A poignant cartoon shows two desperate shipwreck survivors in a life raft. We see the circling sharks, but not at the lifeboat’s other end. One says, “Look at them bail! It’s a shame there’s a hole in their end of the boat.”
Every level of government has trillions of unfunded liabilities: debt, pension and healthcare promises. Annually, our governments make even more unfillable promises. We call the promises entitlements but are not paying what they cost. That is unsustainable. If the life raft fails, then the sharks eat everyone.
“Being the last one eaten by sharks” is a wretched goal. “We all survive!” is a better goal.
Are we the most selfish generation – deceivers who enslave our kids and grandkids? Or do we have the character to begin correcting this complex and unpleasant reality?
American exceptionalism would face reality and decide how to share the inevitable disappointment. Reality will eventually crush unsustainable delusions. If we don’t allocate disappointment, then unsympathetic, powerful forces will. Detroit’s stakeholders refused compromise and then they all ultimately suffered more.
The Nation Can Avoid That Folly
The policies below would slash my income by a third, eliminate 20% of my craft and cost jobs to industries I know well. Accounting, agriculture, banking, finance, hydrocarbon extraction, and real estate would suffer. My clients would pay more taxes.
These ideas could enable the nation to move toward more robust economy, and away from class warfare, financial fragility, and poor choices made simply to minimize taxes.
Grand bargains share pain and benefits across both the economic and political spectrums. Gradual changes ease transition. Shared adjustments decrease the resistance.
From the Civil War through the Korean conflict, young Americans worked with dissimilar people from other states united for common causes. A national consensus evolved. “We’re all in this together,” was the common theme in previous generations. That mindset is missing now.
Require every 18 year-old to serve two years in military or three years in the Peace Corp.
Balance the Budget in a Decade
Taxpayers and recipients must all face reality. Raising revenue and cutting spending will be very hard. Hard is not impossible. It is only hard. Going broke is harder; ask Detroit or Greece.
Leaders initiate improvements. Here are examples how the affluent could break the log jam. These extra revenue sources are offered, if and only if spending is reduced three dollars for every new revenue dollar.
Implement a Simpler Income Tax Plan
Personal federal income tax could have five tiers. There would be no federal tax on the first $20K of income. Taxes would be: 10% on the next $20K, then 20% on the next $40K, then 30% on the next $80K, then 40% on the next $160K and then 50% on everything above $320K.
Suppose there were only three deductions: charities, mortgage interest on $250K loan for a primary residence and half the local and state taxes.
My clients write off (depreciate) the cost of buildings which usually increase in value. That deduction subsidizes the affluent. Over ten years, in even steps, eliminate depreciation, 1031 tax-deferred exchanges, and carried interest.
Collect More Revenue from Financial and Energy Arenas
Over the next 10 years, evenly eliminate deductibility of interest, all depletion allowances, subsidies for ethanol, and other agriculture. Double the capital gains rate and federal gas taxes.
In five years, municipal bond interest payments will still be free from federal taxes – but only for cities that are on a ten year path to fully funding their pension and health care promises to employees. Local governments would be forced to correct their delusions. Detroit demonstrated denial’s horrific cost.
Revenue would be increased, if and only if, spending shrank three times as much. Federal spending must be cut 2% annually for a decade. What magic wand could enforce that commitment? Imagine politicians being rewarded or penalized in relation to the budget.
Every year that the federal budget shrinks by more than 2% then all federal politicians receive double salary. Any year that actual federal spending does not decrease by 2% then they all receive half pay. Simplify the IRS code to 100 pages of 10 point type.
Five Steps to Add Solvency to Social Security and Broaden Pension Coverage
Starting next year, no federal politician would receive any new special government pension plan. Congressmen will rely on Social Security just like the rest of us.
- Raise the minimum retirement age three months annually for the next 30 years. In four years a 68 year-old could collect the full amount. In 30 years a 74.5 year old would collect the full amount.
- Make all ordinary income subject to social security.
- CEOs whose salary is more than 20 times an entry level employee will pay a 20% surcharge of their total salary into social security.
- Social security becomes means-tested starting in five years.
Organizations that provide pensions for 80% of their employees could discount their taxes 10%. More pension sources would lessen the importance of social security. US firms could lower taxes by expanding pension coverage.
Rental property owners are better educated, and have higher income. We know a simplified system could produce a sustainable future. None will receive all that governments have promised. This plan is imperfect. What would be better? The common good must trump all special interests. A majority of both sides must endorse the same plan.
Will we address the problem now? We could abdicate again. In a generation, the unfunded liabilities will be twice as large and then the choice will be made by younger, poorer voters who will out-number older, wealthier voters three to one or by the Chinese after their economy surpasses the U.S.
Terry Moore, CCIM, helps economic winners achieve more than they could alone. He solves hard issues that others duck. He is part owner of Apartment Consultants Inc. Contact info is: 619-889-1031, [email protected], and SanDiegoApartmentBroker.com.