How to Solve the Deficit Problem in US | Financial Planner Long Island

How to Solve the Deficit Problem in the U.S.

I’ve been giving a lot of thought lately about the issues facing our country, particularly the financial dimension of government.  Following the release of the Republican budget proposal authored by Rep. Paul Ryan, President Obama’s subsequent response and the recent downgrading by Standard & Poor’s of our country’s economic prospects, I thought I would share some thoughts with you regarding the Federal budget, about which there is currently much rhetoric and high emotionboth in the media and on Capitol Hill.

Before expressing my recommendations, you need to know that I really don’t like politics – which lately has not produced very good policy – or politicians, who seem primarily focused on getting re-elected.  At the end of the day, much of the business in Washington doesn’t seem to be about what’s good for the country.  So, that said, here are a few suggestions I believe could get us moving in the right direction again.

Keeping the End in Mind

Whenever you take on any project, especially one with the complexity and the magnitude of the annual U.S. government budget, you have to begin with the end in mind.  What are we trying to achieve?  Just balancing the budget?  Making America great again?  How about actually achieving a budget surplus?  Let’s go for the real big hairy audacious goal of creating and sustaining a surplus and demonstrate to the rest of the world that we have what it takes to get back on track to greatness.

How Do We Accomplish This?

The national debt now stands at $14 trillion.  That’s not entirely surprising given that, in the four decades since 1970, the government has run an annual deficit every year but four (1998-2001).  Nevertheless, I believe balancing the budget may not be as difficult as one might think.  I believe we could make a good start if we implemented the following five projects simultaneously:

  1. Create a real energy independence policy
  2. Reduce health care costs while increasing coverage and efficiency
  3. Fully fund any and all entitlement programs
  4. Become a cashless society (eliminate the currency)
  5. Simplify the tax code

As many of you have heard me say before, a goal without a date is merely a wish.  So let’s set a date for achieving our goal of a federal budget surplus by January 1, 2018.

Project 1.  Create a Real Energy Independence Policy

Once again, pain at the pump in the form of $4-a-gallon gas prices are reminding the nation that its heavy reliance on oil – much of it imported – comes at a steep cost, both to consumers and the nation’s economy.  We should have done this in the mid-1970s but we decided to kick the can down the road.  Guess what?  Down the road is now.

We have to begin with the biggest bang for the buck and that’s natural gas, which currently accounts for about a quarter of the nation’s energy consumption.  New drilling techniques and the recent discovery of vast new reserves in domestic shale formations have significantly increased the importance of gas in the nation’s energy equation.  With about 3.6% of the world’s proven reserves (just a tick under Saudi Arabia but far less than Russia),  an Energy Department report released last December estimated the U.S. has enough natural gas to heat homes, generate electricity and supply manufacturers for 110 years. Not only that, but it’s a cleaner source of energy than crude oil.  What we don’t have is the political will.

As part of a broader approach that includes increasing energy efficiency and developing fossil fuel alternatives, the Interior Department is currently formulating new incentives to boost domestic energy production.  But let’s focus first on what we already have – natural gas – while encouraging the development alternatives over the longer term.  We can’t afford to continue debating and waiting anymore.  We have to get the natural gas incentives in place to have an immediate impact.

Once we are out of rehab from our long-standing addiction to petroleum, we can take additional comfort that our petrodollars aren’t subsidizing hostile or unstable regimes such as Iran, Iraq or Venezuela.  Ultimately, this could have an even bigger impact on the budget by allowing us to reduce outlays for both defense and homeland security, which is now about half our annual budget.

Project 2.  Reduce Health Care Costs and Improve Outcomes

The healthcare debate has been a national pastime for about two years.  We need to fix the system, not create a 2000-page healthcare bill.  Fragmented, complex and inefficient, the U.S. healthcare system has the dubious distinction of spending more on healthcare per capita (and that’s with 16% uninsured) than any other developed country in the world while delivering largely mediocre care.  It is also the most critical factor in America’s ever-burgeoning federal debt.  So here’s my proposal:

  1. Tackle the Legal System First:  Limit the amount on legal settlements for medical malpractice suites and change the legal framework to a loser-pays-all-costs system, like they have in the United Kingdom.  With a system like this, you don’t get frivolous law suits, which are a major cause of high insurance premiums for the entire medical system and those costs are passed on to you and me in the form of medical cost inflation.  Currently, 35 states have some limits on malpractice damages and the evidence seems to suggest that the caps have had a positive impact on the escalation of insurance premiums as well as providing doctors with greater peace of mind.  Switching to a loser-pays-all-costs legal system will have a much bigger impact in reducing frivolous law suits.  These suites  are the cause of excess paperwork, excess testing (to cover one’s butt), create an administrative management nightmare and increase costs that are systemic and repetitive throughout the entire health care system.

 

  1. Improve Efficiency:  Better and greater application of technology to drive cost efficiencies has to be a cornerstone of revamping our healthcare system.  That includes recordkeeping, sharing of patient data and e-prescribing.  The result would be a reduction of redundancies, higher quality information, faster processing  and, not least, bloated administrative overhead.

 

  1. Allow Medicare to Negotiate:  Americans are saddled with the highest drug prices in the world.  If the Veterans Administration can leverage its buying power to obtain better prices, why not Medicare?  Studies have shown allowing direct negotiation with the pharmaceutical industry could result in savings of between 30% and 40%, equivalent to more than $300 billion over 10 years. That’s a serious impact on costs.
  1. Fight Fraud:  Statistics vary but there is a general agreement that medical fraud is a $50 billion-a-year-plus enterprise that may, by some calculations, account for up to 3% of all healthcare expenditures. While more vigorous efforts by the government have produced an upswing in indictments, more needs to be done. Statistics suggest that for every $1 invested in uncovering Medicare fraud yields $1.55 in savings but currently the program spends less than two tenths of a cent of every budget dollar combating fraud, waste and abuse. Clearly, more resources and technology need to be brought to bear on this major problem.

 

  1. Change the system where most health care is now provided to individuals by their employer to one where the individual consumer writes the check for health insurance.  The entire health care system is where it is today because individuals were not shopping or negotiating for better prices and better outcomes.  That’s because they assumed the services were free (paid for by the employer) and it became an entitlement mentality in this country.  When the individual consumer has to write a check for insurance, they will shop around for the policy that best fits their needs at the lowest price.  In addition, they will expect better results for their dollars.

Project 3.  Fully Fund All Entitlement Programs

If our politicians want to make social policy than we should require them to fund and actuarially maintain and audit annually the program’s funding.  We should also prevent them from raiding those funds (as in Social Security) without first eliminating the current program and paying out the proceeds back to the taxpayers.

Project 4.  Eliminate the U.S. Currency

Over the years, there has occasionally been talk (and two unsuccessful bills in Congress) of removing the penny from circulation.  But what about removing all hard currency?  Approximately $880 billion of it. Think about it.  Why do we really need all those bills and coins?  By some recent estimates, costs associated with cash (handling, security, etc.) amount to $270 per person annually and could equate to as much as 1% of GDP.  Everything today can be transacted with the swipe of a debit card or credit card.  There is a huge underground economy, much of it legal cash businesses.  But much of it is also illegal cash businesses.  It has been estimated that a cashless society will generate enough additional tax alone to solve the deficit problem.  It will increase income tax collections and help fight crime (including counterfeiting), thus further reducing the deficit and help create a surplus. The technology to ensure the security of electronic transactions had been in use for decades now and is not an impediment to moving towards a cashless society, which will result in an improvement to our nation’s economic welfare.  

Project 6.  Simplify the Tax Code

Here is an idea to help government eliminate wasted time, money and materials.  Spending 29 hours preparing one’s tax returns is not productive.  Our tax code, which has increased from 1.4 million words in 2001 to 3.8 million in 2010, is so complicated that it has created its own industry.  Statistics indicate that 60% of taxpayers and 71% of unincorporated businesses hire professionals to prepare their returns at a cost of $163 billion. The complexity of the code, it is generally agreed, contributes to costly inaccuracies and widespread cheating.

How about creating a tax code that, by law, limits the tax code to 25 pages?  If you can’t express what you want to achieve in 25 pages, you are likely hiding something.  I think all proposed laws should be limited to 25 pages.  Congress might actually read them before voting them into law.

Also, the tax return form for each person should be limited to one page (both sides). The federal income tax should also be a flat tax (say 30%) and, by law, a person whose total taxes exceeds 30% from all sources (federal, state, local) gets a credit from each source to reduce the bill back to 30%.

We can still have a progressive tax structure, but it should not be like the one we currently have, one that takes away the incentive to make more money.  How about something like this:

0% tax on the first $10,000

5% tax on the next $10,000

10% tax on the next $10,000

15% tax on the next $10,000

20% tax on the next $60,000

25% tax on everything above $100,000

On the first $40,000 of income your tax is $2,500.  That’s just 6.25%

On $100,000 of income, you would pay $17,500.  That’s 17.5%

You would also pay state and local taxes on top of this, but the total tax burden is limited to 30%.  This closes the taxing system between the federal government, the states and municipalities, forcing them to cooperate.  It also does not discourage one from earning more money because you still pay the same rate on the lower amounts of income as everyone else is paying.  This plan would also do away with the Alternative Minimum Tax (AMT), which has been quietly ensnaring more and more middle class taxpayers.  We all have available for use the same government services, therefore we should all pay the same amount for those services.

Please note that none of these proposals are about eliminating services, taxing the rich, setting up granny death squads, etc.  It’s just the opposite.  It’s about improving services with the savings obtained.  It’s about having the political will to finally do what we should have decades ago.  It’s about applying technology, smart business practices, becoming efficient, independent and eliminating bad legal, tax and business policies and practices,  which are systemically killing this nation’s economic future.

In my opinion, implementing these five projects will put us in a surplus position within the next five to 10 years.  If you disagree, that’s okay.  But you won’t be any closer to balancing the budget and eliminating the deficit if we sit here, do nothing and continue to debate less-than-reliable data.

Remember that Einstein said that the definition of insanity is doing the same thing over and over again and expecting a different outcome.  We need to tell our politicians to stop jawboning these issues and take action.  Doing so may lead to a surplus sooner than most of us might suspect.

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