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Dear Mr. Obama (& Congress)

I downloaded your proposal ( and the full excel file) for government spending for the next few years, and have the following comments:

I see that in 2011, you expect to bring in $2,567,000,000,000 ($2.57 T), but plan to spend $3,834,000,000,000 ($3.83 T). This means you will overspend by $1.26 T, which is 49.4% of your income, $4,114 per person, or 8.3% of the entire family farm (GDP). I realize that there is a lot going on right now in the U.S. that needs your attention, but I don’t think this is a good idea. Why wait 5 or 10 years to balance the budget and bring the deficit down to 3% of GDP? Why not do it right now? I have some ideas for how it could be done:

Net tax cuts and net spending increases have to be off the table if our goal is deficit reduction. Our only options are to spend less or collect more. So let’s start by cutting spending to make up the difference. The following categories are the biggest annual expenses:

Social Security ($730 B)
Department of Defense ($531 B)
Medicare ($491 B)
Medicaid ($297 B)
Interest on Current Debt ($251 B)
Overseas Contingency Operations ($159 B)
Unemployment Trust Fund ($102 B)
Health and Human Services ($84 B)
Transportation ($77 B)
Federal Employee Retirement ($72 B)

These “Top 10” categories account for 87% of the total spending, and we need to save $817 B to get debt down to 3% of GDP. To do that, we could apply an instant 25% cut to all of these categories. If we decide not to touch Social Security, we could cut 32% from everybody else. Or, we could eliminate entire categories, say Defense and Medicaid. Of these options, I would say that cutting 25% across the board would be the best. Of course, this would be a huge cut. People on social security or federal retirement would see an immediate 25% pay cut, medicare/medicaid copays would jump up, many jobs “created” by DoD & OCO & HHS & Transportation would be lost. We would probably enter a period of serious deflation as incomes fell, asset prices decreased, etc. The Great Recession would most certainly get much worse. So I think making instant cuts of this magnitude is probably not feasible. But it is one way to live within our means, however painfully.

So what about raising taxes? The following categories are the biggest annual sources of income:

Individual Income Taxes ($1,121 B)
Social Security Taxes ($674 B)
Corporate Income Taxes ($297 B)
Medicare Taxes ($192 B)
Federal Reserve Earnings (79 B)
Excise Taxes ($74 B)
Unemployment Insurance Taxes ($60 B)
Customs & Duties ($27 B)
Estate & Gift Taxes ($25 B)
Other Misc ($17 B)

The first thing that jumps out at me is the $297 B contribution by corporate income taxes. Here are the most recent gross annual profits of a few companies: Proctor & Gamble ($40 B), Chevron ($80 B), Apple ($17 B), Goldman Sachs ($50 B), Ford ($19 B), Toyota ($21 B), Exxon Mobil ($189 B), Berkshire Hathaway ($44 B), Burlington Northern ($10 B). You get the idea. Considering the thousands of large companies I haven’t named, don’t you think $297 B sounds a bit low? I don’t know what the average effective corporate tax rate is, but it appears to be somewhere around 18% for various reasons (loopholes, offshore monkey-business, etc). Considering that the stated corporate tax rate is 35%, immediate enforcement of this rate would boost treasury income by almost $300 B, which is close to half of the $817 B gap we are trying to close. Assuming we wanted to close the entire gap by raising taxes only, we could enforce the corporate tax rate and raise social security and medicare taxes to match their respective outflows. Consequences of increased taxes could include prolonged economic slowdown and “encouragment” of U.S. companies to invest outside of the U.S. But some benefits would include a reduction in bonuses and executive salaries, and possibly a sense of justice/equity/fairness between the individual taxpayer and the corporation.

To me, the best solution would involve both cutting spending and raising/enforcing taxes. A 10-15% spending cut across the board (with possibly a few “protected” programs), moderate tax raises, and serious tax enforcement would probably do the trick.

And the consequences of continuing to do business as usual, with massive deficit (debt) spending? I think that events of the last two years have given all of us a very clear economic picture of the eventual, indeed inescapable results of massive debt spending. I don’t believe any good-hearted person wants to see a repeat performance on a country-sized scale.

So I’m glad to hear that you support the creation of a fiscal commission to “achieve fiscal sustainability over the long term”, and I look forward to seeing their results. But in the words of my new favorite author, please “make a plan that adds up.”

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