Balancing Act VII: U.S. can fix fiscal woes
Last of seven parts
The political paralysis in Washington might lead you to believe that our nation's fiscal troubles are hopeless.
Yet these problems aren't hard to solve. Over the course of the past week, Newsday's editorial pages have laid out sensible ways of balancing the federal budget by making our tax system simpler and fairer, getting control of runaway health spending, and putting Social Security on a sound footing. Any reasonable person who's looked at our nation's budget troubles agrees we need less spending and more revenue, which is exactly what we offered. As a bonus, our proposals would help narrow the gaping trade deficit and reduce economic inequality.
The series struck a chord with readers, who showed their engagement with the issues by responding with an outpouring of their own worthy suggestions. One reader wanted Washington to budget from scratch each year and not assume spending should grow just because of inflation. Another proposed a tax on financial transactions. A third wondered how our proposed consumption tax could ever wring enough revenue out of billionaires. Clearly there's an appetite out there for serious discussion -- rather than the usual ideological sound bites -- about how to get out of this mess. Since the issues are so important, it's worth recapping what we came up with.
Lower rates, raise capital gains tax
Let's look at taxes first. The federal income tax system is insanely complex and riddled with loopholes and giveaways. In an ideal world, we'd replace it with a simple, progressive tax on what you spend rather than what you earn. That would promote saving and investment.
But while dreaming is fun, in the real world, we'll settle for improving the system we have by lowering tax rates, taxing capital gains as regular income instead of at a much lower rate, and dropping the corporate income tax, which brings in relatively little revenue and encourages tax-avoiding contortions.
We'd also purge the tax code of breaks for ethanol production, the oil industry, agriculture and other special interests. And we'd reduce or eliminate a lot of the tax deductions beloved in this region, including those for home-mortgage interest and health insurance. Each year Uncle Sam forgoes $1.1 trillion in tax collections as a result of various breaks and deductions. The biggest special-interest beneficiary is all of us; home ownership is subsidized to the tune of $148 billion a year this way, encouraging Americans to buy too much house and borrow too much to pay for it. Such policies have been disastrous.
Some combination of these important changes would leave almost everyone better off. It would simplify the tax code, stop encouraging harmful behavior and raise more revenue for a government now deeply in debt.
One reason for all this indebtedness is runaway medical spending, which buys no better health than is enjoyed by nations spending vastly less. Indeed, as a society we probably spend $1 trillion a year more than we need to on this. The only way we'll ever control costs is to adopt a basic single-payer system, either by extending Medicare to all or letting each state run its own plan. Individuals could buy additional coverage if they wanted to, but either way at least government could clamp a lid on prices, as is done in most other comparable countries. The Obama health care reforms may help -- they'll at least extend coverage to more Americans -- but they won't do enough to control costs, which are the biggest long-run financial problem our country faces.
Preserving Social Security
Finally, we'd make Social Security sustainable by slightly raising the payroll tax -- and making a lot more income subject to it. If you make between $110,000 and $220,000, your taxes would go up quite a bit.
There's something or other in our plans to make almost everyone unhappy. Owners of expensive Long Island homes might decry our proposed limits on the mortgage deduction, for example. On the other hand, the same taxpayer should enjoy a lower tax rate.
Better yet, that taxpayer would benefit from a more solvent nation -- one likelier to enjoy faster economic growth in the future. A basic health care program for all, for example, should free budding entrepreneurs who might not otherwise quit jobs that come with insurance. And a nation not drowning in debt will be better able to rebuild infrastructure, care for the elderly and maintain its global preeminence.