It's agreed: We want the yawning American budget gap to
disappear. But there is wide disagreement about how to make that
happen. Smaller government? Highertaxes for the rich? Actually,
there are solutions no one is talking about -- solutions that may
To give you a framework of the kinds of choices that will need
to be made, it helps to look at the current stance of both
political parties. Broadly speaking, leading Republicans are
committed to a smaller government -- without any tax hikes.
Democrats, for their part, have suggested that for every $10 in
government spending cuts, it's prudent to add at least $1 worth of
new revenue sources -- i.e. higher taxes. Signs are emerging that a
mix of both -- heavily skewed toward budget cuts -- will emerge,
perhaps along the lines of the not-quite-dead Simpson-Bowles plan,
which you can read about here
When that plan was released in late 2010, it quickly became a
political hot potato because it spelled out some tough moves with
which neither side wanted to be formally associated. Courage has
never been a key virtue of Washington's lawmakers.
Still, these tough measures are coming anyway, and even as both
sides agree to compromises, few will be completely happy with the
For a bit of context, let's look at the various ways the budget
gap can be closed and the likelihood of eachoption being
1. Eliminating individualtax deductions
Roughly 18 months ago,
I looked at
the various tax breaks
that consumers get, along with a gauge of how likely these
breaks are to be reduced or eliminated.
As I noted, these deductions cost the U.S. Treasury $700
billion every year, which works out to be more than 75% of
the current budget gap. Getting rid of them would almost
bring our budget into balance. Yet as I noted, eliminating
themortgage interesttax deduction is unlikely, as it enjoys
broad middle-class support. And besides: the housingmarket
is still far too tenuous to handle another big headwind.
Losing thistax break would change theeconomics of a home
purchase, and home prices would have to fall to compensate
for the lack oftax benefits .
On the other hand, those other tax deductions --
charitable giving, state and local taxes and theEarned
Income Tax Credit -- are more likely on the table. The last
one likely would be a key target if Mitt Romney were to win
the upcoming election.
Still, it's fair to assume that some of these cherished
deductions will not be part of your futuretax planning
Cutting corporate loopholes
The tax code has ample breaks for companies as well,
many of which have become adept at exploiting every break
they can. Take
. Over the past four years, the industrial giant has
generated a cumulativeoperating income of $64 billion but
paid just $6.6 billion in taxes, or a little more than 10%.
That's a far cry from the official corporatetax rate of
The parties share their view on the issue: That official
rate of 35% is too high and needs to come down, perhaps to
around 28%, but some loopholes also need to be closed. The
key difference between the parties: Democrats would like to
eliminate enough deductions to have companies contribute a
bit more to the mix. Republicans would also like to close
some loopholes, but only to the extent that it offset the
total revenue drop that results from a lowered top
roughly a year ago on our sister site, StreetAuthority.com:
"In 1934, individuals paid $420 million in taxes and
corporations paid $364 million -- a roughly 54%/46% mix. By
1950, individuals were paying 58%. In 1960, it had grown to
68%. In 1990, it was 77%. Today, individuals pay 83%,
meaning that less than a fifth of federal taxes come from
Just moving that figure back to 80% would help to shave
the budgetdeficit . What kind of loopholes are we talking
about? Investment industry executives shielding their
income by payingcapital gains tax rates (of just 15%),
credits for investments in research & development,
deferred taxes on overseas income, deductions for domestic
energy exploration and so on.
A nationalsales tax
Many countries slap a tax on all goods and services,
known as aValue Added Tax (VAT) . Such a move here has been
untenable, especially as states already have their own
sales taxes. Yet as
I noted a few
, a group called FairTax.org thinks a VAT might be just
what we need.
Even a VAT of just 5% or 7% would raise hundreds of
billions, though it's worth noting that FairTax and other
conservative organizations would pursue a VAT only in
exchange for sharply lower income tax rates, which wouldn't
be as helpful in closing the budget deficit.
4. Raising the gasoline tax
President Bill Clinton hiked the gasoline tax to 18.4 cents
per gallon in 1993, and there it has stood for 19 years. The
tax receipts are used to maintain our bridges, roads and
transit systems, though they don't nearly cover the costs.
Raising the tax on gasoline to 50 cents a gallon (which is 32
cents higher) would still be well below the $2, $3 or $4 that
many European and Japanese citizens pay. Every 10 cents per
gallon increase in gasoline taxes would close the budget gap
by $20 billion, according to the Highway Trust Fund.
CappingMedicare and Medicaid benefits
This highly controversial move would impact many
Americans but has the quiet support of medical economists
that have looked at our nation's rising health care tab.
Consider this stat: 1% of all Medicaid beneficiaries
consume 25% of all Medicaid spending. We're talking about
people with chronic illnesses who rack up hundreds of
thousands of dollars. A Medicaid spending cap, for example,
of $100,000 may seem like an inhumane move -- especially if
it's a loved one of yours, but it may be necessary to move
health care spending back in line with levels in European
Another stat: More than half of the health care
expenditures consumed for most Americans will take place in
the final 30 days of their life as doctors work feverishly
to keep patients alive for just a little longer. Who gets
to decide when not to treat? Well, that's where the scary
"death panels" phrase came up. It's an awfully squeamish
topic but will likely be raised again if we can't cap our
rising entitlement spending.
A Smaller Defense Department?
The United States spent more on defense in 2011 than the next
13 countries combined, according to Bloomberg. Throw in the
high levels of spending on the Department of Homeland
Security, and it's pretty clear that we take our security
concerns seriously. But a question should be asked: Can the
Department of Defense shrink by 10% and still be the best
fighting force in the world? Some defense strategists think
so -- if we are willing to cut a few very expensive programs
such as advanced jet fighters and are willing to reduce our
military footprint in countries like South Korea. A 10% cut
would save the government more than $60 billion annually.
Action to Take -->
The budget deficit may begin to shrink a bit as theeconomy grows.
Rising government receipts come from higher levels of economic
activity. Yet a smaller government -- along with higher government
revenue through closed loopholes -- appears inevitable. So you
should start adjusting your long-term assumptions about the taxes
you pay -- and the government benefits you receive -- right
This article originally appeared on
6 Ways Washington
Could Pay Off The National Debt Now -- If It Had The Guts
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GE in one or more if its "real money" portfolios.
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