Such adjustments go miles beyond anything Congress and the president are considering. No wonder. They arefocused on limiti...
The Purple Tax also makes the payroll tax highly progressive by eliminating its ceiling and exempting the first$40,000 in ...
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Us debt woes worse than greece


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Us debt woes worse than greece

  1. 1. FROM: accordance with Federal Laws provided For Educational and Information Purposes – i.e. of PUBLIC InterestAmericas debt woe is worse than GreecesGREECESeptember 19, 2011|By Laurence J. Kotlikoff, Special to CNN Sheets of freshly made twenty dollar bills lie in stacks at the Bureau of Engraving and Printing on July 22 in Washington.Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford tosend us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon canno longer afford the pension and health care benefits of retired service members. NASA is no longer planning amanned mission to Mars.Were broke for a reason. Weve spent six decades accumulating a huge official debt (U.S. Treasury bills andbonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to todays andtomorrows 100 million-plus retirees.The governments total indebtedness -- its fiscal gap -- now stands at $211 trillion, by my arithmetic. The fiscal gapis the difference, measured in present value, between all projected future spending obligations -- including ourhuge defense expenditures and massive entitlement programs, as well as making interest and principal paymentson the official debt -- and all projected future taxes.The data underlying this figure come straight from the horses mouth -- the Congressional Budget Office. TheCBOs June 22 Alternative Fiscal Scenario presents nothing less than a Greek tragedy. Its actually worse than theGreek tragedy now playing in Athens. Our fiscal gap is 14 times our GDP. Greeces fiscal gap is 12 times its GDP,according to Professor Bernd Raffelhüschen of the University of Freiburg.In other words, the U.S. is in worse long-term fiscal shape than Greece. The financial sharks are circling Greecebecause Greece is small and defenseless, but theyll soon be swimming our way.To grasp the magnitude of our nations insolvency, consider what tax hikes or spending cuts are needed toeliminate our fiscal gap. The answer is an immediate and permanent 64% increase in all federal revenues or animmediate and permanent 40% cut in all federal noninterest spending.
  2. 2. Such adjustments go miles beyond anything Congress and the president are considering. No wonder. They arefocused on limiting growth in the official debt, while ignoring whats happening to the unofficial debt. Tounderstand the thickness of their blinders, note that the fiscal gap, after inflation, grew by $6 trillion last year,whereas the official debt grew by only $1 trillion. Hence, our leaders are looking at one-sixth of the problem.The August budget ceiling crisis deal calls for $2.5 trillion in budgetary savings over the next ten years. PresidentObama is unveiling plans Monday to cut the debt by $3 trillion. Both of these are peanuts compared to whatsneeded to start eliminating the fiscal gap.There is a way forward to deal with both our fiscal mess and the economy, which is lying on the operating table indesperate need of open-heart surgery. Such surgeries are called radical because they require radical intervention.But they are also extremely safe compared with the alternative -- administering Band-Aids and letting the patientdie.At, I provide five radical, but absolutely essential plans to fix taxes, health care, SocialSecurity, the financial system, and energy policy. Collectively, they would more than eliminate the fiscal gap andget our economy out of the emergency room and onto the racetrack.The plans are called purple because they should appeal to blue Democrats and red Republicans. If neither partyadopts them, I guarantee that a third-party candidate running via will.The Purple Tax Plan is of particular relevance now, given Obamas decision to push for a repeal of the Bush taxcuts for the rich and to levy a new tax on the super rich -- those with incomes above $1 million.The president wants to raise taxes. Cant argue with that. We desperately need much higher revenues along withmuch lower expenditures. Federal revenues measured as share of GDP are at a postwar low. And the presidentwants the rich to bear a bigger share of the tax burden. Its hard to disagree with this either. The rich have beengetting off far too easy for far too long.But the Republicans want to ensure that more taxes dont mean more spending or smaller spending cuts than wouldotherwise arise. They also worry about high tax rates discouraging work, saving, and job creation by entrepreneurs.Most of us agree with both the president and the Republicans, which is possible because theyre both talking pasteach other. But what we really want is a tax system thats simple, transparent, fair, and efficient. Neither thepersonal income tax, the corporate income tax, nor the estate and gift tax meet these criteria. Each is a biggernightmare than the next.The Purple Tax Plan entails radical surgery. It eliminates the personal income tax, the corporate income tax, and the estate andgift tax. In their place it substitutes a highly progressive 17.5% federal retail sales tax plus a demogrant -- a monthly payment toeach household, large enough that it reimburses the poor for the sales tax theyve paid. (The 17.5% rate is the taxs nominal rate.Its effective rate is 15%, since 15 cents of every dollar spent goes to taxes and 85 cents to goods and services, with 15 dividedby 85 equaling the 17.5% nominal rate.)If youre a Democrat, a sales tax, apart from the demogrant, probably sounds highly regressive. But nothing couldbe further from the truth. Taxing consumption is mathematically identical to taxing whats used to buyconsumption, namely ones wealth and ones wages. Warren Buffett would effectively pay 15% on his wages, butalso 15% on the principal of all his wealth, which is not now being taxed.The day the Purple Tax is implemented, Buffett will have the same number of dollars in wealth, but the purchasingpower of his wealth will fall by 15%, thanks to the 17.5% higher costs of goods and services. And whether hespends his wealth on himself or gives it to his kids to spend, his wealth, plus any accumulated asset income, willbuy 15% less in goods and services.
  3. 3. The Purple Tax also makes the payroll tax highly progressive by eliminating its ceiling and exempting the first$40,000 in wages from the employee portion of the tax. Finally, the Purple Tax includes a 15% inheritance tax oninheritances and gifts received in excess of $1 million.Since the payroll tax is levied at close to a 15% rate, and the sales tax has an effective rate of 15%, and theinheritance tax rate is 15%, the Purple Tax plan imposes a single tax rate. This is very important for budgetarydiscipline. Under the Purple Tax, everyone will know that if Congress spends more on anything, the 15% effectivetax rate will need to go up.The ongoing food fight between Obama and the Republicans is hiding the real game -- spending ever-larger sumson ourselves and leaving ever-larger bills for our kids. This fiscal child abuse must stop. The Purple plans wouldlet both sides claim victory, save our kids, and get our economy back in the race.