Thursday, October 20, 2011

Budget Fix for the Federal Government

Let's face it we cannot bind future session of Congress to the point that they have no room to deal with war,natural disaster or any other unforeseen issue that threatens the United States. Since 1974 our budgets for the Federal government have automatically increased from the prior year regardless of need. In recent years debate has surrounding cutting the budget but in reality all that has been done is a rollback of automatic increases.

2011 is no different. With the raising of the debt ceiling and all the spending that has taken place - the cuts passed only will reduce the government increase in spending to 5% over 2010. Right now the Super Committee is trying to figure out how to trim $1.2T from the budget over the next ten years. That is what our problem is. We attempt to bind future sessions of Congress to budget limitations that they can change if they don't like them. What we need is a binding element to this process; we need a Constitution amendment.

The new Constitutional Amendment would:

1. Require all budgets by the Federal Government and agencies established on a zero sum basis.
2. Congress can only budget 85% of revenues when debt of the United States exceeds 25% of GDP.
3. Congress can only budget 90% of revenue when debt of the United States is under 25% of GDP.
4. Establish a flat tax at 10% for individuals making over 2x the poverty line. Anyone making less would not be taxed.
5. Establish a flat tax on all corporations at 10%.
6. Abolish all tax credits and deductions to individuals and businesses.

3 comments:

  1. So, here's a scenario.

    We go to war with China. As a result, defense spending skyrockets. But wait, we hit the 25% rule for the constitutional amendment. As a result, catastrophic budget cuts are put in place.

    The military can't fund continuing operations. Military equipment can't be purchased.

    Is this really a common sense and logical way to tie the governments hands in THE SINGLE DUTY THEY HAVE ABOVE ALL OTHERS - NATIONAL DEFENSE?

    Sounds like a stupid amendment. Why can't we just elect officials who are fiscally responsible and trust them to do the right thing? After all, in a democracy the people get the government they deserve.

    And don't tell me the Tea party was that attempt at electing fiscal responsibility. They're no different than the others.

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  2. Truman and/or Viper...I am not an economic dynamo, but tell me if the following is true:

    The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds.

    But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

    So why the hell would we be so bent up on paying off the US debt? I think paying it down would be sufficent...but wouldn't it be easy enough to just lower the effective rate and just remove deductions and subsidies?

    Isn't it true:

    A financial liability is ALWAYS matched by a financial ASSET

    So Govt debt = non Govt financial ASSETS

    And Govt interest EXPENSE = non Govt interest REVENUE

    So why would anyone want the Govt to pay off debt? It would smash pension funds and non Govt interest income.

    Also a Govt deficit (a Govt loss) is exactly matched by non Govt profits (either in the US or overseas depending on the trade deficit).

    If the US Govt paid off their debt it would completely destroy the US and world economy.

    Viper:

    "Since 1974 our budgets for the Federal government have automatically increased from the prior year regardless of need."

    Really? That is quite a statement given the amount of military spending/baby boomer healthcare/corporate giveaways that the federal government has been shelling out since then.

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  3. Truman

    The amendment does not mean new bonds, i.e. War Bonds, cannot be issued to help with defense spending in the event of a prolonged conflict. Nor does it mean slashing budgets either. The amendment calls for the United states to put together a budget that does not allocate 100% of the revenues and depending on the debt ratio to GDP dictates how much of the revenues can be allocated. The unallocated amount is to go to paying off debt, unforeseen events, and items that take place during budget cycles.

    The role of the Federal government is to protect our national interests, keep our infrastructure sound, and keep our property safe. The role is not to supply money for a study of some species of animal or to give cradle to the grave entitlements. And I agree it would be great to elect officials that are fiscally responsible but that has not taken place in my lifetime. It is now time for Americans to demand more accountability and this amendment gets us there.

    Anonymous

    The amendment is not to say we eliminate debt or treasury bonds. For large projects we need to use bonds to spread the cost of the project over several years. If all Treasury bonds were paid back it would not crash pension or retirement accounts. It would free up money to be invested elsewhere.

    You are correct that Govt debt is an asset to someone else - however it is a receivable that is paid for with taxpayer dollars. If the government does payoff its debt investors will not purchase unless they can get a higher interest payment as the risk of principle increases. The source of income from government securities is low compared to other income producing investments. The trouble that can take place is exactly what we saw in the housing bubble with the toxic mortgages that the Government said the banks had to make.

    You do realize that government budgets are not a zero sum basis; rather they are statutory raised each year regardless if they need the extra money - right? It is that issue that made the GOP V. DEM conversation on budget cuts so ridiculous. The budgets were not getting cut at all they were just having their statutory increases reduced.

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