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Monday, February 13, 2012

A Modest Proposal for Congress and the President

A Modest Proposal for Congress

(and the President): Eat Your Own Cooking

Leon C. LaBrecque, JD, CPA, CFP®, CFA

We’re at a point in history where the relative popularity of our elected officials is at an all time low (I will reserve that comment to Washington). Most Americans (by some measures, over 90%) are dissatisfied with the performance of Washington. The handling of the debt ceiling, the squabbling over the simple extension of the payroll tax cut, the impotence of the ‘Super-committee’ all are telling tales of the inability of Washington to agree on anything. Normally, I’m a fan of gridlock, since gridlock forces concession and agreement. Generally, agreement is only a little bad and a little good, but not terrible.

However, there are storm clouds on the horizon, and I’m surprisingly not referring to the November election, although that certainly is a storm cloud. On December 31, 2012, the Bush Tax Cuts expire. This raises the tax on virtually every taxpayer in the US. The ones hit the hardest are working families in low and moderate income brackets. High bracket individuals don’t fare too well either. When I recalculate Mitt Romney’s tax if the Bush cuts expire, his taxes double. And that’s just the income tax: the estate tax kicks back in on estates over $1 million, versus the $5 million now. Then, the very next day, the sequestration budget cuts (mandated by the inaction of the super-committee) kick in, and there is an across-the-board $200B series of cuts. Also that day, a whole new tax, the Unearned Income Medicare Contribution (UIMC) puts an additional 3.8% tax on dividends, interest and capital gains for investors with over $200K of income.

The biggest problem? I can’t see a way for this cantankerous Congress and President to simply extend the cuts before the election or after the election. First, neither party has the political mettle to work on tax policy in an election year: they’re both busy trying to get elected or reelected. Second, after the election, I can only see four options:

  1. President Obama gets re-elected, the Republicans win the Senate: I think the president would not extend the cuts, but rather push the tax policy onto the Republicans plate for 2013 to force them to give him his upper bracket increases;
  2. President Obama gets re-elected, the Democrats keep the Senate: I see the same result as above ;
  3. President-elect Romney wins, the Republicans win the Senate: President Obama would still be in office on 12/31/2012 and would not extend the cuts, but rather push the expiration onto the new administration (‘you fix it’);
  4. President-elect Romney wins, the Democrats keep the Senate: Same result as number 3 above.

So here’s my proposal: Since it is inaction on the part of Congress and the President that is creating this mess, I suggest the following:

  • Cut Executive and Congressional Pay and office allowances by the amount equivalent to the overall sequestration cuts. The average Representative and Senator gets an allowance of about $1.4M, so cut their staff allowance and pay by 5-10%. There’s about $75M.
  • Have each member of Congress and the President contribute the exact amount of the tax increase that would result from the Bush Tax cuts expiration on their compensations to a fund to reduce the national debt. Members of Congress and the Senate make $165,200, so this would probably mean at least a $5,000 increase for each member. There’s another $2.7M toward the deficit.
  • They can have their old pay when they fix the law and the budget.

My bottom line? Perhaps our elected officials should ‘taste’ the outcomes of their actions. I suggest they take the pre-emptive cuts and tax increases upon themselves. If they fix the problem before year end, let them have the money back. Otherwise, the cuts continue. Washington should eat what it cooks.

Leon