Now that we have successfully raised the debt limit, we can all breathe a sigh of relief, but don’t breathe too deeply; the oxygen has gone out of the room. Of course, raising the debt limit and tentatively agreeing to minuscule cuts in spending, or maybe none depending on the base line you use, solves nothing.
What really needs to happen is a complete do over of the tax system plus long-term adjustments to the major entitlements. Absolutely nothing else will get the United States back on track. This does not mean we slash and burn Medicare and Social Security and put granny on the street (or me for that matter). It means we make adjustments that gradually make costs manageable to reduce the long-term liabilities. Here are some ideas to think about prospectively, say applicable to anyone reaching his or her entitlement age in 2020:
- Make the benefits under Medicare income related as many employers do. That means that the deductible and coinsurance varies based on total income using the same income levels that now require additional Medicare premiums. For example, if the standard deductible is $200 than higher income folks would have deductibles of $500, $1000 or $1500.
- Change the Social Security COLA inflation measure. In addition, no one should receive a COLA during the first three to five years of starting benefits. There is ample time for most individuals to plan ahead to handle inflation during this period.
- A Social Security COLA should only be applied every other year for those in the higher income brackets, again based on the existing income levels used for the Medicare premium structure.
- Remove the income limit on Social Security payroll taxes, but also lower the rate after the existing income limit is reached. For example, on income over $106,800 provide a tax rate of 2-3% and increase the income level for everyone each year based on general inflation.
Are we raising taxes, the dreaded third rail? Indeed we are and no one, including me, likes that idea. However, these taxes are designated for a specific purpose for programs that apparently every American not only likes but also has no choice but to utilize.
Now as for income taxes, let’s get real. The tax system is a mess and we all know it. The progressive rates mean little; we are confounded by the AMT and hundreds of credits, deductions and the like, many people and not just the “wealthy” do not pay their fair share.
Scrap the whole thing and replace it with a progressive schedule of tax rates based on total gross income, no deductions, no credits, no write-offs, no pre-tax health insurance premiums, no FSAs or HSAs, (one exception would be one uniform method of pre-tax saving for retirement, everyone can use a 401(k) plan and scrap everything else), no nothin.
The gross amount collected from income taxes would equal the total spending each year by the federal government less federal revenue from sources other than personal income taxes. That means that if the American people want a new entitlement program of some kind or a new space program or better defense, the real cost would immediately be reflected in the individual tax rates the following year. No accounting or budget gimmicks, not hidden costs, no deficit spending. Let people see immediately in real terms what things cost, total transparency…that will scare the hell out of a lot of people.
Given the elimination of all deductions, etc. the tax brackets will be substantially lower than they are today. Perhaps we start at 3% at the low-end and go up to say 30% at the top. I don’t know the real numbers or how much revenue will be needed at the start, but adjusting revenue to expenses will be easy. If the government approved budget goes up three percent, someone determines the expected income level for Americans in the following year and if that level multiplied by the existing tax rates is insufficient to cover the budget, either the budget is lowered or the tax rates are raised…just like your health insurance premiums. If the estimates are wrong and spending is higher (or lower), the year after there are adjustments to compensate…just like your health insurance premiums.
The IRS will be a shell of its former self with far less staff required; another benefit. On the other hand, tax preparers, tax lawyers and CPAs will need a new profession. Depending on your point of view that is good or bad.
One thing is for sure, with all this transparency and elimination of gimmicks, the phrase “You can’t handle the truth,” will take on new meaning.
QUINNSCOMMENTARY 