Boston, Massachussetts -- Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford to send us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon can no longer afford the pension and health care benefits of retired service members. NASA is no longer planning a manned mission to Mars.
We're broke for a reason. We've spent six decades accumulating a huge official debt (U.S. Treasury bills and bonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to today's and tomorrow's 100 million-plus retirees.
The government's total indebtedness -- its fiscal gap -- now stands at $211 trillion, by my arithmetic. The fiscal gap is the difference, measured in present value, between all projected future spending obligations -- including our huge defense expenditures and massive entitlement programs, as well as making interest and principal payments on the official debt -- and all projected future taxes.
The data underlying this figure come straight from the horse's mouth -- the Congressional Budget Office. The CBO's June 22 Alternative Fiscal Scenario presents nothing less than a Greek tragedy. It's actually worse than the Greek tragedy now playing in Athens. Our fiscal gap is 14 times our GDP. Greece's 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 Greece because Greece is small and defenseless, but they'll soon be swimming our way.
To grasp the magnitude of our nation's insolvency, consider what tax hikes or spending cuts are needed to eliminate our fiscal gap. The answer is an immediate and permanent 64% increase in all federal revenues or an immediate and permanent 40% cut in all federal non-interest spending.
Such adjustments go miles beyond anything Congress and the president are considering. No wonder. They are focused on limiting growth in the official debt, while ignoring what's happening to the unofficial debt. To understand 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. President Obama is unveiling plans Monday to cut the debt by $3 trillion. Both of these are peanuts compared to what's needed 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 in desperate 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 patient die.
At www.thepurpleplans.org, I provide five radical, but absolutely essential plans to fix taxes, health care, Social Security, the financial system, and energy policy. Collectively, they would more than eliminate the fiscal gap and get 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 party adopts them, I guarantee that a third-party candidate running via www.americanselect.org will.
The Purple Tax Plan is of particular relevance now, given Obama's decision to push for a repeal of the Bush tax cuts 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. Can't argue with that. We desperately need much higher revenues along with much lower expenditures. Federal revenues measured as share of GDP are at a postwar low. And the president wants the rich to bear a bigger share of the tax burden. It's hard to disagree with this either. The rich have been getting off far too easy for far too long.
But the Republicans want to ensure that more taxes don't mean more spending or smaller spending cuts than would otherwise 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 they're both talking past each other. But what we really want is a tax system that's simple, transparent, fair, and efficient. Neither the personal income tax, the corporate income tax, nor the estate and gift tax meet these criteria. Each is a bigger nightmare than the next.
The Purple Tax Plan entails radical surgery. It eliminates the personal income tax, the corporate income tax, and the estate and gift tax. In their place it substitutes a highly progressive 17.5% federal retail sales tax plus a demogrant -- a monthly payment to each household, large enough that it reimburses the poor for the sales tax they've paid. (The 17.5% rate is the tax's 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 divided by 85 equaling the 17.5% nominal rate.)
If you're a Democrat, a sales tax, apart from the demogrant, probably sounds highly regressive. But nothing could be further from the truth. Taxing consumption is mathematically identical to taxing what's used to buy consumption, namely one's wealth and one's wages. Warren Buffett would effectively pay 15% on his wages, but also 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 purchasing power of his wealth will fall by 15%, thanks to the 17.5% higher costs of goods and services. And whether he spends his wealth on himself or gives it to his kids to spend, his wealth, plus any accumulated asset income, will buy 15% less in goods and services.
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 on inheritances 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 the inheritance tax rate is 15%, the Purple Tax plan imposes a single tax rate. This is very important for budgetary discipline. Under the Purple Tax, everyone will know that if Congress spends more on anything, the 15% effective tax rate will need to go up.
The ongoing food fight between Obama and the Republicans is hiding the real game -- spending ever-larger sums on ourselves and leaving ever-larger bills for our kids. This fiscal child abuse must stop. The Purple plans would let both sides claim victory, save our kids, and get our economy back in the race....
Laurence J. Kotlikoff, an economist, is a William Fairfield Warren Professor at Boston University, a columnist for Bloomberg and Forbes, and the author of 14 books including "Jimmy Stewart Is Dead" (John Wiley and Sons), "The Healthcare Fix" (MIT Press), and "The Coming Generational Storm" (co-authored with Scott Burns, MIT Press).
The European dream lies in ruins...
I have to say that even in my most apocalyptic Eurosceptic moments – when I had moved on from thinking the federalist project simply preposterous to believing that it was criminal folly – I never anticipated this. What I expected was growing disillusionment followed by an almost imperceptible unwinding which would be finessed with political double-talk and diplomatic duplicity. The implosion would come, but it would be with a whimper, not a bang. Faces would be saved and enormous numbers of lies would be told, and somehow the thing would be brought to an end – or made so vestigial that it would no longer matter.
Well, so much for that idea. This is going to be huge: so cataclysmic that it may summon up forms of ugliness that we have not seen walking abroad in Western Europe for half a century. This is where the story goes beyond irony. The European federal dream was devised by its architects to be a definitive repudiation of the ideological conflicts of the 20th century. Pragmatism, consensus and regard for the greater supra-national good would reign where once wicked nationalism and zealotry had prevailed. But what strikes me when I hear the surreal statements emanating from those emergency summits and absurd Franco-German-Greek conference calls is that this is precisely a continuation of the old ideological delusions of the European past. The EU leadership and the Greek prime minister announce implacably that Greece will not leave the euro (ever), as if their uttering of the words made them indisputable. In fact, this is simply a statement of political will that dares the world to defy it.
It seems that the European political class still thinks that an assertion of its mystical belief can alter reality: that what it insists is so, will be so. If its idea of itself and its design for the future are in conflict with the facts of economics or life as it is actually lived, then it is those facts that will give way. (A German Christian Democrat politician once said to me, “The single currency will work because we will make it work.”) Those facts now include not only Greek debt but the democratic wishes of electorates who have a sentimental belief in their right to hold their own governments to account. This is where we are: up against the unavoidable contradiction of the European federal project. The complaint that the EU is lacking in strong political leadership is misconceived: it has had altogether too much “leadership” – which is to say, domination from political and bureaucratic authorities determined to lead with as little interference from real people as possible.
“Consensus” has become coercion. The imperatives of federalism and ever closer union have come bang up against the basic principle of democracy: that elected governments should be answerable to their own electorates, particularly on matters that affect the lives of ordinary citizens, such as taxation and public spending. Federalism cannot allow democracy to disrupt its objectives, and democracy will not permit federalism to ignore its anger and frustration. Angela Merkel cannot do what her critics are insisting that she must do – as George Osborne put it, show that she recognizes “the gravity of the situation” and is “dealing with it” – because her electorate will not wear it. She cannot commit herself to endless bail-outs and the under-writing of infinite Mediterranean debt, just as the Greek government cannot deliver the EU’s austerity measures – because the people of both these countries do not wish it. The irresistible force has met the immovable object.
So the choice is between abandoning the democratic principle which holds that the legitimacy of government derives from the consent of the governed, or backing down on the commitment to the euro and all the strictures that go with it. We know which side of this argument our Government has chosen. Mr Osborne reiterated last Friday his insistence that the EU needs “fast-track” fiscal integration – and never mind the democratic scruples.
I suspect that the US Treasury Secretary, Timothy Geithner, who is drumming his fingers on the table with exasperation at EU dithering, wants the same. Since the consequences of this European folie de grandeur now threaten the American and British economic recoveries, it is scarcely surprising that Mr Osborne and Mr Geithner are pushing for a resolution to the central contradiction: are you separate countries or are you one unified economic entity? Settle the damn thing once and for all. Your paralysis is putting us all in peril.
Are the British and American governments prepared for what may follow if they get what they wish for? We were always told that the choice was between European solidarity and war. The EU was created to eradicate the sins of nationalism and, specifically, to tie Germany into a federation which would prevent its historical bellicosity from rising again – which makes it peculiarly ironic that one “solution” being currently mooted is the withdrawal of Germany from the euro. But in fact, discord and hostility are now being provoked by the very constraints and pressures of EU enforcement.
Civil unrest and non-cooperation with government demands are exacerbated by the resentment of what are still perceived as “foreign” agencies. (And, indeed, they are foreign in that individual populations have no hold over them. Greek trade unionists cannot vote Mrs Merkel, let alone the EU Commission, out of power.) Whoever it was who said that this was at least as much a political problem as an economic one was stating the obvious. The rage and anxiety over this loss of national self-determination are already taking sinister forms in the rise of aggressively nationalist parties and neo-fascist movements in the most unlikely “liberal” countries. Add to that the fears of those recent EU member states – the former Warsaw Pact countries – which still look anxiously to the East toward a rampant Russia. Here is a recipe for real conflict both within and between the countries of Europe. Is it beyond the bounds of imagination that we might see the Muslim minorities become the Jews of the 21st century?
EU ministers are not, as is sometimes claimed, “in denial”. They fully appreciate what Mr Osborne calls “the gravity of the situation”. They are paralyzed because they see clearly the full force of their dilemma. So they vacillate between the impulse to ram through “fiscal integration”, and the fear of electoral consequences: between the totalitarian impulse and the democratic principle. By the end of the year, we will know which one they chose....
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