Another year, another tax day – and another time for people to complain that we aren’t spending enough but we are taxed too much . I am not going to rehash old topics this year. Instead, I am going to risk being run out of town on a rail by stating a few bald truths:
1) We (i.e., the US government ) have been spending more than we take in.
2) We can fix this by spending less, by taxing more, or by some combination of the two.
3) Taxing less will not help.
4) Spending more will not help.
5) It took decades to get into this mess; it will take decades to get out of it.
And now to compound my offense by expanding on those points:
We have been spending more than we take in. With the exception of 1998-2001, the US has spent more than it brought in every year since 1969. In constant dollars , Carter increased the national debt by 17%, Reagan by 58%, Bush41 by 21%, Clinton by 6%, Bush43 by 24%, and Obama by 12% . Since 1969, we have more than tripled the national debt in constant dollars, increasing our servitude to China and other foreign countries  by an average of 4%/year. To put this into more prosaic terms, it is the equivalent of a typical family making $66,000 but spending $68,500. If the family does that for too many years, soon enough they won’t own anything except regrets. But if the family starts to spend less and earn more, they can become very happy indeed
We can fix this by spending less, by taxing more, or by some combination of the two. There are lots of people who have made considerable political hay by promising that we will be able to pay off the debt without having to make any sacrifices. They are the moral equivalent of those folks on TV who sell diet pill, promising that you will lose weight without diet or exercise. In short, they are liars and poltroons. Just as you cannot drop the pounds without a little effort on your part, we cannot get rid of this deficit without sacrifice from all levels of society. The most common quack nostrum proposed is the flat tax. Ignoring the socioeconomic aspects of the tax , if we were to impose a flat tax with the goal of paying down the debt over ten years without reducing spending, then you would have to pay a flat tax of 71% . The second most common quack nostrum is lower tax rates on the wealthy. Again, ignoring the socioeconomic aspects , this approach has proven to be a total and complete failure. The third most common quack nostrum is “cutting out the pork”. Based on the FY2010 budget, about 2.5% of our total spending is “pork”– but the FY2010 deficit is nearly 40% of total spending. So saying that we can fix the deficit simply by cutting out the pork is the equivalent of saying that you can lose weight by skipping dessert after eating filet mignon. The only solutions that will work must include lower spending, higher taxes, or some combination of the two; there simply isn’t any other way.
Taxing less will not help. We have already seen that supply-side economics does not work. It does stimulate the economy, but there is no concomitant increase in tax receipts. Instead, tax receipts have gone down every time that supply-side economics has been put to the test. In practical terms, taxing less is the equivalent of a household saying “You know, we aren’t making enough to cover our bills. Why don’t you quit your job? That should fix the problem!”
Spending more will not help. Government spending is often necessary and is frequently a good idea. Without government spending, there would be no interstate highway system. Without government spending, we would never have landed on the Moon. Without government spending, we would not have a stable banking system. Without government spending, we would never have won World War II. However, spending just to spend (or, equivalently, to keep jobs in a specific district) is rarely a good idea. That sort of spending has brought us such disasters as the V-22 , the B-1 , the CVN-21 , and the Constellation program . Such spending does not increase the nation’s wealth, nor does it make us stronger or smarter; it merely benefits one small area by short-changing the rest of the nation.
It took decades to get into this mess; it will take decades to get out of it. As we’ve seen, the current debt problem has been more than four decades in the making. For each of those four decades, there have been politicians on both sides of the aisle who have claimed that they wanted to reduce the deficit ; most of them have done this even as they worked to increase government spending in their districts. Neither party is innocent. Though, on average, the Republicans have been marginally worse at spending more than we take in, over the past forty years both parties have indulged in deficit spending . Right now, the debt is four times our annual spending. In other words, if we were to spend our taxes only on paying down the debt, it would still take more than four years to do so! Thus, we will have to take at least a decade to pay off the debt ; two decades is more likely. And that will happen only if we, as a nation, muster up the courage to endure some sacrifice in order to ensure a better life for our children.
What will be required? First, we will have to reduce spending significantly. An across the board 15% reduction is the minimum that will work. How can we be sure? Because, over the past 30 years, the average deficit has been 15% of the budget. Thus, by reducing the budget by 15%, we as a nation will be able to live within our means; if we wanted to pay down the debt without raising taxes, we would have to cut spending by more than 15%. A 20% reduction in spending would allow us to pay off the debt in 70 years. A 25% reduction in spending reduces that to 35 years.
Next, we will have to raise taxes significantly. Merely allowing the Bush43 tax cuts to expire will not be enough; that will raise only about an extra $100 billion per year. Using that money to pay off the debt will do the job in a mere 141 years. Instead, we must raise taxes across all levels of income, even though that is politically unpopular. Because every citizen benefits from government programs, and so every citizen should pay a fair share of the government’s costs. Unfortunately, today more than 47% of filers will pay no federal income tax at all, thanks to a series of ill-conceived tax breaks and loopholes. For example, John McCain and Hillary Clinton were able to use tax breaks to reduce their tax burden by nearly a third (Obama and GW Bush paid at nearly the full rate). Worse, most companies will also pay no income taxes.
The only way to end this is to remove the majority of tax breaks; as a side benefit, this will also simplify the tax code. If we simplified the tax code by removing all deductions and exempting the first $10,000 of income  plus any money that was immediately re-invested in new equipment or R&D , then our revenue would increase by about 35%  even while keeping the current tax structure. This would allow us to pay off the debt in about 25 years, assuming that no new deficits are added. If we also returned the capital gains rate to 50% , then our revenue would increase by more than 40%, allowing us to be debt-free in 20 years (again, assuming that no new deficits are added).
Thus, though we can pay off the debt through tax increases or spending cuts alone, doing so would entail a multi-decade effort and a consistent political focus on maintaining the fiscal health of America . So we must speed up the process by combining the two options. If we reduce spending by 15% and simplify the tax code, the debt will be gone in 25 years. If we reduce spending by 20% and simplify the tax code, we can pay off the debt in 15 years. If we reduce spending by 25%, simplify the tax code and restore capital gains, we can pay of the debt in under a decade.
However, as always, the devil is in the details. For example, most people agree that the tax code is too complex and that there are too many special deductions. However, very few are willing to get rid of those deductions that benefit them. To name one example, removing the mortgage interest deduction on houses would cause a great outcry among homeowners and businesses  but would not bother apartment dwellers. Similarly, people agree that the budget must be trimmed – until you start to trim government spending in their home town. Take the recent cancellation of the Constellation program as an example. Even though the project was behind schedule, over-cost, and under-performing, the Houston locals have gotten upset that it was cancelled. However, when the microgravity experiments were cancelled in order to fund Constellation, the people in Houston couldn’t have been happier.
But, the quacks cry, “We can do this by cutting FITB”. Unfortunately, that is not true. Looking at the US Budget for FY2011, 84% of our spending is on national defense, Social Security, unemployment, Medicare, Health, and interest on the national debt. In other words, if we were to close NASA, shut down the EPA, get rid of the Departments of Energy and Education, get rid of FEMA, shutter every national park, stop all farm subsidies, and stop prosecuting criminals, we would still not have reduced the budget enough to avoid deficits. Thus, any solution must involve all parts of the government. Social Security and Medicare must been limited, not expanded . National defense must stop spending money on airplanes that we don’t need and vehicles that we don’t want. NASA must give up its goal of returning to the moon in two decades. The NSF must stop ORION. And so on, down the list. Every budget must shrink by 25%, no matter how painful that is because the alternative would be much, much worse .
And that, my dear reader, is the moral of this story: We must act now and we must do things that we don’t want to do. Because our alternatives are much, much worse.
 The logical inconsistency doesn’t seem to be evident to these folks for some reason.
 “We the people” isn’t a rhetorical device; it is a simple statement of fact. The US government is one of the few in the world designed from the start to be secular and representative. Thus, the only people that we have to blame for the current budget mess is ourselves.
 Constant dollars take out the effect of inflation and so are preferred for this sort of analysis. Using current dollars makes the situation much, much worse.
 On an annual basis, that works out to be Carter 4%/year, Reagan 6%/year, Bush41 by 5%/year, Clinton 1%/year, Bush43 3%/year, and Obama 12%/year [a].
 Debt is servitude; Shakespeare hit the nail squarely on the head with that one. And that is the primary reason that China has been buying US currency – so that they can defeat us with our own weapon.
 I.e., the fact that it is a tax increase on all but the wealthiest and that it encourages concentration of wealth instead of creation of prosperity.
 Here’s the math: 116,011,000 households making an average of $66,570 gives a net income of $7,743 billion. The 2010 budget was $3,721 billion. The national debt is $12,826 billion; to pay it off in ten years, we’d need to pay about $1,832 billion a year (including interest). That gives a total of $5,553 billion in spending each year. $5,553 billion/7,743 billion = 71%
 I.e., the fact that most prosperity comes not from investments by a few wealthy people but by the spending of the throngs of poor and middle class people. It is that spending that creates the profits that companies use to build new factories, employ new people, and develop better products. The investments are necessary, but they are not sufficient.
 Only the government would spend $55 billion over 25 years to build a military airplane that can’t fly and has no mission.
 Also known as “the little bomber that couldn’t”, the B-2 Spirit was designed exclusively for a first strike nuclear role – a direct violation of our agreements under MAD and a destabilizing weapon. At $1.2 billion dollars for each aircraft, it was the first plane that was literally worth its weight in gold (actually, gold would have been cheaper); all told, we’ve spent $45 billion on this boondoggle.
 It is a truism that the military is always equipping itself for the previous war, not the next one. The Navy’s approach to ships is a classic example. They canceled the littoral ship program in order to shift funds to this behemoth – a $14 billion set of aircraft carriers built solely to ensure that we have the capability to build more aircraft carriers.
 A $230 billion dollar program to go boldly where we’ve gone before, plagued with cost over-runs and stupid management decisions that resulted in a design that accomplished less and cost more than the program it was replacing.
 That they confuse the deficit (the amount we add to the debt in any given year) with the debt (the total amount that we owe) is telling.
 It is interesting that the shift from occasional deficits balanced with surpluses to deficits as far as the eye can see happened about the same time that the Baby Boomers became a political force. However, this is not a new pattern; it plagued Rome and England, and it will probably burden our greatn-grandchildren on Beta Pictoris.
 Remember those surpluses from the end of the Clinton years? Had they continued, it would have taken 73 years to pay off the debt.
 This would mostly affect those with part-time jobs, such as students and retirees, by making their income tax free.
 This would reverse the decades-long trend of shipping R&D and manufacturing to other countries where those costs can be deducted. Here, depreciation is a far larger tax break, which is why companies wait for something to break before they replace it.
 It would probably be closer to 50%, as this would also get rid of most of the loopholes (e.g., excess depreciation) used by companies to shelter income. Currently, companies shoulder less than 15% of the tax burden.
 Thereby reducing the perverse incentive that stockbrokers and money managers have to churn stocks in order to reap short-term gains. Right now, a stockbroker who makes $500,000 on a sale of stock held less than a year only pays $140,000 in capital gains, whereas a stockbroker who earns $500,000 in salary pays $152,000 in taxes; thus, by churning the stock, he gets to take home an extra $12,000.
 And when was the last time that a politician was able to maintain a consistent position on anything for more than one election?
 Heck, it would bug me, as I use that and the depreciation deduction as tax shelters. But that is exactly what has gotten us into this mess in the first place – we want the meal but don’t want to pay the tab.
 And, no, privatizing Social Security is not the answer. Look at what happened to the market over the past two years. On the other hand, allowing the government to invest in a broad fund would be a good idea [b]; had the government invested the Social Security fund in the market over the years, then there would be no looming Social Security crisis.
 Actually, there are two “alternatives”. Alternative 1: We can go broke. Alternative 2: We can let Congress fight over cutting programs in that state while increasing the funding for programs in this one. I’m not sure which one would be worse…
[a] While Obama has not had enough years to create a true picture of his spending habits, the results of his first year do not look promising.
[b ] Why the difference? Because the government has deep enough pockets to be able to weather any short-term slide in the Dow, where you and I may not.