"You didn't build that" - Obama

[Aielyn]

I think the whole Obama quote thing is just a demonstration of how utterly stupid American politics is. Here in Australia, there is some level of context removal by the other side, but never something so obviously nonsensical.

So instead, I'm going to use my post to talk about what America should be doing about its situation, regarding taxes, debt, etc. How do I justify this? Because some are already discussing it, and because deficits are related to the issue.

The first thing to note is that the entire federal budget is only of the order of $3-4 trillion a year, meaning that this isn't going to be fixed in a couple of years. Now, the deficit in 2011 was $1.3 trillion... you guys are spending somewhere in the vicinity of 50% too much.

So, step 1: Significantly cut the defence department. There are two reasons I say this. One is that it's a source of a lot of waste, and thus simply cutting their funding will force them to identify savings. The other is that American spending on defence is remarkably high as a percentage of the federal budget. America spends 20% of its entire budget on defence... Australia spends just 6%. And note that Australia also doesn't have state militaries, whereas America does, and that spending isn't included in the federal budget.

So you cut the defence department's budget. By 30%, I'd suggest. Their first task would then be to find as many savings as they can without cutting functionality. I'd expect maybe half of the budget cuts can be absorbed without any functionality reductions. Then prioritisation would be applied to cut it the rest of the way. In this way, you reduce the budget by about 6-7%. Note that the net interest on government debt is about 6%, so you've already made a significant dent.

Step 2: Implement a private account system for retirement social security, with a public system as only a fallback. Australia already has this, in the form of "Superannuation". Basically, the money that would have been paid as social security taxes instead go to the person's private account, where they earn interest on it, but can't access it until they reach retirement age, except under special circumstances. This impact will be slower than the last one, but getting it done now will help to reduce deficits in the future. The trust fund you have now should be able to sustain the excess in the meantime.

For welfare, temporarily make a cut comparable to that for the military (proportion, not absolute amount). Again, the focus should be on cutting implementation costs, not reducing benefits. To further reduce welfare costs, examine any spending source that would provide more benefit to the currently-unemployed by employing them to work on infrastructure, etc. Prioritising the unemployed in such work is a sensible step, and should cut welfare without increasing net spending.

Step 3: Identify any discretionary spending that is wasteful. "Wasteful" is defined by two factors - its economic impact, and its social impact, and is only wasteful if it fails on both fronts. Economic impact is most easily examined by the effect on the economy relative to amount spent - sometimes, spending $1 million on a project can boost the economy by $5 million. Other times, it actually boosts it by less than $1 million. If its impact on the economy is less than the amount being spent, then it is economically wasteful.

Social impact is best described as an "impact towards the future" - it basically says that spending on education that has visible impact on learning, for instance, is not wasteful, even if it doesn't positively impact the economy directly. Another example is preventative health spending that reduces need for medical services - the net impact on the economy might be zero, but it improves health in a way that doesn't increase the deficit, and helps more in the long term. If a program fails both tests, then it should be cut.

Step 4: With spending cuts making a strong impact, it's time to boost taxes. American tax as a proportion of GDP is remarkably low, especially compared to spending. The first part is increasing corporate taxes. Corporate tax is only 8% of your current revenue, at $181 billion. For comparison, Australia's company tax (plus a tax on oil profits) represents 22% of Australian tax revenue, or $77 billion (consider that Australia has only 1/15th the population of America). Taxes should be applied to company income made only in America - why? Because otherwise, it encourages offshoring. And corporate tax rate should be higher than typical income taxes in America, but lower than the top income tax rate - this encourages companies to pay their employees more and their top management less in order to reduce the tax burden (in reality, it encourages paying employees more and penalises the excesses being paid to top management).

Now, standardise the sales tax system across the country. It is absurd that there can be states in America that charge no sales tax, or that online purchases can be subject to other sales taxes from the local ones. Standardise across the country, at a reasonable rate. Low numbers are better on sales taxes - 4% looks like a healthy number.

As for income tax, here's how you handle it - for those in the bottom four brackets (up to $178,650), keep the current rates. For those in the next bracket, bump the tax rate by 1%, to 34%. For those between $388,351 and $1 million, increase the tax rate to, say, 38%. Then, for those over $1 million, increase it to, say, 42%. Then, remove any benefits to capital gains tax with regards to tax percentage, but modify it so that capital gains for durations shorter than, say, 3 years, are taxed as though they were only some fraction of the actual number.

What does this mean? It means that you work out how much tax is being paid on regular income, then work out how much would be paid on income + capital gains * x, where x is the fraction. Then, total tax becomes income tax + effect of cap gains / x. As an example, using really simple numbers, suppose that income tax were 10% up to $100,000 and then 30% for each dollar above that. And suppose x=0.6. Now suppose that the person earns $50,000 in regular income and $150,000 in capital gains. Then it's $5000 in regular tax. 0.6 * $150,000 is $90,000, which means the taxable set is $50,000 + $90,000 = $140,000 - that's $10,000 for first bracket, then $12,000 for upper bracket, for a total of $22,000. So, $5000 in regular tax and $17,000 for uncorrected capital gains. Now divide that last number by 0.6, to give $28333.33, which gets added to the regular tax to total $33333.33 in tax. That's an equivalent of 16.67% of total income including capital gains, whereas without the correction it would have been 20%.

I know, it sounds a bit complicated, but it's not.

Anyway, between the changes I've mentioned, you should get to having a small surplus.