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CBO Solution to Budget Crisis - Everyone Bend Over!
CBO Solution to Budget Crisis - Everyone Bend Over!
Courtesy of Bruce Krasting
I look at the political landscape and conclude that we’ve got more of the same in front of us. I think Obama will win, and the Republicans will control the legislative side. For the sake of this discussion, assume that is how it works out.
As of today, there is an economic firestorm that is programmed to hit on January 1, 2013. It’s the kitchen sink - the Bush tax cuts (all of them), the payroll tax cuts, the AMT patch, the ending of extended unemployment benefits, the Sequestered Amounts (11’ budget deal), the debt ceiling, the need to pass a continuing resolution to fund the government and a bunch of other landmines. Many of the things that have been kicked down the road during the past few year come due on New Year's Eve.
If there is a hostile mood in D.C. (there will be) this list of “must fix” issues will be impossible to tackle following the election.
It’s difficult to see around the corner on this. One possibility is that nothing happens in the six weeks post-election. If nothing is accomplished, it would bring about an immediate and significant recession.
I say that doesn’t happen. For once, both the Republicans and the Democrats will pay a big price if there is no deal. For the Republicans, the mandatory cuts in the Military, and for the Democrats, the mandated cuts in the rest of the budget, means there has to be a deal.
But what deal could there be? The problem is enormous. The budget “hole” will be at least a trillion in 2012. It will get bigger every year. The Republicans have said “no more taxes.” The Democrats have said, “We need to spend more”. These seem like irreconcilable differences.
Fortunately, the Congressional Budget Office has come up with a solution. It’s a neat one at that. Neither overt new taxes nor cutbacks in spending would be required. This magic would be accomplished with a very big stealth tax. The CBO looked at eliminating all tax deductions. That would generate a ton of additional revenue. The CBO put the extra annual loot for the Feds at $800 billion plus, exactly what is needed.
Of course the idea of cutting/eliminating tax deductions is an old one. The CBO does a super job of summing it up on one (crowded) page. The critical issue is:
.
The answer is:
.
Ah… that would come to about 250 million people. Damn near everyone chips in. The highlights:

- Forget the mortgage deduction. That would be gone. This would be a significant change in the Rent VS Buy calculation. Bye-bye housing.
- Are you working and have benefits? You will be taxed on the value of those benefits. Same thing for employer contributions to 401Ks. You will have the same income, but your taxes will be higher.
- Do not be confused; this is not a tax increase. Both Parties will tell you so.
- A geezer on Social Security? Your benefits are going to get taxed (much more).
- Don’t bother having kids, the child deduction is gone.
- Live in a State with an income tax? You’re about to be hosed big time. NY and Cali will end up paying an ever-higher percentage of total federal taxes.
- Feel good about giving some money to a worthy charity? You won’t any more. That deduction will be gone too.
- Trying to save a buck? Dividends and Cap Gains will no longer have preferential treatment. Under this plan, short-term gains will be taxed the same as long-term gains. The “Casino” will move to the short-time horizon. The Wall Street crowd will welcome the new (and needed) players.
It’s easy to say that this could never happen. It never has before. Every special interest group would be whacked. But before you dismiss it, consider what will be happening in the weeks between November 10 and December 31. America will be on the edge of a cliff. The option described by the CBO is the only thing that is both politically feasible and large enough to fill a very big bucket.
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The CBO one pager follows. Where are you on this list? Where do you expect to be on this list in five-years?
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Gotta love some good quality political gridlock...
Don't worry folks, we'll have a World War before any of this happens...No time to think about taxes when you're dead...
I missed the part that said, I must accept the premise that government spending levels must always remain in an upward trajectory and can never be allowed to go down in order to meet actual revenue coming in from taxes.
Or did I? ;-)
Exactly. Bruce you gave us some excellent examples of just how bad some of the uses of our money are a couple weeks back. Stealing more from the people to pay for this ridiculousness is just complete nonsense. The answer to this riddle is as obvious as the nose on your face. We need a smaller .gov, there is no other good answer. So since the politicos can't agree on anything, we must create a system like the "Super Committee" that either selectively cuts or just gets a blanket cut across the board at X%. On the positive side there is so much fat and waste, even a blindman would have an easy time.
I heard Canada is cutting .gov spending 10% across the board. Maybe we should take a lesson from our neighbors to the North. The plan you mention would be an absolute disaster economically. What exactly is the fear that if we tightened our belts say 10% that life might in fact go on? Businesses deal with budget reductions day in day out. It is high time our .gov learned to do the same.
Can you say VAT?
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Or you know, they'll ask Ben for negative rates and they'll run a 4 trillion $ deficit, saying the more debt we have, the better since there's a negative interest.
/you know they are crazy enough to do that.
Another thought-provoking article, Bruce. The CBO is a bit ivory tower at times - this is one of those times.
I do not share your belief that Congress will go along with much of this - I'm with HD on this.
Eliminate mortgage deduction? The reaction would make the SOPA storm look like a spring breeze. "I have a mortgage and I have internet access" bumper stickers across suburban america - would shut down the email system of Congress and the White House. Would make the anti-gun control and anti-abortion lobby look like pikers. Most of all, would unite a really diverse bunch of voters right-left-and middle - always a scary idea to any politician. There is not enough cover in a CBO report to protect the Congressional backside on this - it would be a firestorm of outrage from the complacent middle class. (Which might be a great idea, actually!)
Eliminate dividend and cap gains favorable tax treatment? Now the CBO is whacking at the 1% (OK - 10%). I can't imagine the legion of high-powered lobbyists that would roll out against this one, and who is going to be strongly for it? Maybe my avatar, but who else? A few of the usual suspect rag-tag (relative to those agin it) non-profits? No contest - money versus ideals in DC.
There is also the real possibililty that we will be in a recession by Nov - Dec (in which case Mitt might be in - and I personally don't think it will make much difference) and more taxes would only deepen the austerity - and does anyone reading this think there is a majority in Congress with enough spine for that?
Upshot - patches, last minute deals, can-kicking extraordainaire - another huge deficit and finger-pointing galore. Some of the Bush tax cuts probably don't get reinstated, extended unemployment goes by-by, the AMT comes back (patched), half-assed stuff all the way around.
OR we will be in another war (really scary one) and stuff gets rammed through 'for the good of the country' - but I'm just being cynical here...
NFP
Just glad I've got my garden and chickens and spring water and solar panels and enough metals set aside to pay property taxes and will be riding this show out for the rest of my days.
The rest of ye are truly fucked.
Is it not amazing, Bruce, that so many of the commentators think this is your idea? Must be the water.
This is definitely out-of-the-box thinking. If you go back and read Bruce's yearly prognostications, the man has a very impressive record. That said, I have to respectfully disagree - the political costs would be enormous and it would gut too many industries. Short of an "emergency" where congress can pass the bill Patriot Act style - I just can't wrap my mind around it coming to fruition in a six week time span.
I have no well developed thesis here - but here's what I would wager happens. The OWS make a resurgence. Not a sleeping in the park, playing the bongos return - but a ready for prime time movement with financial backing. The tea party went from angry people with signs to a political force - I expect the same from the OWS. The SOPA backlash was a watershed event in my view. Americans are largely ignorant or complacent when it comes to legislation. The fact that in a few days - the people stopped a certain to pass bill dead was impressive. The genie is out of the bottle. People witnessed a collective power they did not know they had. We will see more of this. HR 1981 will be next.
Second - as we have all seen for the past few years - underestimating the ability to "kick the can" and extend and pretend is folly. TPTB don't even try to hide the fact the game is rigged anymore. Congress will deal with the bare minimum and pass stop gap measures as band aids to get through the new year.
It would be one hell of a show to watch congress try to eliminate all tax deductions - I just don't think they have enough spine to dare try.
Yikes,
I would get f*cked as would every other hard working worker bee, especially those of us in states with income taxes.
I would much prefer a flat tax on all forms of income with an exemption for the 1st 20k of income. What ever that rate it, we would all pay our fair share.
Arthur
Id support eliminating every one of those deductions except Cap Gains. Of course I'd also reduce Non-military spending to 2008 levels, remove Bushs Medicare benefit, raise retirement ages, take millitary spending to Clinton levels. I'd use the resulting surplus to cut marginal rates and pay off the debt.
Bruce,
If you've ever managed a statistically significant number of people, you will have experienced the WTF moment when "solutions" are offered up that are completely impossible to enact - even if you thought they were good ideas. Reality; be it financial, political or just every day living; is a bitch.
If you're numbers translate directly across to reductions in GDP - they are NOT possible in either the financial, political or an every day living scenario. You know this as well as any of us.
There are no other choices in the immediate future beyond dismantling the bulk of the federal government. Any other path is just as delusional and corrupt as the choices and deceits put forward since the Lehman tipping point. There is far more pain to come.
Pretending or positing there are alternatives won't change the FACTS. Putting false alternatives forward - at this point - is willingly being an accomplice after the fact.
I respect your work on ZH. I've read you every time I see you've posted something new. You've demonstrated you understand the financial comlexities and the related problems we face. I think your political insights are either being held close to your chest or you need to get out into the country and understand the depth of anger felt across America towards those who believe they can forever play the average American for a fool.
barliman
Great piece. Totally unique thoughts. What about corporations? Would interest deductability be eliminated? Would have dramatic effects on the capital markets and corporate capital structure.
LOL!
Bruce, you SERIOUSLY think this can be solved with tax increases?!
You think it's bad NOW with unemployment? If they did what you proposed, it would be a better return on your labor to work a farm and barter for what you need with your neighbors!
The only way out of this is a minimum 33% reduction in all forms of government, a reversal of the laws and regs that favor big business over large, debt forgiveness/repudiation, and a devaluation of the USD vs. gold on the order of 500-5000% (combined with letting gold trade free of derivatives and unencumbered by taxation).
Anybody who thinks this is "solvable" without such radical change is in for the wake up call of their life!
And "politically feasible"? If you consider civil war "feasible". WTF.
Never happen, BK. Much easier to apply stealth tax through inflation. US Govt is desperate to keep housing from collapsing and eliminating mortgage deduction would be final nail in coffin.
When an American citizen has income outside the USA they are required to report that income and pay US income tax on that foreign income, correct? And hasn't the US Supreme Court decided that US corporations should have the same rights as persons, i.e. citizens? Then why aren't US corporations required to pay US income tax on foreign income even if that income is not "repatriated?"
Mine works like this:
1) I get a foreign earned income exclusion (90K, I think).
2) The rest I pay taxes to the US - the taxes I paid to the Germans on that unexcluded portion.
Usually, I don't owe the US anything because German taxes are higher. Sometimes, though, because of differing allowances for particular deductions, i wind up owing the IRS, too. From my perspective, it is an unncessary waste of time and money doing the filing, especially when the US is about the only major country that taxes its expatriate citizens on their overseas income. It makes it very difficult for many expats to accept a competitively low salary in a low tax country, and affects US companies who are transferring US workers to overseas locations. I suppose the government will not be satisfied until each and every worker has been replaced by cheap labor in Asia or South America. For mostly this reason, I plan to become a German citizen in the next couple of years. I'm not worried about exit taxes, as I have almost no assets. If anyone can tell me why I should feel any loyalty to the US as it stands today, I'll be glad to listen.
That said, if Ron Paul wins, it will be a BIG game changer.
as far as I researched a few years ago the US and Germany are the only two countries taxing their expats, while the US is the only one that enforces this law.
Though I was not aware of any "exit taxes", are they due for leaving the country or for giving up the citizenship?
Some people are more equal than others.
George Orwell
and this equality belongs to all freedom-loving individuals and corporations who have the right amount of dough
the tax code is written this way and the only way to fix it would be to reduce the tax code to a few pages anybody can understand
seen this way, any scrapping of deductions would be a good starting point
I thought by now every American would write to her congressman and ask: "gimme pronto the same tax rate as Romney!"
I hear Mauritius is really nice . . .
Things like this are in our future. Perhaps not this - but definitely things like this. Slaves will always be treated as such.
Per the CBO chart, these changes would instantly remove 6% of GDP from the economy, in order to maintain current levels of government spending. In other words, a net hit of 6% to GDP, since it seems unlikely that households who are now much poorer will be sustaining any recovery.
Noting that US corporations are only paying about 50% of the taxes they were in 2007, while households (consumers) are paying 90%, it seems also likely that the corporate tax rates will also be raised... perhaps by 100% to achieve the same contribution that corporations were providing back before the crisis.
Hold the phone. Corporations only have to pay taxes on their US-originated income. They simply don't have to repatriate the foreign-generated profits. Just as well, as with households being hit with the tab, discretionary income (and therefore purchases) will hit a wall, and US-generated corporate income will drop like a rock. Except for niche areas such as storage, tax assistance, chartered homeless shelters, and the like. As noted, with the mortgage deduction gone we can finally give last rites to the housing market, which will immediately succumb as everybody's monthly payment becomes 25% higher. The 5M shadow housing inventory will become 10+M very quickly.
Things have changed at zerohedge.
In the past one and a half years I could read many times, the Germans have to bend over. Now everyone has to bend over. Good that the world is showing now some solidarity with poor Germans and are bending over now too.
sounds fair. I'd only add that the one in seven Americans on foodstamps/snap chip in as well. Instead of EBT cards to spend as they choose, I'd make them walk down to the nearest public school and receive a Michelle Obama approved, nutritious and properly portioned meal or pick up a UN style famine assistance package of rice, beans, corn meal etc. I bet we cut food stamp participation rates in half!
I would be totally OK with the highlights you listed.
Forget the mortgage deduction. Great, homes becoming more affordable for people with savings!
You will be taxed on the value of [...] employer contributions to 401Ks. There aren't many of those left anyway. Also see next line:
Social Security benefits are going to get taxed (much more). What do you think why I am not putting money in a 401k or other gov't controlled scheme?
Don’t bother having kids, the child deduction is gone. Still want to have kids, will need to afford them on my own.
Live in a State with an income tax? Yep, really time to move elsewhere.
Feel good about giving some money to a worthy charity? Never did in large enough amounts to get me over the standard deduction anyway. Might have an little impact on AMT though.
Dividends and Cap Gains will no longer have preferential treatment. Wonder what the markets will do when everybody realizes the long-term gains before that kicks in.
But I believe most of those will not happen.
If anything, even more madness like the a further FICA rate reduction will be put on top of the existing mess.
ha ha, assume the position, never!
Bullish on Tax Attorneys and Accountants!
Have no fear - those with great wealth will pay even less...same as it ever was.
what is that 8 maybe 9% savings?
Big deal- the us is going to have to cut by govt spending by 50% slap tarrifs on everything and give a tax holiday for companies to bring back that offshore cash. But in true american form the will do whatever is easiest so just the tarrifs and tax break and add 50% more govt jobs by intoducing a new job creation act called YAATA young americans against terrorist act whereby youths are paid to inform on any "suspisious" activity.It will be good for terrorist, I mean tourism.
Grab your ankles and pucker up...not even the courtesy of any vaseline either, they are going for the rest of what very little we have left. Thanks for another great post Bruce. Run for the hills girls and boys..the big, bad gubbermint will soon come for your gold and guns too,,,run for your lives...
They will get my bullets before they get my guns.
Bend over this and pick up your gold:
Forbes: The Federal Reserve's Explicit Goal: Devalue The Dollar 33%That Forbes article is crap.
They're doing this about every 3.5 years already.
Also crap because to fix this, 33% is off by a factor of ~1.9
e.g. (1.9 * 33) + 33 = 95.7%