Thursday, October 6, 2011

Letter to the Members of the Super-Committee

The forgoing is an edited excerpt from an actual letter I am sending to members of the Super Committee.
Dear Members of the Super-Committee:
Congratulations on your being chosen for the task of helping to steer our nations’ fiscal ship in the right direction.  The task you face is of significant importance to all Americans, and to the world as well.  America stands as the bastion of economic and moral strength in the world.  Your recommendations will shape America’s present, and your actions will shape our future.  In that spirit, kindly consider my humble recommendations:
1.  Conduct yourselves with the respect and decorum expected from your position of leadership and honor.  The partisan bickering that surrounded the debt ceiling debate was destructive and divisive.  Genteel debate and conduct is a good starting point for reestablishing trust with the American people who are counting on you to lead them to a sustainable fiscal future.
2.  Please consider that all of you represent all of us, and that no one of you represents all of us.  You should put the country’s best interest foremost, and your Party’s, lobbyist, or contributor’s considerations secondary.  To wit, trying to balance a $1.6T deficit by cuts alone is unworkable, as is trying to fund it on the backs of 2% of the population.
3.  Please remember that there are two issues here:  (a) a short term problem (this very anemic recovery); and, (b) a long term problem (excess debt and deficit spending).  Delineating those issues is paramount:  Cutting jobs to cut spending in a weak recovery is a destructive feedback loop.  In other words, delay spending changes to make sure nothing harms the short term recovery.  Get the economy growing first.  Remember, the US debt-to-GDP ratio is still the lowest among our peers in the developed world.  Therefore, the first priority (short term) should be economic recovery, and the second priority (long term) should be reducing the deficit.  If done properly, we do not need to sacrifice one priority for the sake of the other.
4.  Simplify the tax code.  As a CPA and former professor, I can assure you that our tax code and appurtenant laws are fraught with unnecessary inconsistencies and complexities.  In addition, vast tax incentives are an anathema to a free market society.  Hundreds of billions could be re-allocated by simplification of the tax code.
5.  Have courage in your decisions.  Our founding fathers stood with their reputations, fortunes and lives on the line to create this country.  Demonstrate a modicum of that courage to protect it, even if you have to inform the country that we need to simplify, spend less and pay a little more. 
6.  You can balance budgets by less spending, increasing revenue, or both.  I believe both are necessary.  Recognize revenue comes from rate and volume.  A growing economy pays more taxes.  Employed people pay more taxes.  Your plans should encourage business and job growth. 
7.  As to the current situation, we have a Fed balance sheet and money supply that should provide some significant stimulus, but for the cloud of uncertainty.   To that point, here are two ideas:
a.  Lower the Fed lending rate to zero.   Banks currently can keep functioning, protect massive store of cash, and moderately satisfy regulators and shareholders by sitting on their assets.  Lowering the fed lending rate to zero (only .005 less than the T-bill rate), will force more money out into the system for business and consumer lending.
b.  Have GNMA (or if desired, allow FNMA and FRMC) to provide mortgage lending for home purchases or refinancing under the following conditions:
i.      High credit score,
ii.     Current payment status,
iii.    Maximum Loan value equal to the greater of 80% of appraised value or current balance.
This might stop the downward slide of valuations, discourage strategic defaults, and again move money into the system.  In addition, it will provide a wealth effect in resetting the perceived value of the home higher to its current mortgage balance.
8.  On Social Security:
a.    Provide a graded increase on contribution rates, adding 0.3% to the rate each year for 5 years   starting in 2014.  Raise the wage base to $150,000;
b.    Index the Normal Retirement Age (NRA) for participants born after 1960 grading it eventually to age 70. My calculations indicate this reduces the liability by 8-10%;
c.     Modify the earned income limitation to incorporate the NRA earned income limitation until age 70. This encourages working semi affluent retirees to delay collecting benefits;
d.    Use linked CPI to add increases: it is a logical inflation measure.
9.  On Medicare:
a.    Link eligibility to Social Security NRA, e.g.  Instead of some folks being eligible for full Social Security at 66, but Medicare at 65, make the eligibility ages the same.
b.    Raise the Medicare tax rate to 1.5% in 2013, and raise it .15% a year for 5 years.
10.  Income Tax Rates:
a.    Either let all of the Bush cuts expire in 2012 (raising taxes on everyone), or modify the rates to broaden the base. 
b.    Consider that the UIMC in the Health Care bill is a strange and inconsistent tax on upper brackets.  In addition, it’s an unearned income tax paying for a payroll based program. Link your programs to your taxes (e.g. Social Security taxes pay for Social Security, Medicare taxes pay for Medicare, etc.).
c.     Eliminate the vast array of inconsistent and irrelevant individual tax rules.  AMT is an obvious example:  either use the regular formula or use the AMT formula.  Perhaps consider renaming the AMT (if you don’t eliminate it) to the more honest name of ‘Alternative Maximum Tax’.  Incidentally, force users of the Earned Income Credit (EIC) to actually support the dependents they claim on the return.  There is a level of fraud associated with EIC (I might even ask why we even have an EIC?).
d.    Eliminate the vast array of incentives and credits on the corporate income tax and simplify the corporate tax.
11.  VAT:  Deficit reduction excise tax:
a.    Consider a VAT of 3%, specifically earmarked to deficit reduction and not used for anything expect deficit reduction.  Link this to a freeze on discretionary spending to 2012 levels.
b.    Exempt necessities (food at grocery stores) from the VAT.
12.  Spending:
a.    Freeze discretionary spending to an acceptable level.  Allow increases only by the percentage linked to overall deficit reduction (e.g. discretionary spending can only go up when the deficit goes down, and then only by linked CPI).
b.    As a token of good faith, cut Congressional office budgets (except security) by 3%.  Freeze them for your terms.  Don’t give yourselves a raise until you balance the budget.
c.     Thoroughly evaluate each aspect of the budget, but start with the big one that should be easier:  the defense budget.  The waste in military spending in Iraq and Afghanistan are enough alone to probably cut $50-$100B.  I feel you should avoid cutting costs to soldiers, or soldiers’ families.  Waste on support programs is another thing.
In short, the budget of the United States is not entirely different than any other budget:  Spend money on essentials, get enough revenue to cover expenses, don’t hurt anything, or anyone too much, and spread the pain.  My best wishes and thoughts are with all of you.  Please recognize that we, the people of America, need you to serve as the advocates of all Americans not just limited groups. Have courage, and stand up for what is right, fair and good for the country.
Leon C. LaBrecque, JD, CPA, CFP®, CFA