The Rusted Musket

The Wall Street Journal has a article aptly named: “Hi. My Name Is America, and I’m a Deficit Addict.”

It is a very interesting article and well worth the read. The author starts off by saying that the deficit (and Federal debt in general) is something that everyone talks about but nobody does anything about. How true is that? Its like this story I heard about some fishermen.

There was a group of fishermen who bought all the latest gear, read all the articles and magazines about fishing, and talked endlessly about fishing. But they never actually went fishing. The government (meaning politicians that are running it), and maybe even American citizens, are like those fishermen. They are afraid of change and afraid of failure. Instead of being a hero and hated (yes both) for fixing the problem they leave everything at the status quo. What will it take to finally make them realize that they are killing this country? We simply can’t afford trillion dollar deficits or we are going to implode.

I got dreams about what would be the ideal solution; such as cutting social security, medicare, department of education and all the other unconstitutional, practically worthless departments that have sprung up. Having actual fiscal oversight and a government website that details every penny spent, who spent it and who approved it.
But I’m a realist, I know that those kinds of changes would to very difficult to make period let alone all at once so then what could be done?

First off do away with our current tax system and adopt the Fair Tax
I wrote a bit about this in my last post about the Greek deficit but the gist is that all federal taxes would be done away with and replaced by a national sales tax. Not a VAT tax (which is a politicians dream tax as they can raise taxes without the general public knowing).

A important thing to note is that businesses wouldn’t pay the usage tax for buying wholesale items from other businesses. So if I make hats the cotton I but from another company has absolutely no taxes added. Why is this good you might ask? Because that tax saving will be passed on to the consumer, just like tax increases are. If you tax a company 10% you can be sure that they will raise their prices by 10%, if you lower taxes by 10% then assuming there is healthy competition, prices will drop by 10%. This would be a enormous and positive change reducing the red tape and some of the frustrating aspects of owning your own business.

The sales tax would be high, probably around 23%, but everything would be cheaper because the businesses that are paying 15% FICA taxes wouldn’t be paying that anymore, so there is a 15% decrease in price off the bat. But it gets better, the several hundred billion dollar tax industry would go away (including many IRS areas), yes lots of jobs would be lost, but doing away with our current form of taxes would be a economic stimulus that you could only dream of.

This tax is the most fair and transparent type of tax out there. It would also be hard to circumvent and easy to collect. Imagine not having to file tax returns every year and actually getting your full paycheck. Heck businesses could raise your salary by 10% just because of tax savings. It is a fair tax because the people that spend money are the ones that pay taxes. Think of all the people that live paycheck to paycheck because they spend all their money. Wouldn’t this type of system be a great incentive to start saving more money? Paying bills? Paying down credit card and student loan debt?

Next point would be to examine federal employee’s pay (and benefits) as compared to the private industry and get it inline. Federal employees are paid on average 20% more than private employees and that is not counting benefits which are generally 2-4 times better for federal employees.

Next all the social services that are offered need to be examined. Medicare is so expensive because it is corrupt and the medical industry wastes so much money. Obamacare didn’t do anything to address costs and so those are likely to just go up. We need to repeal that legislation and put in its place some guidelines to reduce medical costs such as tort reform for malpractice lawsuits, reducing the cases where money is spent on needless tests and examinations, etc… Social security needs to go away. The government can’t be trusted with our retirement money as they love to just squander it away. So anyone currently receiving benefits or close to receiving them gets them, but then no more. Put that money back into citizen’s pockets and trust that they can  take care of themselves.

Fiscal responsibility needs to be mandated somehow. I’ve heard people mentioning a constitutional amendment to limit government spending to a percentage of the GDP and although that sounds good on paper the problem is that I imagine the government would always be at that level, but still that would be better than adding debt every year.

There are many other things that can be done, such as figuring out a way to reduce military expenditure, paying down the debt to reduce interest etc… But what I’ve written is a good guideline. It won’t happen all at once, but if drastic reforms don’t take place then we are in a sorry state.

Times aren’t looking so good for Greece right now. Their debt is piling up and they don’t have the means to pay it off. As a result they have had their credit rating downgraded to junk status. With a deficit nearing 14% of their GDP it certainly doesn’t look good for their credit rating (by comparison the USA is hovering around 10.6%, but normally is 1-4%).

Greece’s GDP is currently $356 billion with debt of over $400 billion putting them at 112% of debt as percentage of GDP. By comparison the USA is sitting at 94%.

Now that the facts are laid out I must say that it is very interesting situation on many different levels.  First off USA is only 18% behind Greece right now and at our debt accumulation rate we’ll be surpassing them soon. Could the US Treasury’s credit be downgraded? Maybe but I’d have to wonder if the reigning democrats would put the people responsible for the credit ratings on “trial” if they did lower the rating.

A interesting thing about Greece’s situation is that they are desperately trying to reduce their deficit but are being met with strong resistance by the populace who are unwilling to give up or see cuts to their pork projects and socialist programs. Apparently they don’t understand how serious and bad their situation is. When a credit rating is downgraded to junk status the perceived and real risk for lenders/investors goes up and as such the demanded interest rate rises as well because the investment is now considered highly speculative. What that means is that there is a lot less people willing to loan them money and when they do get money they will be paying a lot higher interest rates. Given this many Greek people are bemoaning the fact that they might lose some of their precious programs? Their economy is at risk and instead of trying to fix the problem they are pretty much making it worse?

I can’t say I’m surprised though, as I imagine there would be plenty of protest here if say Social Security got large cuts (which will probably happen by the way).

Debt is serious business; often it is necessary but these governments (USA included) are being flippant and irresponsible and we (the tax payers) will pay for it. The US Government, instead of being responsible and reducing spending, wants to raise taxes to pay for the deficit, they are even thinking about adding a VAT tax (value added tax which is basically a invisible sales tax).

I say why not reduce spending and lower taxes? Or better yet implement the Fair Tax (and reduce spending). The Fair Tax will not penalize people for making money or being entrepreneurial, it’ll only tax people when they buy things. So in most situations we would control when we paid taxes and the highest consumers would pay the most in taxes. It doesn’t get any more fair then that. Plus a great part about it is there would be no income tax returns for consumers, only businesses would file, and businesses to business sales are exempt from the tax which will lower prices and encourage  more people to go into business. Plus think about it this way, people who have a lot of money spend a lot, yet that spending doesn’t add much to the coffers of the tax system. Yet middle to low income people who can barely afford to pay their rent or buy food or pay their bills are having 10-20% taken off before the money even gets to them. The fair tax, if implemented, would be the greatest stimulant that our economy could get and it wouldn’t cost the government a dime.