46. Saving America: Part 1- A New Approach to Taxes and Spending is Needed
Over the next four weeks, we will discuss the structural changes in taxes and spending that must occur to allow the U.S. to escape the cycle of ever-increasing debts and deficits that have spiraled out of control with each successive business cycle this century. Each economic downturn requires escalating currency debasement and mind-boggling deficit spending to restore stable employment. In the first week, we will address the twin problems of deficit spending and inflationary printing, highlighting the inadequacies of the proposals from our two presidential candidates and laying out new ideas for taxes and spending reduction.
Today, we face a presidential election in which neither candidate has explained how they plan to finance their respective plans to “Restore the American Dream.” The specific issue is the need for accountability regarding trillions of dollars borrowed during a time of growth (3% Gross Domestic Product, or GDP) and record tax receipts.
Let’s examine four years of data from the Trump administration and more recently from the Biden/Harris administration. On October 1, 2024, our government completed fiscal year 2024 and began fiscal year 2025. Here are two important things for voters to know about fiscal years 2021, 2022, 2023, and 2024:
During the Biden/Harris administration, our government collected $4 trillion, $4.95 trillion, $4.44 trillion, and $4.39 trillion (a decline of $560 billion in revenues over the last three years). All four years were revenue records. In contrast, under the Trump administration, tax collections were approximately $1 trillion less per year: $3.4 trillion, $3.4 trillion, $3.6 trillion, and $3.42 trillion. Despite a significant increase in revenue, the debt formation was within 15% of the Trump administration, accruing $7.8 trillion. Biden/Harris debt accumulated $7.37 trillion. It is safe to say that annual expenses during the Biden/Harris administration were running approximately $1 trillion more per year than those of the Trump administration. Why?
The deficit after the 11th month of fiscal year 2024 stood at $1.897 trillion, an increase of about $300 billion over the deficit in fiscal 2023, which was $1.7 trillion. Therefore, the total deficit for the four years of the Biden/Harris administration, which includes three months of the Trump presidency, was $2.38 trillion in 2021, $1.38 trillion in 2022, $1.7 trillion in 2023, and $1.897 trillion (for 11 months) in 2024, totaling $7.37 trillion. This is approximately 9.4% less than the Trump administration's deficit, despite having received $4 trillion more in tax revenue.
There has never been a period in American history when tax collections were this high and deficits soared simultaneously. It is clear that large deficits during periods of high tax receipts cannot be sustained.
In 1990, Senator Paul Tsongas from Massachusetts, while running for president before withdrawing due to a brain tumor, stated, “My greatest fear for America is the feeling of entitlement.” Over the last 34 years, the worst politicians imaginable have pandered to citizens' wants at the expense of America's needs.
Today, both candidates, Harris and Trump, are competing with “gifts” to win votes from a country that is in a debt spiral. Both have proposed plans “to restore the American dream” that lack detail on debt reduction and protecting our entitlements. One candidate is focused on transferring wealth from the upper one percent to the bottom fifty percent through taxation, while the other aims to provide tax forgiveness to the bottom fifty percent funded by GDP growth and tariff taxes. Both are concentrating on “gifts” without adequately explaining how they will be funded. Neither has a plan to rein in our out-of-control deficit spending.
In fiscal year 2023, the government spent $6.134 trillion, with entitlements accounting for 55% of the budget, down from 66% in fiscal year 2021. However, entitlements represented 76% of tax receipts collected, totaling $4.44 trillion. In fiscal year 2024, the situation worsened, with expenditures rising to $6.4 trillion and tax revenues dropping by $50 billion to $4.39 trillion. The percentage spent on entitlements increased to 81.4% of collected revenues! This spending included 100 welfare programs and expenses related to immigrant resettlement. Adding in the interest expense of $892 billion (as estimated by the CBO for 2024), which accounts for 20.3% of tax revenue, brings the total to 101.7% of revenue collected ($4.39 trillion), before considering defense spending and additional discretionary expenditures! This reality is ignored by Harris and Trump, who are busy competing on “gift” giveaways from a debt-burdened U.S. The current reality compels us to propose structural changes to preserve our currency and our country.
“Both candidates are taking the Santa Claus approach, just throwing out random populist tax cuts, money grants, and spending hikes to voters, with no coherent program or consistency,” says Brian Riedl, budget expert at the Manhattan Institute, in his piece, “A Comprehensive Federal Budget Plan to Avoid a Debt Crisis,” dated June 27, 2024.
Due to the complexity of our current tax code, taxpayers are estimated to spend over $800 billion a year, mostly on lawyers who develop schemes to minimize their U.S. tax liabilities. This is particularly true for large corporations with foreign sales and individuals with net worths exceeding $50 million. One of the less obvious objectives of this proposal is to substantially reduce these tax avoidance and evasion schemes by simplifying the code. Often, sophisticated avoidance becomes outright evasion. Simplification will also lead to significant reductions in enforcement costs. Thus, we believe that savings from enforcement and avoidance fees could easily total hundreds of billions. These savings could theoretically be directed toward more productive investments that expand wealth and welfare. Efforts to simplify can be summed up by the military saying: Keep it Simple Stupid (KISS).
Our second major focus is to apply a principle known to many liberal and conservative economists: Broaden the Base and Lower the Rate (BBLR) to maximize government revenue. Many politicians gain favor by proposing higher taxes on the wealthy. However, by maintaining elaborate deductions that feed into complex avoidance plans, the ultra-rich often pay a lower effective tax rate than the middle class. Herein, we will advocate for the politically unpopular BBLR, but we will also eliminate all deductions, redefine out-of-country U.S. revenues that are largely untaxed for large corporations, and restructure foundational charities to include a tax liability. We will also eliminate all tax credits.
Finally, federal ad valorem sales taxes, which have traditionally been frowned upon by Congress, must be revisited. A National Ad Valorem Sales Tax would compete with state sales taxes and is often considered regressive because lower-income individuals would pay the same rate as higher-income individuals. Additionally, like inflation, it would increase the prices of all goods and services. However, a National Ad Valorem Sales Tax would be much easier to collect and enforce, and less expensive to administer. Once the system is set up, it would also be nearly impossible to avoid or evade. With our national debt approaching $36 trillion, alongside certain destructive social forces that reduce hope and opportunity, we will propose a specific form of a National Ad Valorem Sales Tax. The variation we will suggest is called a Harmonized Sales Tax (HST), which has gained acceptance in Canada, assigning a portion of the tax to the states. We will propose a lower general rate than in most countries for all taxes, along with the elimination of almost all deductions in the current code, except for three higher-rate exceptions, two of which aim to improve the health and welfare of our citizenry. This will be our general approach to adopting a completely new HST tax.
Next, it is evident that income and payroll tax revenues account for approximately 86% of all tax collected. For individuals with income—earned or unearned—over half a million dollars a year, an additional 5% tax will be allocated directly to entitlements (Social Security and Medicare). All deductions will be omitted, except for those for families with children. Omitting the interest deduction alone could save America $100 billion a year. If the political opposition is initially too strong, we could at least reduce the interest deduction to $250,000 for a transition period. This would also likely decrease home prices by 5% to 8%.
Next, we will discuss specific ideas for cutting spending, including funding changes and eligibility for entitlements, as well as identifying areas of unnecessary entitlement and discretionary spending. For example, the SNAP program provides food for households if one person makes less than $2,430 a month, and up to eight people who collectively make less than $8,427. This program is not being managed effectively by the government. In 2023, $112.8 billion was spent on SNAP, with an estimated $13.2 billion (11.7%) subject to fraud, according to the GAO. An opinion piece by Andrew McClenahan, published in The Hill on September 28, 2023, states that 20% of all SNAP costs are “fraudulent,” totaling approximately $22.56 billion. The article suggests that program integrity could be enhanced through increased technology. In 2023, the federal government spent $849 billion, while states spent $78 billion on Medicaid, with an estimated $100 billion in fraudulent expenses according to the Department of Health and Human Services (HHS). The total expenditures for SNAP and Medicaid in 2023 reached $961 billion, with an estimated range of fraudulent disbursements between $113 billion and $122.56 billion. How about transitioning these expenditures to the states over three years, removing the federal government from these programs entirely?
Regarding Social Security and Medicare—two programs that Americans pay into throughout their working lives—we propose a 5% tax on all income, both passive and earned, starting at $175,000. This additional tax will begin at $175,000 for all earned and passive income during a calendar year. There are many more changes planned for both Social Security and Medicare, including increasing the retirement age by one year to 68, which will be discussed in the coming weeks. However, the 5% additional income tax will supplement these two paid-for programs over the next three to four years and will be evaluated.
In summary, we propose scrapping the entire U.S. tax code—currently comprising 6,871 pages, according to Public Law 117-154, 6/23/22—and starting with a blank slate that emphasizes the principles of Keep It Simple Stupid (KISS) and Broaden the Base and Lower the Rate (BBLR).
Brand New Tax Code:
Standard Deductions: Individual lowered to $11,000; married to $22,000; married with children to $25,000; and for each child (up to three), an additional $10,000 deduction until they turn 18. We must encourage families and children, so a family with three or more children would have a $55,000 deduction (consider adding $2,000 for each additional child).
Income Tax: All income, earned or passive, will be taxed at 10% up to $60,000. Income from $60,000 to $399,000 will be taxed on a scale from 11% to 18%.
Social Security and Medicare Tax: Above $175,000, there will be an additional 5% tax earmarked for Social Security and Medicare.
Tax on Higher Income: Above $400,000, the tax on all income will increase from 18%, proportionately rising to 20% when reaching $1 million, plus the 5% for Social Security and Medicare.
Tax Above $1 Million: For incomes above $1 million, the tax will remain at 21%, plus the additional 5% for Social Security and Medicare.
Corporate Tax: All corporations will be subject to the same increases as individual income tax up to $1 million in earnings, at which point the rate will be 21% for all products and services sold within the U.S. Discussions regarding taxation for overseas sales will come later.
Elimination of Tax Credits: All tax credits will be eliminated, and three new ad valorem taxes will be imposed:
a 20% tax on products high in sugar (to be defined later),
a 20% tax on highly processed foods (to be defined), addressing the obesity epidemic, and
a 12% tax on gasoline (current federal gas tax of $18.4 cents has remained unchanged since 1993, despite rising gas prices). No credits will be provided for wind, solar, or electric vehicles.
Death Tax: The death tax will be adjusted to a floating scale, starting at 1% for estates of $4 million, increasing to 5% up to $5 million, and up to 10% for estates of $100 million, progressively increasing to 20% for estates over $500 million.
Harmonized Ad Valorem Tax: Two new consumption taxes, plus an increase in the gas tax, will be harmonized ad valorem taxes—20% of the revenues will go to states, while 80% will go to the federal government. Additionally, a 10% harmonized ad valorem tax will be placed on all goods and services in America, again split 20% for the states and 80% for the federal government. Forty-five states already collect sales taxes and have the necessary infrastructure in place. All ad valorem taxes will be displayed on the bill of sale, unlike in Europe, allowing citizens to monitor them.
Once we regain control of our debt, we will consider reducing the ad valorem taxes. We will delve deeper into these ideas in the coming weeks. The simplicity of this plan will lead to a significant drop in avoidance fees and enforcement costs. We aim to complete our proposal over the next three weeks and guarantee it will be far superior to the current 6,871-page tax code.
Have a blessed week.
From Sunshine and Transparency
Tony Christ