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The headlines today are full of political debate over deficit reduction. It seems, however, that the debate should be in two pieces, debt and deficit.

The debt is the total amount owed. The deficit is the annual difference between the government’s revenue and expenditures. The first debate should be about debt reduction. If debt reduction is not addressed, the U.S. will soon face higher borrowing costs. This will quickly make the deficit problems worse. Moreover, nearly everyone agrees that the debt is too high and that something should be done about it. There is really no political party ideology about debt reduction. The U.S. has been borrowing too much for too long. When times are good the government spends every penny of revenues. When times are bad, the government borrows to keep up the boom time spending and borrows even more to “stimulate” the economy back to better times. When this cycle is repeated long enough the total borrowing becomes a bigger and bigger debt.

It seems that there should be a new plan developed to reduce the overall debt. This plan needs to recognize that the numbers are way too big to quibble about who should pay more or receive less. In order to make a serious reduction in U.S. debt, everyone will have to be taxed more and the revenue stream from the plan must not be available to politicians to spend buying votes. A simple approach would be a national sales tax. Canada has a national sales tax (at 7 percent) and their economy is plugging

along better than the U.S. The U.S. would not need a rate nearly that high to make a meaningful start on the debt. A national sales tax can be easily implemented with no new federal bureaucracy. The states would simply collect the tax along with their own sales taxes and send the federal portion to Washington. The critical piece of the plan is to write rules that keep the federal government from spending these funds on anything but debt reduction. Social Security is a great example of how politicians will spend funds if not prevented.

The second piece of the debate is annual deficits. If the overall goal is to reduce the debt, the annual federal budget will need to become balanced on average. Instead of spending every penny in good times, the government will need to save during good times so that there is a cushion of funds for bad times. The government of Chile has had some success with this approach. It is fairly clear that an absolute requirement to balance the federal budget each year is not practical. Normal business cycles are always going to be part of life, so the government must have some flexibility.

The taxpayers cannot, however, rely on politicians to show good judgment as long as the primary election system keeps sending radicals from both the right and left to Washington.

For now, there will need to be better rules on taxing and spending growth. Perhaps some rules that tie spending growth to economic growth would work. If a national sales tax is attacking the debt as a separate issue, it may become more obvious how the revenue and expense of the federal government can be balanced. Economists can surely help develop some rules as to taxing/spending as a percentage of GDP.

It is pretty clear that a percentage which is too small will underfund basic government services. A percentage that is too high will stifle economic growth. In any case, having a regulated amount to spend should force a more practical debate as to what gets funded. The debate about who should pay what tax rates is mostly a political and emotional sideshow. Everyone should pay some, and the better off should pay more. Starting with silly subsidies and loop holes will help clarify the tax picture. They are what keep Warren Buffet’s tax rate so low.

Such rules may be a hardship to many federal programs, but they may also help root out waste as agencies are forced to do more with less.

Adjusting to such rules will be a political battle, but forcing the battle into a sensible framework is a must. The average annual budget deficits will never get to zero, let alone slightly positive, if there isn’t a frame work which keeps politicians from running deficits to buy votes. The government cannot be all things to all people. The American people are smart enough to see that tough decisions are necessary to stabilize the debt, the economy, and the economic future of the U.S. The trick now is to make a real start that has real support. A national sales tax that must be spent on debt reduction might be a place to start. Overall limits on taxing and spending should follow quickly.

Mike McKeown is a Las Cruces resident. He is a recently retired software developer and small business CEO.

Source: http://www.lcsun-news.com/las_cruces-opinion/ci_19695351?source=rss

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