue (By Year)
2013: 2.9 Trillion (estimated)
2012: 2.5 Trillion (estimated)
2011: 2.3 Trillion
2010: 2.2 Trillion
2009: 2.1 Trillion

We only see about 200 Billion a year increase at about 2 percent a year.  As GDP goes up, the percentage would help, but even the most optimistic forecast of 4% increases would net us maybe 400 billion a year.

The Best Case Scenario (aka the Impossible Scenario)

What if we were able to get another 400 billion a year from GDP increases, as well as an additional 1.14 Trillion a year by doubling taxes on the top 5 percent?  That would allow us to break even again on the debt, assuming it did not grow another penny from its current level, in a mere 40 years.

40 years, and that is assuming our economy grows like gangbusters without any hiccups.  It assumes we are able to maintain the percentages of tax revenue.  It assumes many things that just can't occur simultaneously (tax increases and growing economy) because we don't live in the 1950's anymore.  The world is a much more competitive place considering the cost of labor disparity and a host of other factors.  Even a the fairy tale scenario I just presented would take 4 decades to fix the mess we are in.

I hope that someone will swoop in here and tell me how we're not supposed to worry about this, and that everything is going to be alright.



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Pi
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« Reply #1 on: November 13, 2012, 02:23:09 AM »

Spending Cuts:

What difference would spending cuts make when it comes to the deficit?  Right now, our defense spending is 660 Billion as of this moment in 2012.  Let's assume we spend another 40 Billion before the end of the year and make it a nice round 700 Billion.

Let's say that we could somehow spend $0 on defense.  In other words, we decided we weren't even going to buy a tank of gas or a single bullet.  It would reduce the time it would take to pay off the debt, and would only take us about 14.5 years to pay it off.

And once again, that is assuming that:

1. Defense costs are zero (not possible)
2. GDP stays at 4 percent growth for the next 14.5 years
3. We double the taxes on the top 5% of earners

The reason I'm coming up with these outlandish scenarios is that I want people to understand exactly how bad things are.  This is what it would take to climb out of it in our lifetimes.  The problem is that I don't see any proposals that use realistic numbers that show how we can solve this in the next 25 or even the next 50 years.  We got into this mess in about 12 years, and it might take 112 years to get out of it even if we do everything we can, up to and including austerity.

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« Reply #2 on: November 13, 2012, 02:35:50 AM »

Quote
Let's keep the name calling out of this one please.  I don't want anyone using that as an excuse not to participate in the discussion.

Goldammy, Pi, I specifically stated that at the beginning of the thread I started and not ONE of them participated.  And they won't in this one either.  How many threads do you think are needed?

Face it, they don't want to look at it.  Period.  End of sentence.

They're either afraid or want to believe Obama's going to be able to go along like things are normal, and thus, so are they.
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« Reply #3 on: November 13, 2012, 02:45:09 AM »

I have to try.  As to how many threads, the answer is: as many as it takes to get a discussion.
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« Reply #4 on: November 13, 2012, 02:48:52 AM »

I have to try.  As to how many threads, the answer is: as many as it takes to get a discussion.

Why?  Why do you have to try?
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« Reply #5 on: November 13, 2012, 01:42:00 PM »

Cccoach,

You said that you felt that NC Yippie already explained your thoughts in one of his previous posts.  I believe I've found that post:

Well, I thought I did give you some more reasons besides his top advisor - including the idea that the CBO says the Bush tax cuts cost about $2 trillion so far, and that Romney's new tax plan goes much further, cutting an additional 20% across the board, as well as lowering the rates for the top percentage of folks. So it certainly is possible that his combination of tax breaks and spending cuts will create a situation where - get this - the economy gets better and fixes much of the deficit. Sound familiar? I also don't have a lot of faith in Romney to 'do the right thing' as far as workers, based upon his history at Bain and that company's policy of shipping US jobs overseas to increase profits.

Reagan also actually pushed to raise capital gains rates, which Romney plans to cut. The 1986 reform raised the tax rate on long term capital gains from 20% to 28% because there was no other way to make sure the rich didn’t pay less of the tax tab after reform than before it. Similarly, recent rate-lowering tax-reform proposals from both the Simpson-Bowles deficit commission and the Bipartisan Policy Center eliminated the special rate for capital gains.

http://www.forbes.com/sites/janetnovack/2012/10/22/10-reasons-reagan-could-cut-the-top-tax-rate-to-28-but-romney-cant/


I highlighted the part that I thought pertains to this discussion.  What I did above was consider that we:

1. Have a huge tax increase for the top 5 percent
2. Have an economy that doubles the rate of growth over the past few years
3. Cut spending in a major way

Those are the tools we have at our disposal.  I've talked about what we would actually gain from a capital gains increase, and shown the numbers.  What it looks like to me is that even with all of these things working in our favor, it would take a very long time to dig ourselves out of the hole.  And that is assuming that all of those things are possible, though I don't think they are.

So what I'm asking is this:

What combination of GDP increases, tax increases, and spending cuts, do you believe can be made?  And most importantly, what is it about the probability of those key things happening that causes you to be optimistic?
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« Reply #6 on: November 19, 2012, 08:18:26 PM »

Bumped to the top for cccoach's eventual response.
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« Reply #7 on: November 19, 2012, 09:04:33 PM »

PI: we know that a significant number of large corporations held their cards (and their bankrolls) awaiting the outcome of the election. The prevailing wisdom is that a Romney victory would be heralded with a loosening of those purse-strings knowing that he was inclined to ease the onerous regulations and taxes that are smothering business.

The election didn't go that way.

My question to you is do you believe that corporations will continue to hold their capitol and postpone expenditures, expansions, and upgrades knowing how the election went (and correspondingly how business trends are likely to go), or will they regroup and seek new markets for that capitol (off-shoring and foreign expansion, etc)?

I get a sense that "wait n see" has them in its firm grips and that there will be no flood of cash into the marketplace any time soon.
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« Reply #8 on: November 19, 2012, 10:37:19 PM »

Pi, I am not a math expert but this stuff is basic addition and subtraction. I don't understand why more people can't understand the whole concept of debt and the negative implications.
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« Reply #9 on: November 19, 2012, 11:21:22 PM »

Not can't, SH; won't.
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« Reply #10 on: November 20, 2012, 02:23:37 AM »

My question to you is do you believe that corporations will continue to hold their capitol and postpone expenditures, expansions, and upgrades knowing how the election went (and correspondingly how business trends are likely to go), or will they regroup and seek new markets for that capitol (off-shoring and foreign expansion, etc)?

I get a sense that "wait n see" has them in its firm grips and that there will be no flood of cash into the marketplace any time soon.

Good question.  How much that has to do with the election is hard to say.  I would suspect that is isn't so much a political decision on the part of business owners as much as it is economics.  It isn't that Obama was re-elected per se.  It is the certainty of the full implementation of the ACA, no change at regulation reduction, higher taxes on individual income, higher capital gains tax, etc.

I think that it is really hard to say where the market will go in the short term.  If you are business affected by headline inflation, i.e. if your business has expenses like food, gasoline, and energy, then you might be more sensitive to the looming debt.  People will be watching to see what happens the next time the debt ceiling needs to be raised.  People will be watching bond auctions.  People will also be watching the things that are happening in the Middle East. 

Personally, I think the market is really unsettled.  There are so many things that could hit us with very little warning, and it is nearly impossible to hedge against all of them if you own a business, regardless of size.  If I had to guess, I would say that the big players are looking to diversify interests abroad.  That's the long term strategy.  If we do have some sort of economic upheaval in this country, it doesn't necessarily mean we'll take the rest of the world down with us.  It will be a scary time for everyone, but there will be some winners that emerge.  Figuring out who those are and putting your money in something that will hold value, or possibly gain considerably as others desperately search for a safe haven for assets, is the key.  The real winners are the ones that bet on the right horses and place their bets early.  What that will mean for you and I is hard to say.  I'm not a tycoon.  I'm just a canary in the same tunnel with the rest of you poor miners.  Your fate is pretty much my fate.

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« Reply #11 on: November 28, 2012, 12:37:49 PM »

Ok, here's my fix and ALL the specific numbers to go with it:

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=xrtk66qs



Try it for yourself:
http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html
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« Reply #12 on: November 28, 2012, 01:09:31 PM »

I've seen that before Mr. Yippie and I appreciate your participation.  I would just point out that what that interactive website does is allow you to address the budget deficit over the course of the next 17 years.  But that leaves us with the debt we have already accumulated.

How do you intend to address that? 

Also, note that the shortfall projected for 2015 is 418 Billion.  That is based upon a number of assumptions, one of which is that we will enjoy some modest GDP growth.  The CBO is predicting a recession next year so I'm not so sure that we're going to maintain an annual growth rate of more than 2 percent.  Another issue is that one of the things you chose to cut was the troop levels in Iraq and Afghanistan.  The interactive tool suggests we reduce that to 30,000 troops deployed to Iraq and Afghanistan combined.  In Afghanistan alone there are about 66,000 troops, so that 169 billion is a moot point, and it also happens to be a significant portion of your 418 billion in savings.  That's the problem with picking something from 2010.

http://www.reuters.com/article/2012/11/26/us-usa-afghanistan-idUSBRE8AP19620121126
Allen's preliminary suggestions for a post-2014 training and counterterrorism mission ranged from around 6,000 to 15,000 troops, said the U.S. official, speaking on condition of anonymity. The figures were still in flux, the official said. The estimate was first reported by the Wall Street Journal.

By comparison, there are around 66,000 American forces in Afghanistan now.


Also, from your article:
Our goal was to come up with a list that included the major options that are part of the current debate over the deficit — even if they are not considered politically feasible in the immediate future. As Mr. Gale notes, closing the deficit doesn’t seem to be politically feasible anytime soon.

Unfortunately for you and I, Mr. Yippie, Mr. Gale is probably right.  Even though what you've posted here addresses the budget shortfall to some degree, it does not address the current debt of over 16 Trillion.
« Last Edit: November 28, 2012, 01:27:11 PM by Pi » Logged

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« Reply #13 on: November 28, 2012, 04:10:43 PM »

Well, it also does not include the 80 billion or so the same CBO estimates Obamacare will ultimately save, so there are a lot of things missing from the numbers. However, it does represent a very significant cut in spending, as well as a significant increase in revenues compared to today.

What is your own plan?

 

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« Reply #14 on: November 28, 2012, 05:14:59 PM »

Well, it also does not include the 80 billion or so the same CBO estimates Obamacare will ultimately save, so there are a lot of things missing from the numbers. However, it does represent a very significant cut in spending, as well as a significant increase in revenues compared to today.

What is your own plan?

You seem to be answering my question with another question.  The whole point of me posting all of this is to show how it is next to impossible, given the political realities, to deal with the deficit and the debt.  That's what I'm trying to get across here.

What are the "lots of things" missing from those numbers?  Have we not already talked about how Obamacare's cost has been revised?  Are you not aware that the CBO has decreased the anticipated savings three times now?  There's a major flaw in the CBO estimates when it comes to cost.  The CBO hasn't taken into account, if you look at their cost estimates, what the ACA will cost with regard to jobs or hours lost due to businesses' reaction to increased operating cost.  If people get reduced hours, that is less money they earn and thus less money they might pay via taxes.  If they get laid off, the bill might be responsible for making a revenue generating person an entitlement cost contributor.  We already had this discussion, but based on what you're saying here it is as if it never happened.  Are you also not reading what I write here or what?  Am I just wasting my time?

I'll ask you again Mr. Yippie: how would you deal with our existing debt?  I don't see where you've addressed that at all.  I also don't expect you to have an answer.  What I would like to see is acknowledgement of just how big this issue is and proper prioritization of it.  Call it "raising awareness" or whatever you like.  Did you really understand the difference between the deficit and the debt when you posted that?  Or did you think that somehow that was the only answer necessary?  If you did, then I have truly failed and I just give up.

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